Mutuals Survey: A fight for your life insurance

The debate about the benefits of mutuality has concentrated on the building societies, but the battle to defend the benefits of collective membership is being fought just as hard in the insurance industry, as Simon Read reports.

Why go to a mutual organisation to buy life assurance? "Mutuals often produce better payouts for their policyholders," argues David Mott of the Co-operative Insurance Society.

Duncan MacKechnie, chief executive at Direct Line Life, disagrees. "The life insurance marketplace is ripe for change and the position of strength enjoyed by the mutuals for a long time is now being successfully challenged by newcomers such as Direct Line," he says.

It's obvious on which side of the fence these two sit. Mutual life offices extol the virtues of traditional mutuality while direct insurers and banks point to speed of service or ease of buying a policy. "We are proving that life insurance need not be a complicated, time-consuming purchase involving huge commissions paid to intermediaries," says Mr MacKechnie.

The Direct Line concept is straightforward, selling simple life assurance at competitive rates over the phone. "More and more customers are coming to us because of the simplicity and ease of buying over the phone in minutes, at times that suit their lifestyle," says Mr MacKechnie. "The efficiency of our operations, plus the lack of commissions, means that our customers can often save as much as 50 per cent on their premiums."

So cost-savings and convenience are promised. How can the mutuals match up?

"Our charges are low and the whole of our life surplus goes to life policyholders in the form of bonuses," says Mr Mott. "But also part of the co-operative philosophy is providing the best service we can. Our sales force is one of the best trained in the industry. We can visit and advise customers in the comfort of their own homes."

An example of where mutuality is still a key part of the business is the friendly societies, which offer a range of savings and life assurance- linked products.

They receive generous tax advantages and their very mutuality means the societies can deliver better value for money, according to Nigel Brinn, chief executive of Homeowners Friendly Society. "Because we do not have to provide a return to shareholders, we only need to look after our members," he says. "This, of course, only works if we do not over-price our products." While some friendly societies are renowned for the heavy charges they levy on their products, they argue this is the price paid for not insisting on very high contribution levels into their policies.

Mutuality is at risk from the so-called carpetbaggers, who have swept through building societies and insurance companies in search of easy profits by forcing the organisations to become public companies. The resultant share handout has given billions of pounds in free shares to members of the former mutual companies.

Could the same thing happen to friendly societies? Mr Brinn thinks not. "We're not prone to carpetbaggers in the same way that building societies are," he says. "Partly because friendly societies have not, in general, built up large reserves and partly because our tax advantages would go upon losing the status of a friendly society."

Despite the mutuals' claims, Richard Rogers, an independent financial adviser with Roy King Insurance and Financial Services in Cornwall, thinks that when it comes to considering life assurance, mutuality is not the key issue.

"Despite the army of home service salesmen from the Pru, Pearl, Liverpool Victoria and so on, and more recently the advent of the bancassurers, the public remains woefully under-insured," he says. "Premium rates for pure life assurance have come down considerably in recent years and anyone with such policies should be shopping around for cheaper cover in just the same way as they would for their car insurance."

Effectively, when it comes to buying simple term assurance, which only pays a benefit in case of death, you should simply choose on price irrespective of the status of the life assurer.

When it comes to investment-based policies, however, it is essential to look closely at the investment element. "With-profits plans have been the traditional way to combine savings with life assurance," says Mr Rogers. "Mutual companies have consistently figured among the top performers as they are able to return all their profits to their policyholders. Proprietary companies need to make dividend payments to their shareholders.

"At present however, we are seeing some mutual life assurance offices losing their status as they are taken over by banks or other insurers, or turn themselves into proprietary companies. There are probably too many companies competing and further mergers seem inevitable, in much the same way as the number of building societies has contracted over recent years."

Choosing between mutuals and non-mutuals, therefore, comes down to the type of product you're seeking. If you are not looking for an investment, just life cover, then the cheapest policies can often come from a non- mutual.

But for a significant cash payout at the end of a fixed period, you'll need to consider a much more expensive with-profits endowment policy or equity-linked life assurance. Here charges vary greatly among the companies and they will have a big impact on the eventual maturity value of investment products, so they need to be looked at closely.

An independent financial adviser will have to know what the charges are and what past investment returns have been with most companies, and will be able to guide you to the right policy. But as a general rule of thumb, the best returns at maturity are generally given by the mutuals.