"The only possible rationale for a Term to 90 policy recommendation must be that it’s a cheaper version of Whole of Life (WOL), based on a prayer that the customer will die before the age of 90."
Various protection providers offer Term to 90 policies, which, as the title suggests, will cover a life until the age of 90. Now, why would a customer want to do that?
They might want to repay debt. Although it’s unlikely that a mortgage debt would be outstanding until the age of 90, the customer will likely use equity release and may want to replace the outstanding debt upon death. This would allow the next generation to retain the family home instead of the lender selling it to repay that debt.
Alternatively, customers might want to cover funeral expenses and/or leave a legacy. Unfortunately, if they were to live a day too long, the premiums paid would be in vain.
Maybe they want to retain pension income for the remaining spouse. If one or both wish to maintain income upon their death for the other, because state and private pension income could be reduced upon the first death, a lump sum would certainly help.
“Again, death would have to occur before the age of 90, and (of course) there’s no guarantee that would happen.”
It’s also possible to purchase a Joint Life Second Death Term to 90 policy. The only reason anyone would recommend a second event policy is to cover Inheritance Tax (IHT) liability.
Using a Term to 90 policy to mitigate IHT means both spouses would need to die before the age of 90 to meet that objective. If they don’t, customers will have paid 25, 30, 35 years’ worth of premiums for nothing in return, because they lived a day too long. I’m not convinced the Financial Conduct Authority (FCA) would call that a ‘good outcome’.
Advisers have told me that they recommend Term to 90 for IHT mitigation because customers have agreed there’s a strong likelihood that they will be either dead by the age of 90 or have given away enough of their assets such that there would no longer be any IHT liability upon death.
“Possibly; even probably. But not definitely by any means, especially now that the IHT calculation will include pension assets.”
More often than not, a large part of an estate is the value of the principal residence, and it’s not easy to lose that asset without creating a gift with reservation or a requirement for market rate of rent.
I can’t think of any circumstance where the reason for cover isn’t the financial consequences of death – whenever it occurs. Therefore, the only possible rationale for a Term to 90 policy recommendation must be that it’s a cheaper version of Whole of Life (WOL), based on a prayer that the customer will die before the age of 90.
“Let’s have a look at the risks of this recommendation.”
On average, a man aged 60 has a 1 in 3 chance of living to the age of 90. That means Term to 90 policies are appropriate for two-thirds of the population. If only we knew which two-thirds.
There’s a 60% chance that one of a couple aged 60 will live to age 90. That means a Term to 90 policy to mitigate IHT is only appropriate in 40% of cases. Knowing this, you have to question why an adviser would endorse such a product.
In my opinion, two key factors influence this recommendation.
The first, as previously mentioned, is that Term to 90 is much cheaper than WOL. Usually, customers aged 60 can get twice as much cover for the same premium if it’s Term to 90 instead of a WOL policy.
“But isn’t that false economy, given that the customer has a reasonable chance of surviving beyond their 90th birthday?”
The other factor is controversial, and one which the FCA’s protection market study is investigating. The commission payable on a Term to 90 policy can be as much as three times that of WOL for the same premium, depending on the age of the customer at inception.
Half the price and three times the commission; I think you get the picture.
