Beware Over-50s' Life Insurance
Many waste a fortune on Axa & others, we compare best buys
He's a lovely man that Parky – just don't listen to what he has said about insurance. Michael Parkinson's caring voiceover made Axa SunLife's over-50s' life insurance policy seem simple, yet for many they're a seriously bad bet.
You wouldn't buy a lottery ticket if it cost more than the jackpot, but as I explain below, the millions of people with these types of policies risk doing just that. So in this guide I'll take you through how over-50s' plans work, what to watch for and the best buys if you decide they're for you.
In this guide...
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How over-50s' plans work
My normal call to arms is to plan for all future events so you might be surprised by how scathing I'm going to be about these policies. To start with, just look at the SunLife over-50s website with its glossy pic and deliciously simple sales pitch:
- It promises a fixed lump sum when you die – so there's no investment risk and you always know what your family will get.
- If you're between 50 and 85, you don't you need a medical; anyone can get a plan.
- The costs start at £4 a month, but what's paid out depends on your age when you sign up.
- If you die within the first two years, you won't get a fixed lump sum. Instead you'd get back what you paid in, plus 50% on top. The exception to that is if you die in an accident (such as a car crash) you'd get the full lump sum due.
It also touts that among other things it's perfect for funeral planning, to alleviate the nagging worry of being a burden to loved ones.
Four problems with the SunLife plan
So far, it's all sounding pretty marvellous – no surprise these plans are so popular. Yet, as I've said before, there are huge holes and risks in these supposedly 'simple' policies. It's not just Axa, but as it's the main provider of these policies I'm focusing on it here.
The maths doesn't add up
I want to draw your attention to two key clauses that when put together contain a problem so noxious it needs to be shouted about…
You need to pay the premium for life or your plan will end and you'll get nothing back.
You could pay in more than the cash lump sum paid out.
Get its over-50s' plan and you need to keep paying until you die. There are no breaks, so you won't be able to stop paying, yet the lump sum paid out is fixed. So the longer you live, the more you pay, while the amount paid back remains static.
Evaluating these plans requires a bit of simple arithmetic, often not even calculator-worthy, so here goes...
Step 1: When you will have paid in more than it will pay out.
These days, insurers can't discriminate based on gender, so let's call our example Bob – short for Robert or Roberta. (S)he's a 65-year-old in decent health who loves dancing and spending time with the family and who decides to put £5 a month aside in Axa's over-50s' plan. It promises to pay out a lump sum of £750 on death.
Divide the payout (£750) by the monthly cost (£5) to get 150 months; that's over 12 years. So by the time Bob's birthday cake has 77 candles on, the amount paid in will be exactly the same as the policy promises to pay out.
Therefore if (s)he carries on paying past this age, Bob will be making a loss.
Step 2: What are your chances of living that long?
While it's impossible to know, statistical averages give you a good idea of the risk. The Office for National Statistics How long will my pension need to last? will give you an idea.
In Bob's case, the average shows that a man who has reached age 65 in good health would be expected to live until age 86, a woman until age 89.
So let me make this loud and clear (you won't see this on Axa's site for the £5 plan):
An average 65-year-old woman will pay in £1,440 and receive £750. An average 65-year-old man will pay in £1,260 and receive £750.
And even if you went on and lived until 180, with Axa you need to keep paying in – although some over-50s' plans at least cap the pay-in at age 90 (see best buys below for more).
Of course, no one lives an average life, so factor in your health and the longevity of other members of your family to see whether you're likely to live for longer or shorter.
To be fair to Axa, its payouts do improve slightly for those paying in more substantial sums each month (though still the payout is poor). The table below shows how much it costs and the payout rates for different age and price combinations – and remember: the older you are, the longer your life expectancy.
AXA SUN LIFE OVER-50'S PLAN - HOW MUCH IT PAYS OUT 50 £1,425 73 £3,370 78 £11,440 81 £17,355 82 65 £750 77 £1,720 79 £5,435 80 £8,225 80 85 £230 88 £535 89 £1,675 89 £2,520 89
Even with today's pitiful savings rates, the situation is even worse once we factor in interest. If you put £5 a month in the top cash ISA with 2% tax-free savings, those starting at age 65 would have the payout amount saved up a year quicker, those starting aged 50 would have it saved four years sooner.
Therefore, for many people, simply putting money in a top savings account each month is a better option than getting one of these policies.
These plans lock you in
Over-50s' plans are insurance schemes, so once the money is paid in, you can't get it back. Furthermore, miss just one payment and it's game over – there's no payout and you won't get any cash back.
A few years ago, I made a film for BBC One's Watchdog where I met 84-year-old Mary Vickers. She had two SunLife policies with a combined total payout of £2,740 – but she had already paid in £3,700 and needed to keep on contributing £22 per month for life, as cancelling means you lose everything already put in so no payout is due.
Miss one payment and you get nowt
It used to be a firm term of Axa's policy that if you missed a payment you'd get nowt.
