Thousands of life insurance customers could get compensation due to unaffordable price hikes of up to 1,000 per cent they were never warned about.
The issue surrounds whole-of-life policies, a type of life insurance guaranteed to pay out a lump sum, often of £500,000 or £1million, upon the death of the policyholder.
These policies are often used to assist loved ones, and to pay inheritance tax bills.
But many insurers sold unit-linked whole-of-life policies with very cheap initial premiums which then soared by up to ten times in price, according to law firm WLI Claims.
Lack of cover: Many former life insurance policyholders had to surrender their policies due to unexpectedly massive premium price increases
Many policyholders then gave up the policies as the premiums became unaffordable, with three consequences – they lost all the premiums paid in, they lost the end-of-life payout, and they were often unable to buy a replacement policy.
The issue is that many policyholders were never told their premiums could increase in this way, according to Peter Gatenby, insurance policy expert at WLI.
By the time policies were reviewed, often after 10 to 15 years, customers could have paid in tens of thousands of pounds in premiums.
Gatenby said: ‘They were structured in a way that they had much lower premiums than you would normally expect to pay for a whole-of-life policy. If you take one out as you get older the premiums can be quite high.
‘What a number of insurance companies did was have a low-cost version of this.
‘So the premium could be just £100 a month.
‘After 10 years, when the policy had its first review, there would have to be a substantial increase, and every year thereafter the premiums would keep increasing.
‘What [insurers] didn’t do was illustrate to prospective customers how rapidly premiums would increase in the future.’
This practice happened between the 1980s and 2000s, Gatenby said, with millions of policies sold in that time.
Although life insurance regulation has changed a lot since then, the fundamental shortcoming by insurance companies is the same – a breach of contract.
Because many customers were effectively wrongly sold something they could never claim on, this allows them to seek compensation from insurers, according to WLI head of legal Karl Cameron.
WLI now wants to hear from life insurance customers who believe they may be affected. Customers should contact WLI via its website.
The law firm will then hear their story and work out if they have a valid claim.
WLI will work on a ‘no win, no fee’ basis, with the fee varying depending on the complexity of each case.
Cameron said this made it difficult to say what the average fee would be, but that it ‘has to be just and reasonable’ and that ‘you’re not talking 50-60 per cent, it will be the other end of the spectrum’.
WLI Claims will not say which insurers are involved, but said they would reveal that information shortly.
If an insurer is no longer trading that is not necessarily a barrier to a successful claim, Cameron said.
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