The ugly duckling of the ISA family

Life insurance is an under-publicised element of the new ISAs, writes Stephen Spurdon
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The Independent Online
Individual Savings Accounts (ISA) have finally gone on sale and everyone is banging on about tax-free cash savings and stock market investments. But there has been no big noise made about the life insurance provision of ISAs.

Only a handful of providers are currently offering ISAs combined with life insurance policies. Many people feel insurance-linked investment is an outdated and expensive way to save money - because of commission paid to salesmen or financial advisers - and the life insurance component in the ISA plans was a bit of a shock.

So why is it there? The Treasury says it was for the sake of completeness. However, other sources suggest life insurance crept into the proposals as a result of highly effective lobbying of MPs by friendly societies - much the the Treasury's annoyance. The life insurance ISA market includes three friendly societies: Family Assurance, Scottish Friendly Assurance and Tunbridge Wells Equitable. Others are expected to enter the fray soon.

Combining the insurance ISA allowance with the individual annual allowance for tax-free investment in a friendly society fund adds up to pounds 1,270.

Some insurance giants, including Standard Life, have not launched an insurance ISA. But Abbey National, AXA Sun Life, Co-operative Insurance, Norwich Union, Pearl and Scottish Amicable have gone ahead.

Most are offering investment in their with-profits funds. These are the traditional offerings from life companies (an endowment policy is invested in a with-profits fund).

Their fall from grace over the past decade has been spectacular. The image of a safe investment linked to the stock market has faded. We now see these contracts as inflexible, high-charging deals sold by commission- hungry salespeople. Returns from with-profits investments have declined and are likely to remain depressed. And yet the slightest wobble on the stock market appears to ensure a rush to the with-profits bond. Some pounds 6bn were sold last year.

Most of the ISAs are straightforward with-profits savings schemes placed in a tax-free ISA wrapper. Norwich Union is promoting a version of its mini-insurance ISA as a mortgage repayment vehicle called Homesaver. NU has taken its insurance mini ISA and just strapped a term life assurance policy onto it. Also standing out from the pack is Tunbridge Wells Equitable Friendly Society (TWEFS), which is offering the Advantage Bond, a unitised with-profits bond for which the minimum investment is pounds 5,000 but which acts as a feeder account to its insurance ISA, transferring pounds 1,000 into the ISA each year.

People who sell insurance-linked savings schemes often stress the importance of the life cover in the package. However, the taxation of life companies means it is not tax-efficient for them to offer life cover in a tax-free wrapper, so this is not a feature of ISA accounts.

A feature of ISAs is the inclusion of voluntary benchmarks called CAT standards. These provide reassuring guidelines to investors that they are not being ripped off.

There is speculation that the Treasury exacted revenge for being forced to include life insurance in its ISA plans by setting the CAT standards in such a way that no insurer could meet them. Only AXA Sun Life Direct claims to do so. Its ISA Wealth Builder mini-ISA costs 2 per cent a year with no initial charge. The access terms are met by having pounds 25 a month premiums, and the surrender value meets the standard.

A problem here is in attempting to compare the charges between unitised funds and with-profits funds, where charges are not declared but reflected in the bonus rate.

The providers say the effect of placing an insurance fund within a tax- free wrapper means an annual bonus rate of 0.5 per cent more than outside the wrapper - or perhaps 1 per cent a year - by taking the terminal bonus into account.

Other things to note include the terms for withdrawal of money from the account. These accounts are designed for long-term savings, so expect penalties if cash is withdrawn before the specified term is ended.

n Insurance ISA providers: Abbey National, 0800 302030; AXA Sun Life, 0117-989 9000; AXA Sun Life Direct, 0800 608072; Co-operative Insurance, 0161-832 8686; Family Assurance, 0808-100 7654; Norwich Union, 0800 0562450; Pearl Assurance, 01733 473332; Scottish Amicable, 01786 448844; Scottish Friendly Assurance, 0141 275 5000; Tunbridge Wells Equitable, 01892 515353.