MTTM Podcast Episode 334 – Whole of life insurance explained & The biggest homebuyer turnoffs

10 min Read Published: 29 Aug 2021

Episode 334 - On this week's podcast Harvey explains how whole of life insurance works including the types of policies you can buy and who they might be good for. Bronte joins Andy and reveals the top 15 homebuyer turnoffs and what can be done to increase the asking price of your property. Finally, Laura talks to Andy about whether getting a loan with the sole purpose of increasing your credit score is a good idea.

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Abridged transcript - Episode 334

Andy Leeks 00:07

So we're going to start the pod this week by speaking to Bronte who's going to be coming on the show and talking about house prices. More on that in just a second. We've got Harvey coming up in the middle of the show, who's going to be talking about a particular life insurance product that is often misunderstood and then at the end of the show, we're going to be speaking to Laura, who's going to be talking about credit ratings, what can impact them, and whether taking out a loan to try and improve your credit rating is a good idea. So let's start with Bronte and she's going to be talking about the top 15 homebuyer turn-offs that could end up costing sellers more than £65,000.

Bronte Carvalho 01:56

Okay, so before we dive in just to let you know we've calculated all of these costs based on this month's Rightmove estimation of the average UK property price, which at the moment is £337,371 pounds. For the full breakdown of this piece, check out the article "15 top homebuyer turn-offs" in the resources section below.

Andy Leeks 10:15

And so for the next section of the team takeover podcast, we're going to be welcoming Harvey back to the show. Harvey, if you're a regular listener to the podcast has been on the show a few times. And she's our resident expert that talks about all types of personal insurance. Now, Harvey, we brought you onto the show this week, because there's been quite a lot in the press about whole of life insurance and it's been quite negative in terms of the general view on this product. I wanted to bring you onto the podcast to really dispel some of those myths and provide a bit of balance. So Harvey, welcome to the show.

Harvey Kambo11:51

Often people who buy life insurance assume that life insurance will pay out when you die. The truth is that most of the products that are available in the market, and the ones that are most commonly bought are term assurance products. Term insurance products only pay out if you die within the policy term. So you buy the policy for a number of years and if death happens within those years, then the policy pays out. If you live beyond the term, then great, you've had the cover whilst you needed it. The policy doesn't pay out anything at the end. Whole of life insurance contracts are slightly different. These types of policy actually do what people assume a life insurance policy would do, which is they pay out when you die as and when that happens. So whether you die early in life, or you have a full full life and die well into your 80s and 90s, it simply pays out when you die.

Andy Leeks 12:49

So who is it that needs whole of life insurance and why would people buy that product?

Harvey Kambo 13:18

People would buy it when they require a sum of money to pay when they die, regardless of when that happens. Usually, this is when there's going to be a cost upon your death. So the kind of things that people leave money behind to pay for are things like funerals, they might want to leave a gift for somebody, they also may want to fund the inheritance tax that will be payable on their estate once they've passed away. So those three things are the main reasons why a whole of life contract is usually bought. You do get some policies that are called over 50s plans, which are a little bit like funeral plans, but essentially, they're like a whole of life contract.

Andy Leeks 14:10

So why is there so much negativity surrounding the product?

Harvey Kambo 14:19

The negativity is stemming from a particular type of whole of life insurance contract. Qualified contracts in previous years have been available on a 'maximum' or a 'balanced' basis. A 'maximum' whole of life insurance policy is one where you would have started out paying quite a low premium. It is then reviewed on a regular basis. It might be every five years, it might be every 10 years and the insurance company will assess whether the money that you've paid for your policy is actually going to be enough once it's invested in order to fund the payout when you die.

If the premium that you've paid is not enough, the insurance company will give you a choice. They'll say, we can either increase the amount that you're going to pay for your policy so that we still pay out what is required when you die, or, they'll say you can keep your premiums the same, but we will reduce what is going to be paid out at the end. It is these kinds of policies that have attracted a bit of negative news coverage recently, primarily because there are a few people who haven't really understood how the policy works. That might be because the advisor that sold it to them hasn't explained it properly or perhaps they haven't understood the jargon within their documentation that they've received from the insurance provider.

Essentially, at each review the insurance company has to work out whether the premiums that you're paying once invested will grow to fund the level of payout that needs to be made when you die. Now, if growth slows down, as it sometimes does, and if the markets don't produce the kind of returns that the insurance company was expecting, then that review is likely to result in an increased premium or a reduced sum assured. Clearly, that can be quite disappointing for policyholders if they haven't understood that properly at the outset.

Andy Leeks 16:39

So you mentioned earlier that there are different types of whole of life insurance, they've got different names. You've already explained maximum benefit whole of life insurance, what other types are there?

