U.K.: The Golden Age - Rewarding policyholders for living longer

Comment The golden age Rewarding policyholders for living longer By Tony Levene, Personal Finance Ccorrespondent on The Guardian LONDON, England (Health Insurance & Protectinn), March 2008 News -------------------------------------------------------------------------------- In the spirit of “treating readers fairly” – the journalistic equivalent of Treating Customers Fairly – I shall be upfront. I am going to give myself a plug. In January, my latest book, the Which? Money Saving Guide, was published. It is full of ideas such as minimising tax and maximising your mobile phone budget. My talented publicist at Which?, Rebecca Leach, worked her stockings off for this one and I ended up with some television, over 20 local radio slots, and coverage in The Times, The Daily Mail and The Guardian. Rebecca concentrated the press release on “waste of time insurances” – policies that are mostly useless because claiming demands jumping through small print hoops or because the cover is not needed. So avoid accident policies where you only claim if you lose at least one limb (and preferably in public transport accidents) or identity theft cover which merely duplicates what the banks are obliged to do for you. Other wasteful insurances include payment protection, mobile phone and extended warranties on household electrical items. Surely, I was asked by countless interviewers, there are insurances that are worth having? Yes, I replied, and reeled off motor, household and life. On many programmes, I stressed a fraction of the money wasted on unnecessary accident cover would buy a whole load of life protection. However, following a presentation by Life Trust, a new company, I am not so sure life protection is a necessity. Life Trust claims to be the first ever insurer which offers protection against living too long, as opposed to traditional life cover which pays out if you die prematurely. It features an eye-catching chart, courtesy of Watson Wyatt, which shows that someone who is now 35 has a 69% chance of reaching 85 and a 14% chance of hitting a century and receiving a telegram from Buckingham Palace. Someone who is now 65 has a 63% possibility of reaching 85, and a one in 14 chance of the century. Even if you doubt these figures – and some statisticians and actuaries have questioned them – it is obvious that short of a global catastrophe, we are all living longer. There are already more pensioners than children of school age. Life Trust has turned protection upside down and you bet your money on outliving everyone. In its crudest form, you invest a lump sum at 50 which is returned to you without any growth if you die before 80. After that, you get a regular income from a pot which increases with investment growth and with “birthday units”, which go into your plan from the policies of other holders who fall by the wayside. Perhaps Deathday Units might be more appropriate. Older readers may remember the “tontine” from insurance text books. For those who do not, a tontine is a basic form of life cover where each policyholder pays in a lump sum and the last survivor scoops the pool. The idea, still occasionally used in France, has provided the plot line for many a film. Alternatively, think of it as a game of “Reverse Cluedo” where instead of discovering the murderer, you are the killer and try to eliminate all your fellow players. Of course, Life Trust says it is not quite like that, as it hopes to have a steady stream of customers. However, few of us are brave enough to look the 50 years into the future that a 50 year old signing up to a 100 plan would have to envisage. Policyholders have a choice of a 75-95 or an 80-100 plan – in any case they have to sign up at least 10 years before their own scheme kicks into action. But does it work? Retirement income expert Nigel Callaghan at Hargreaves Lansdown kindly put some figures into a spreadsheet. He accepts longevity is a problem – witness pension fund problems and falling annuity rates – so there may often be a need to boost income in very old age. Assume a male aged 50 investing £50,000 into a conventional offshore life policy (Life Trust uses Dublin). With a 7% investment return and a 1.5% annual charge, this would be worth £243,367 at age 80 (a no-charge fund would produce £381,000). If the holder dies before 80, the accumulated fund would be returned in full – hopefully worth more than the original investment – and paid into trust to avoid inheritance tax (IHT). Surviving to 80, the £243,000 could buy a purchased life annuity. This would currently produce an income for life of £26,979 without escalation or guarantee, down to £21,814 with 3% escalation and a five year guarantee – there are other options, of course. With Life Trust, there is no investment gain for death before 80 (or 75 on its other plan) so advisers might recommend a life policy as an each way bet (adding to the costs). And with Life Trust, the first few payments, which are lower than the annuity, for survivors come out of the original investment – so it takes two or three years before any of the growth is used. During this period, more will die. Callaghan calculates that on present figures any investor who lives to the 100 where their scheme ends will scoop a fortune – possibly a quarter of a million in the final year alone. Plan holders will have to live until around 92 to break even over the investment and annuity route, he believes. But mortality assumptions could change (this would also affect annuity rates) so if longevity continued to outpace our expectations, you will have less. While payments will be liable for IHT (if that still exists way into the future) the “birthday unit” idea could lead to some harrowing death bed scenes, especially near birthdays with relatives strong-arming medical staff into artificially prolonging life. And that could form the plot of a new book – I am already thinking Hollywood mega-bucks film rights. Source & Copyright: Health Insurance & Protection