I've heard from many who'd been stung by this like one woman who tweeted me "HELP! Mum died two weeks ago and had a policy with Axa. Final payment was missed – as mum was ill. Now it's refusing to pay." Thankfully, MoneySavingExpert.com was able to intervene (see Axa pays up after twitter appeal) at the time and managed to get the full lump sum. But many others didn't.
Now if you miss a payment you've up to six months, to pay back all the missed premiums and the policy will start. Yet if you die after you miss a payment, then nothing is paid out.
So if you've got one – or you're thinking about getting one – best practice is set up a direct debit payment to make sure this doesn't happen.
The amount you're going to get paid may seem decent when you take it out – but each year it's eroded by inflation. So what looks like a lot at the start risks becoming a sum that won't stretch far enough – possibly not even enough to pay for your funeral plan.
Axa is well aware of this, which is why some existing customers have received letters over the years asking them to top up their payout by taking out new plans. Some providers do offer inflation-linked policies (see best buys) where the final sum increases (or decreases) with inflation, but the amount you pay in also goes up.
For example, with the inflation-linked plan from Legal & General the lump sum payout increases each year in line with the retail prices index (RPI) level of inflation. However, the monthly premiums will also rise by RPI multiplied by one and a half. So, if you were paying £10 a month and RPI is 3% you'll start paying £10.45 per month and risen to almost £15/mth by the tenth year.
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I've got a plan. Should I cancel?
Some people with plans (reading this with teeth gnashing) may be asking, "Should I cancel?". The answer isn't that simple, because if you stop paying now, all past contributions will be lost.
Clinical logic demands you ignore all previous contributions. Do the sums as if you had started paying today, and work out if you're likely to put in more from now on than it will pay out. Obviously, the more years you've been paying in, there will be less point in cancelling.
While over-50s' plans aren't right for everyone, I wouldn't want to discourage anyone from helping protect their loved ones from bills once they're gone.
An alternative is a standard funeral plan, whereby you pay for your funeral in advance, at today's prices. However, these aren't hitch-free either. For example, a plan might cover cremation costs in full but only partially cover burial costs and not include a church service (see our Death Happens: Plan For It guide). Plus, always ask what happens to the money if you die abroad or if the funeral director goes bust.
The straightforward option is to put money in a top savings account, or a tax-free cash ISA (for the latest rates, see our Top Cash ISA guide). Yet even this isn't risk-free – if you die early, you might not have saved enough to pay for a funeral.
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If you've poor health, play the odds and over-50s' plans can be lucrative
Although I've spent most of this guide so far ranting about the dangers of these policies, don't think every over-50s' plan is a nightmare for every customer. If you understand what you're doing and have weighed up the risks, you can win.
Let me be blunt: this means that if you're likely to die sooner than the average, these plans can be lucrative.
For example, if you've an already diagnosed medical condition, or you're a heavy smoker or seriously obese, these plans can be a good gamble because you don't need a medical even though your life expectancy will be substantially lower.
If we take someone with poor health at 65 who is likely to live until 70, they could take Axa's £74 per month plan which would pay out £13,360, while they'd only have paid in £4,400 – they'd get a whopping gain of almost £9,000. If they died during the first two years they'd just get back what they'd paid in plus 50%, still not a sum to be sniffed at.
Therefore if these are for you, read on.
Over-50s' plans: The best buys
Axa is the dominant market leader of these plans, and far from the best – both in cost and in favourable terms. All of the main policies require you to pay monthly, pay out a lump sum and don't ask for a medical if you between around age 50 and 85.
If you are one of the minority whom these plans do suit, there's no one best provider; it depends on your age and how much you pay in, so do the sums. To help, here's a table comparing six major providers.
|Min age||Total sum paid on death if paying: £10/mth||Total sum paid on death if paying: £30/mth||Age you stop paying||When will you be eligible for the full sum payout?||Inflation-linked option? (1)|
|Legal & General||50||£1,860||£6,050||90||12mths before full sum is paid (2)||No|
|Sainsbury's||50||£1,805||£5,870||90||12mths before full sum is paid (2)||Yes|
|Royal London||50||£1,800||£5,830||90||12mths before full sum is paid (2)||No|
|Shepherds Friendly*||50||£1,720||£6,080||90||24mths before full sum is paid (5)||No|
|SunLife (Axa)||49||£1,720||£5,440||You never stop paying (4)||24mths before full sum is paid (5)||No|
|Aviva||50||£1,525||£5,330||After 30 yrs or 90th birthday (3)||12mths before full sum is paid (2)||No|
|Note: (1) Inflation-linked accounts increase (or decrease) with inflation. (2) Full sum paid if accidental death within 12 months. (3) Whichever comes first. (4) Unless you opt to pay more with the premium capped plan. (5) Full sum paid if accidental death within 24 months. Correct as of March 2018.|
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What to do if something goes wrong
First, you need to complain to your insurance company directly. If it doesn’t respond, or if you don’t like what it says, then you don’t need to just take it.
You can escalate your complaint to the free Financial Ombudsman. The ombudsman is an independent adjudicator which will make the final decision on a claim if you are locked in a dispute with your insurer. For more on how to make a complaint, read our Financial Rights guide.