Personal Finance: All a matter of policy

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ANYONE who signs up for a long-haul savings policy tied to life insurance, such as an endowment to repay a mortgage or a pension, will be let down with a nasty bump if they jump off before reaching the final destination.

A report published on Friday by the Office of Fair Trading showed exactly how unfair the trading practices of the life companies can be.

This is an important issue, for it is more than a tiny minority of people who find that they have to change their 25- year plans because of unemployment, divorce or a change of job.

The life companies are secretive about how many of their policies do not stay the course, but figures from AKG Surveys have never been challenged by them. They show that around 30 per cent of regular premium policies lapse in the first two years. For unit-linked policies sold by company salesmen the lapse rates are 40 per cent.

This surely says something about the way that these highly rewarding policies are pushed to customers.

It is the unit-linked policies sold by direct sales forces that have the highest lapse rate, and also have the lowest early surrender values. The OFT goes further and says that, for a few companies, the higher the lapse rates the higher the profit margins.

It might be tempting to believe that the pot is being divided differently - so the companies delivering poor surrender values are boosting the rewards for those who stay the course, and those with relatively generous payments to those who hop off are skimping on the rewards for long service.

But this is not necessarily the case. In a Money Marketing survey of 46 policies conducted by actuaries Clay & Partners, of the 23 policies with the lowest surrender values, only three had maturity values that would put them in the top 23.

Equitable Life stands out as consistently good on the surrender front. Among the companies with the meanest early payouts are AXA Equity & Law, Allied Dunbar, MGM, Pearl, London & Manchester and Hill Samuel Life.

The differences between companies are astounding. On a 10-year with-profits policy, for instance, Equitable Life would pay out 98 per cent of premiums on surrenders at the end of the first year compared with zero for Royal Life. After another year Equitable would pay 102 per cent compared with Royal Life's 39 per cent. . . and so it goes on.

Or, take out a 25-year unit-linked policy with TSB and after a year you would get back 43 per cent of the premiums paid, and 70 per cent after another year. Allied Dunbar would pay nothing at all during those two years. At the end of three years it would pay just 18 per cent, compared with TSB's 80 per cent. On a pounds 50-a-month policy that's a difference after three years of pounds 1,127 ( pounds 1,447 compared with pounds 320).

There are already moves towards a series of single premiums rather than a long- term commitment, to mitigate the effect that seeing the commission payments spelt out before signing on the dotted line - a new rule to be introduced next year - might have on potential clients.

In France this is already the norm with bancassurance, and gives much higher surrender values - 100 per cent of premiums after two years compared with 79 per cent delivered by an average UK bank's policy.

Marks & Spencer is due to join the life and pensions fray next year and has taken on Equitable Life as an adviser. It must be hoped that M&S will deliver the same sort of fair returns for all as Equitable Life.

Once that is commonplace on the high street and written out in plain English for every potential policyholder to see, let's hope that a bit of competitive pressure begins to make any other approach seem like daylight robbery perpetrated on everyone who cannot predict the future course of their life.