Full cost of cover to be revealed to consumers

PEOPLE who buy life insurance or personal pensions over the next few months may be baffled by new documentation offered by the salesperson or independent financial adviser.

From the beginning of July, life companies have been able to tell consumers exactly how much the policy is going to cost them before they sign up.

Consumers may be confused because the requirement to disclose the total costs of the policy, including the commission paid to the salesman, is only voluntary until January next year, when it becomes mandatory.

Then, consumers will be able to shop around on price for their policies.

So far, Equitable Life is the only company to move over to the new regime. Although others may follow suit, many may be reluctant to do so until the last possible moment, because they do not want to be at a competitive disadvantage.

Equitable's expenses reduce the returns on its policies from 9 to 8.1 per cent - a 10 per cent point reduction. On a policy for a 45-year-old man priced at pounds 750 a year, the average cost of paying the salesman is pounds 231. Equitable's salesmen earn, on average, pounds 45,000 a year in salary, and its figures are likely to be among the lowest in the industry.

Members of the public who intend to buy policies from those companies that do disclose will be given an illustration document before they sign up. This will detail the actual amount of commission earned and the way it will be paid - either upfront in one lump sum or on a pay-as-you-go basis.

If the consumer buys the policy from a tied agent or direct salesman, he or she will also be told how much the salesman earns in commission as well as from other benefits such as company cars, laptop computers and office equipment.

If the consumer buys from someone paid a salary, he or she will be told in one figure what the total remuneration package is.

Until disclosure becomes mandatory, however, consumers will only be able to demand from independent financial advisers what they are earning from policies. They will not be able make this demand from direct salesman or tied agents.

In effect, the new regime will put a stop to people buying policies on their first visit to a financial adviser, as they will not be able to sign up for a policy until they have seen all the charges relating to it.