Life Cover not with bank

alxmorgan

Hey,

Sorry if I'm missing a thread on this already but not sure what I'm even looking for.

Anyway have a mortgage and life cover is with bank
Just become aware of company called Acorn Life who have policies that will cover life but have chance of money back at the end based on growth if it occurs.

What I'm wondering is is there a downside to these policies ?
If not then why would anyone ever go with your typical bank policy which gives you nohting at the end ?

thanks in advance

Liam D Ferguson

Acorn Life aren't the only company that sell this type of policy. Most of the life insurance companies have something similar. Personally I advise clients to avoid them. They're called "Unit-Linked Whole of Life" plans.

If you compare the cost of a simple Mortgage Protection term life insurance plan with one of these, the whole of life plan is more expensive. The premium on the former will stay constant for the life of your mortgage or until you cancel. The premium on the latter can and will be reviewed at regular intervals, and may well go up.

You're far better off sticking with the cheaper policy and saving the difference into a savings account.

I wrote a blog piece on these a while ago.

alxmorgan

Liam D Ferguson wrote: »

Acorn Life aren't the only company that sell this type of policy. Most of the life insurance companies have something similar. Personally I advise clients to avoid them. They're called "Unit-Linked Whole of Life" plans.

If you compare the cost of a simple Mortgage Protection term life insurance plan with one of these, the whole of life plan is more expensive. The premium on the former will stay constant for the life of your mortgage or until you cancel. The premium on the latter can and will be reviewed at regular intervals, and may well go up.

You're far better off sticking with the cheaper policy and saving the difference into a savings account.

I wrote a blog piece on these a while ago.

Thanks for the reply. Interesting blog.
I guess a couple of things that come to mind:

1) The term life cover I have is more expensive than the whole life I am being offered - so extra amount in savings not an option

2) The guy who talked me through the policy obviously understood the issue of the increasing premium issue as he advised to change the amount insured each year as the mortgage drops so as to keep your premium down

Any thoughts on the second point in particular ?

thanks again

Liam D Ferguson

It's unusual that the whole of life policy is coming in cheaper than term life. I'm guessing your mortgage has a long term to go, or did you have any loading on your term policy for health or other reasons? If you got this policy a couple of years ago or more, have you put your details into one of the many life insurance quote websites to see if you an get a better deal now?

Anyway, the second point about reducing your cover each year would certainly reduce the chances of your premium being reviewed at the first review, although it seems a bit cumbersome to have to do this each year. Would Acorn do this reduction automatically for you?

As they're the ones offering this solution, I'd be inclined to ask Acorn to provide you with a written illustration, showing the cover being reduced in line with your mortgage each year and assuming a modest growth rate, say 4 or 5% per year before charges. Ask them to calculate when your premium might need to be reviewed using these assumptions and what the total cost of the policy over the remaining term of your mortgage would be. Then compare to a fixed-cost term policy.

Liam D Ferguson

Do make sure to get everything in writing. The Financial Services Ombudsman has had quite a number of complaints about this type of policy. (I'm not knocking Acorn Life here, by the way - just opining that this generic type of policy is poor value.)

Have a look at Page 7 of this PDF from an old Ombudsman's annual report. There are others.

alxmorgan

Liam D Ferguson wrote: »

It's unusual that the whole of life policy is coming in cheaper than term life. I'm guessing your mortgage has a long term to go, or did you have any loading on your term policy for health or other reasons? If you got this policy a couple of years ago or more, have you put your details into one of the many life insurance quote websites to see if you an get a better deal now?

Anyway, the second point about reducing your cover each year would certainly reduce the chances of your premium being reviewed at the first review, although it seems a bit cumbersome to have to do this each year. Would Acorn do this reduction automatically for you?

