What rights do you have should your insurer suddenly go bust?

Guarantees are not what they used to be, says Tom Tickell. Compensation is likely to be a lot less than you expect

One of the insurance industry's great advertising slogans was,"Get the Strength of the Insurance Companies Around You". That, now, has a distinctly hollow ring. Insurance giants including Standard Life, Scottish Widows and Norwich Union have cut their bonus rates dramatically recently, and more cuts are in the pipeline elsewhere. And Equitable Life lies in a financial version of the permanent vegetative state.

The Financial Services Authority (FSA) decision last week to loosen solvency requirements for insurers and pension funds may provide the industry and stock market with some relief. But savers may wonder why easing the rules is necessary, and what happens if, as many fear, an insurer slips through the safety nets and actually goes bust.

There are compensation arrangements covering all insurers, whether they offer life and pension plans or do general business, including motor, travel or house and contents policies. Banks, building societies, and friendly societies, as well as all investment schemes, are also under the umbrella. In the past, each area had a separate scheme. Now the FSA has created a group, the Financial Services Compensation Scheme (FSCS), to handle problems.

But the danger remains of being left in limbo, as with Equitable, with little hope of re-dress. Sarah Harrison, a retired English teacher in her sixties, could not join the teachers' pension scheme when she began as a part-timer, so she took a plan with Equitable Life. She stayed when she could have joined the teachers' scheme, because Equitable had a good reputation.

"That is particularly ironic when the pension they pay me went down by 16 per cent in the middle of last year," she says. "What is more, I had put in an extra £7,000 into the scheme to boost my pension only four months earlier. Whatever the disasters, no one is ever responsible. If I had mugged an old lady, and stolen her savings, I'd have been in court and sentenced. But the company, the City, the government the regulators just seem to duck behind each other when it comes to blame. And some of the group's directors left recently, apparently taking bonuses and extra pension entitlement."

Ms Harrison believes compensation arrangements underpinning insurance compan- ies and other financial institutions are wonderful, but she suspects that somehow, reasons will be found to keep them unused, if only to save money.

The limits on compensation are different for each type of business, but getting the regulators and others to pronounce a failed group is insolvent may be difficult.

LIFE INSURANCE

If a company collapses, people it covers get the first £2,000 in full, with 90 per cent of their policy's guaranteed value at liquidation. That is considerably less generous than it looks.

"Almost every life company loads its charges at the front of any policy, and they can take up to two years' premiums," says Neera Patel, of the independent financial adviser Hargreaves Lansdown."Guarantees apply only to with-profits contracts, and they are not impressive. With-profits plans build in layers. At the bottom comes the guaranteed sum assured, the minimum the company will play. Year by year, they add bonuses, which are supposed to smooth the investment up and downs, and they become part of the policy, so are guaranteed.

"Almost every insurer has a terminal bonus, whose size depends on the conditions when the policy matures. They are not guaranteed. The guaranteed element on with-profits policies is small."

PENSIONS

People with pensions can be just as badly hit, as Paul Braithwaite who runs the Equitable Life Members Action Group (EMAG), says: "Other companies offer with-profits annuities, though not on the same careless basis as Equitable Life did," he says. "People with Equitable contracts know their annuities will go down by 20 per cent this year and 10 per cent next. If the group goes into formal liquidation, compensation will be based on how much the group will be paying at the time. Any compensation scheme has to allow for the payments people with annuities have had. So the older you are, the less help there will be."

HOUSEHOLD INSURANCE

The limits are the same as for life companies. Again, you collect the first £2,000 in full, and 90 per cent of anything above. The rules for premiums are the same. If your insurer collapses half-way through the year, compensation applies to the six months' unused premiums.

INVESTORS

They can collect the first £30,000 a bankrupt investment business owes them, and 90 per cent of the next £20,000. So £48,000 is the limit. The rules also cover you if you are due compensation for an endowment as for a personal pension, but the advisers who recommended or pressured you into buying it have gone bust.

BANKS AND BUILDING SOCIETIES

Their compensation covers the first £2,000 of deposits in full, and 90 per cent of the next £33,000. Alas, if you have a joint account, that is not two sets of compensation. FSCS will split the single limit between you.

FSA helpline: 0845 606 1234