Harvey Kambo 17:05

Ok, so lets explain the balanced one first and then we'll talk a little bit about the guaranteed types of policies, which are predominantly the ones that are available in the market today. If you've got a policy that you took out some years ago, then you might have something called a balanced whole of life insurance policy. Balanced policies were probably a little bit more expensive at the outset, but the reason why they are more expensive is to stop massive hikes at the reviews. The insurance company will have factored in a little bit more in terms of what the real cost of the policy is going to cost from the outset. So essentially, you're paying a little bit more when you start the policy, but you shouldn't see the kind of hikes as time goes on, as you would do with a maximum whole of life insurance policy, where the policy would have been quite cheap at the outset.

Then there is a third type of whole of life insurance policy, which is a 'guaranteed' policy, which is the safest bet. Like the name suggests, the premium that you pay for a guaranteed whole of life insurance policy is fixed for the duration. So, for as long as you live, you will pay the same premium throughout. This is predominantly the type of policy that's available in the market now.

Andy Leeks 18:25

So who would buy a whole of life insurance policy and why would they buy it?

Harvey Kambo 18:58

The type of people that would buy a whole of life insurance policy are those that will have some sort of cost that's going to arise when they die, regardless of when that happens. Now, when we talk about mortgages or loans, these things are usually only a concern to us whilst we're working because it is the income that we generate during our working lives that funds our mortgage and the cost of raising our children. So our lives see an actual financial impact if we die during our working lives. So most people only need to take a life insurance policy for as long as they need to pay off a mortgage or until their children are of an independent age. Then, in later life, most people start thinking about the financial impact of their death and the inheritance tax that might be applicable to their estates. If that is you then you may want to put some life insurance in place and leave it to your beneficiaries so that they can pay the tax that's going to be applied to your estate when you die.

Andy Leeks 20:52

So what about those people who knowingly or unknowingly have a 'maximum' or 'balanced' type of whole of life insurance policy that is on this 'maximum' or 'balanced' basis. They're looking at the cost of it and knowing that there may be increases that are coming and perhaps they can't afford those increases. What can they do?

Harvey Kambo 21:13

The first thing to do is speak to the insurance company. Also, if your advisor who provided the original advice when you arranged your policy is still in touch with you, perhaps contact them as well and discuss what options are available to you. The insurance company may give you options to reduce the sum assured, but you might feel that that's not viable, or it doesn't feel like it's cost-effective for you. Some policies can be made 'paid up', which means that you no longer pay any further premiums into them. This option doesn't always exist, however. Some policies will also have a surrender value, but it is often quite low compared to what has been paid in and that becomes problematic for some.

The key thing here is, as much as it can be painful to know that you've spent a lot of money on a product - to then find out it's not going to do what you expected it to do - is not to throw good money after bad. Don't keep paying for something in hopes that it will get better at some point. Ultimately, the answer is going to be different for different people depending on the reason they set up the policy.

Andy Leeks 22:42

Thanks so much for coming on Harvey. They welcome Andy. So for the final piece on the pod, we're going to be welcoming Laura back to the show who's going to be talking about whether getting a loan to improve your credit rating is a good idea. So Laura, welcome to the show.

Laura Mossman 23:16

So this is something that is often talked about in the various money groups, including on our own Facebook group, where people have considered whether getting a loan, or perhaps a credit builder credit card could help them to improve their credit rating. While it's undeniable that by taking out a loan or another credit agreement, and being responsible, keeping up with your repayments, and just making sure that you make all of those payments on time will improve your overall credit rating, there are some other things to consider before you go down this route.

So the first of those is to think really hard about whether you need to take out this loan. Is there a specific reason for it? It's never a good idea to borrow money that you don't need to borrow, because by taking out a loan, you're using up some of your 'credit quota'. So for example, when a mortgage lender is assessing the affordability of a future product you take out, they're going to be looking at any outstanding loans and the payments that you have to make to those. So you can end up inadvertently limiting the amount that you can go on to borrow for say a mortgage or re mortgage or even something like car finance.

Another thing that you need to consider is whether you are actually going to keep up with the repayments because the effect that missing a payment or defaulting on the loan will have on your credit rating will be huge. It could dramatically affect your life in the future stopping you from getting a mortgage, securing car finance and it can even go so far as limiting the current accounts that you could potentially open in the future. So these things are all worth bearing in mind before taking that step to take out a loan simply to improve your credit rating.

Another thing to bear in mind with all of these things, and especially these credit builder credit cards, is you're going to pay a much higher rate to take these products out, which could then impinge your ability to actually make the repayments. It may just be better to look to improve your credit score in other ways and there are quite easy steps that you can take to make you a more attractive proposition to lenders in the future.

Andy Leeks 26:17

Well, that moves us perfectly on to what you're going to talk about next. So what is it that people can do to help improve their credit rating.

Laura Mossman 26:36

A simple first step is just to check your credit file with the main credit reference agencies. That is Experian, Equifax, and TransUnion. By doing that, you can make sure that there aren't any mistakes on those files and can correct them. Make sure that everything is accurate in terms of your address, your date of birth, and any other information such as whether you are on the electoral roll. These can all help boost your credit score.

There are also other services that are available that are designed to improve your credit rating and we have provided links below to Loqbox and Experian Boost for you to check out.