As they're the ones offering this solution, I'd be inclined to ask Acorn to provide you with a written illustration, showing the cover being reduced in line with your mortgage each year and assuming a modest growth rate, say 4 or 5% per year before charges. Ask them to calculate when your premium might need to be reviewed using these assumptions and what the total cost of the policy over the remaining term of your mortgage would be. Then compare to a fixed-cost term policy.

Good advice again.

Ok so when we got the life it had 30 years to run - no loading for health afaik
If I got a quote now I should get it for 23 years for the amount outstanding on the mortgage ?
Which raises the question as to why would one not get a new policy every year in line with reduction in amount covered ? Gets more expensive as you get older ?

Liam D Ferguson

alxmorgan wrote: »

Ok so when we got the life it had 30 years to run - no loading for health afaik
If I got a quote now I should get it for 23 years for the amount outstanding on the mortgage ?

Correct.

alxmorgan wrote: »

Which raises the question as to why would one not get a new policy every year in line with reduction in amount covered ?

You can ask at the outset for a reducing cover policy, where the cover reduces automatically to take account of the reducing mortgage balance. This is cheaper than a level term policy.

It is theoretically possible to take out a new policy each year, but as you say each new policy would be based on your age(s) at the time of starting it, so you'd be getting older each year and the premium would therefore be getting dearer. Also you'd have to disclose your medical history each year and if you got some illness in the future, that might scupper your plans.

alxmorgan

Liam D Ferguson wrote: »

You can ask at the outset for a reducing cover policy, where the cover reduces automatically to take account of the reducing mortgage balance. This is cheaper than a level term policy.

I'll have to check my policy but I think I have one that takes account of my reducing balance but is still quite expensive. Maybe I just got done.
Although it does also roll in critical illness so maybe that is a large part of it.

As an aside (as you seem to be a man in the know) I have 2 under 2 and looking to start a savings plan for college for them (all going well of course).
The Acorn guy suggested a savings policy which based on growth rates seems good.
Any thoughts on this or where would you recommend to get the best long term (circa 20 years) value out there ?

thanks again

Liam D Ferguson

alxmorgan wrote: »

I'll have to check my policy but I think I have one that takes account of my reducing balance but is still quite expensive. Maybe I just got done.
Although it does also roll in critical illness so maybe that is a large part of it.

Yes - critical illness cover would certainly add a fair amount to the premium. It's dearer than life insurance cover, which makes sense as there's more chance of a claim on critical illness cover than on life cover.

alxmorgan wrote: »

As an aside (as you seem to be a man in the know) I have 2 under 2 and looking to start a savings plan for college for them (all going well of course).
The Acorn guy suggested a savings policy which based on growth rates seems good.
Any thoughts on this or where would you recommend to get the best long term (circa 20 years) value out there ?

With two under two, how do you get time to use a computer?

There's two generic types of regular savings plan - deposit savings and unit-linked savings. The former is a type of bank account with a bank or post office. There's no explicit charges. You get the quoted rate of interest. Foe example EBS pay 4.1% AER for the first year on their regular saver account and 3.6% in year two. Interest is subject to DIRT tax.

The unit-linked savings plan (like Acorn and others) is a more complicated beast. There are usually charges, which can be a charge on each monthly contribution, a charge on the fund every year and often both. After charges, your savings go into one of the funds that the company offers. In theory, such plans have the potential to provide a better return over the long term than deposits. BUT - like any investment the greater the potential for return, the greater the risk. They might not produce a return greater than deposits and indeed they might drop in value.

Be wary of charges on unit-linked savings plans. They can be complex and hard to understand. Ask Acorn for the "Reduction in Yield" figure. That takes all the charges and summarises them into one figure which represents how much of your annual return is being eaten by charges. For example, if the RIY figure is 1.5% and your fund achieves 6% growth in a year, you'll only see 4.5% of that growth because the charges have eaten the other 1.5%. I don't want to abuse the board by overt plugging, but for comparison purposes the sort of unit-linked savings plans we offer would have RIY figures of 1.5% or less depending on the amount of the savings and whether or not the client kicks off their savings with a lump sum. Growth is subject to Exit Tax.

