Customers who bought "whole-of-life" insurance policies are discovering that the policies may not work as they expected.
The basic concept of a whole-of-life policy is that the policyholder pays a fixed premium every month until they die, at which point the policy pays a fixed amount. The idea for the customer is to mitigate some of the payment risk: although they'll pay for longer if they live a long time, they won't get the price rises that apply with most life insurance policies.
What many customers don't realise is that whole-of-life policies allow for reviews at, for example, five or 10 year intervals. This is because insurers invest part of the premiums and use the proceeds to fund the eventual payouts.
When financial markets are struggling, the investments may turn out to be insufficient upon the review. The insurer often has the right to insist that the policyholder either pay more each month or accept a cut in the payout when they die.
The problem is that many policyholders say they are unaware of this clause and that it wasn't clearly explained. The Financial Ombudsman Service says complaints about alleged misselling are up 25% year-on-year, largely because many policies sold when markets were strong are now due for review.
However, only around a third of such complaints were upheld last year, and the rate so far this year is less than a quarter.