Neither type is categorically better than the other - it's down to personal choice. Do you want the certainty of deposit even though you have lower growth potential? Or are you prepared to take higher risks with your savings in order to have the potential for higher returns? Your advisor should go through all these factors with you.

Liam D Ferguson

alxmorgan wrote: »

The Acorn guy suggested a savings policy which based on growth rates seems good.

Just be aware that any projections you receive in respect of any unit-linked savings plan are not guarantees - they're projections that make assumptions as to what your return might be if the growth rates shown are actually achieved. If they're not, your return might be vastly different.

Don't ever make the mistake of thinking that because a projection says (for example) 6% growth on it that this is any indication that the actual fund might achieve 6%.

alxmorgan

Liam D Ferguson wrote: »

With two under two, how do you get time to use a computer?

With difficulty

So one more question for you. Take your average savings account such as the one you mention. How do I work out what I should get back after 20 years.
I mean I can make assumptions such as:
1. Amount I put in being steady
2. Interest rate remaining the same (it won't but I can come up with an average/best guess)

So 100 per month for 20 years = 24000 but how do I work out the interest given that it's not 24000 for 20 years, its an increaing amount over time at the interest rate.
Just need to try and see how much I need to save to make a number that will mean not having to re-mortgage

Again thanks for all the advice

alxmorgan

Liam D Ferguson wrote: »

Just be aware that any projections you receive in respect of any unit-linked savings plan are not guarantees - they're projections that make assumptions as to what your return might be if the growth rates shown are actually achieved. If they're not, your return might be vastly different.

Don't ever make the mistake of thinking that because a projection says (for example) 6% growth on it that this is any indication that the actual fund might achieve 6%.

I'm fairly au fait with my pension at this point so I'd be fairly clear on all the health warnings (especically given the erosion of my pension over the last 5 years :rolleyes:)

coylemj

OP, you're getting good advice there from Liam D, let me throw in my tuppence worth...

Do you actually need critical illness cover? That being part of your existing policy is why the savings scheme is coming in cheaper. If you work in the public sector or for a good private sector employer, maybe your sickness benefit is sufficient to see you through any serious illness in which case you could switch to a policy which protects the reducing balance only, this would be a lot cheaper than your existing policy and the proposed Acorn policy which incorporates a savings element.

Also bear in mind that the Acorn salesman and his area manager will get a sizeable chunk of your first years's premium, it may take several years before that policy goes into positive territory and you certainly won't be able to cash it in in the first five years or you'll get nothing. Every time he mentions 'admin' or 'setup' costs he is referring to his commission.

If you don't need critical illness cover, I'd shop around for a mortgage-protection policy based on a reducing balance and take the cheapest quote you get. Those savings policies tend to have high leakage for annual management charges and sales commission so they usually don't return anythin like what's claimed in the brochure, all of which as Liam D has pointed out are based on optimistic projections.

Liam D Ferguson

alxmorgan wrote: »

With difficulty

So one more question for you. Take your average savings account such as the one you mention. How do I work out what I should get back after 20 years.
I mean I can make assumptions such as:
1. Amount I put in being steady
2. Interest rate remaining the same (it won't but I can come up with an average/best guess)

So 100 per month for 20 years = 24000 but how do I work out the interest given that it's not 24000 for 20 years, its an increaing amount over time at the interest rate.
Just need to try and see how much I need to save to make a number that will mean not having to re-mortgage

Again thanks for all the advice

Try this http://www.candidmoney.com/intro/calculators.aspx

Look at the "How Much" savings calculator. I know it's a UK£ calculator but it's only crunching numbers so that doesn't really matter. To keep the figures simple, I'd assume "non-taxpayer". Deduct DIRT tax off your assumed interest rate. So if you want to assume 4% interest, put in 2.8% into the calculator - 4% less 30% DIRT.