Decades of Life Insurance Mis-Selling:
Can You Claim Compensation?

As with most consumer claims, the first step is to raise a complaint with the company or individual you purchased the policy from. In this case, you should contact your bank, insurance company, financial adviser or insurance broker, and outline your complaint – based on financial mis-selling – and the circumstances. If they do not respond or you are not happy with their response, it is possible to escalate your complaint to the Financial Ombudsman Service.

The Financial Ombudsman Service (FOS) is an independent body that handles cases where there are disputes between FCA-regulated financial organisations and their customers. Over previous years, and a sign that the FCA’s review is long overdue, many life insurance policyholders have been taking their cases to FOS to ask for compensation for their financial losses. Here are some useful illustrative examples of their complaints:

Mrs M, a 77-year-old widow, was recommended by financial planners, St James’s Place to take out a whole of life policy in 2011. There was an outstanding mortgage on her property, which she wanted paid off when she died, so that her family could continue living in the home.

The sum assured was £132,000, with premiums costing £525 per month. When the policy was reviewed in 2021, Mrs M was told the premiums would have to increase to £1,600 to maintain the same level of cover. This was unaffordable and Mrs M complained to St James’s Place that she wasn’t aware such a significant increase could happen. She believed the policy was index-linked and the premiums would only rise in line with inflation.

St James’s Place denied the policy had been mis-sold but paid Mrs M £250 for the delay in answering her complaint. She was unhappy with this response and took her complaint to FOS.
The Ombudsman upheld Mrs M’s complaint, saying that:

• The policy had been mis-sold, as Mrs M hadn’t been told it was reviewable and that the premiums could rise to unsustainable levels.
• Mrs M would have been distressed at learning the new monthly premiums would be over £1000 more expensive than what she had paid for 10 years, so should be paid £500 in compensation.
• St James’s Place must compensate Mrs M by refunding the premiums she paid for the policy, less the surrender value.
• Interest of 8% should also be added to the redress.

Mr and Mrs P were sold a whole of life policy by Lloyds Bank in 1992. The amount insured was £50,000 and their monthly premium was £36.55. The level of benefit dropped to £43,335 after 12 years and to £19,000 another eight years later. They claimed that they were never told the sum assured could or would decrease. After complaining to Lloyds, the couple were offered just over £11,000 in refunds and interest.

They rejected the offer and asked FOS to look at their case. After a detailed and independent investigation, FOS agreed with Lloyds and concluded that the offer was fair and reasonable. Of note:

• Lloyds admitted mis-selling the policy and refunded the premiums that had been paid.
• The mis-sold policy would be cancelled.
• FOS agreed the couple still would have needed life insurance from 1992 and were covered by the policy, even though it was mis-sold.
• Lloyds was correct to subtract a hypothetical cost in their calculations, representing the period the couple benefitted from life cover.
• The compensation awarded would allow the couple to purchase a new policy more suited to their current needs.

Mr and Mrs D took out a Legal & General ‘whole of life’ policy in 1997, which cost £18 per month and provided life cover of £32,880. After 10 years, it was reviewed and it was recommended to them to take out an additional policy for £10,478 (costing another £13.11 per month) to maintain the sum assured at £32,880. They declined, meaning their life cover was now a significantly reduced figure of £22,402. Five years later, the policy was reviewed again, at which point Mr and Mrs D surrendered it and received £432.54. They complained to FOS that Legal & General had given unsuitable life insurance advice.

FOS reviewed the complaint, considering the couple’s circumstances in 1997, including other life assurance benefits offered by their workplace pensions and mortgage, property ownership and what they could afford to pay.

The Ombudsman concluded that the couple did not require a ‘reviewable’ policy providing life cover and should have been recommended a ‘non-reviewable’ 20-year level term assurance policy.

Legal & General was ordered to pay redress based on calculating the total monthly premiums paid, minus the cost of a 20-year level term assurance policy, factoring in interest at 8% on each net premium and the surrender value of the whole life policy.

Ms D and Mr F, a married couple, were recommended by Barclays to take out a whole of life policy in 1993 when buying a property together. The couple complained to FOS that the policy was unsuitable for their needs and should have been a decreasing term policy, as the money would have been used to pay off the mortgage had either of them died.

The Ombudsman reviewed the adviser’s documentation from the time, which was found to be vague, with no clear indication of whether the two types of policies, and their costs, had been clearly explained to the couple.

Barclays was ordered to compensate Ms D and Mr F the difference in cost of the two policies, minus the surrender value of the whole of life policy, plus interest at 8%.

Mr C took out a 25-year flexible mortgage plan through ReAssure in 2000. It included a savings element, administered by a third party, invested into an ISA and designed to repay a mortgage at the end of the term. There was also a life assurance element, administered by ReAssure. Both the premiums and level of cover were reviewable.

The sum assured was £19,957 and Mr C paid monthly premiums of £40.86 (£12.23 went towards the life cover and £23.86 to the ISA). Mr C added a new policy in 2001, and the total sum covered was £100,000.

In 2020, Mr C was advised that the cost of the life cover was more than he was paying and money from the ISA was being used to fund the difference. To maintain the ISA, ReAssure reduced the level of cover from £80,043 to £41,600. Mr C complained that he should have been able to consider other alternatives to a sum assured reduction and received compensation.

By March 2023, Mr C received a statement showing that the plan’s value was £9,123.83 and the ISA still wasn’t on track to pay off the mortgage. He asked ReAssure to remove the life assurance element and put that portion of the monthly premium towards the ISA, but was told this would not be possible.

Mr C and ReAssure looked at different ways to cancel or reduce the life assurance cover element of the plan, as a result of which ReAssure admitted providing Mr C with incorrect information and paid him £500 in compensation.

Still not satisfied with the outcome, Mr C took his complaint to FOS. An Ombudsman considered whether or not Mr C had been treated fairly from March 2023. The Ombudsman looked carefully at the original terms and conditions and key features documents provided to Mr C decades earlier. It was noted that:

• As the plan was flexible and reviewable, and the life assurance cover became more expensive over time, less of the premium would be available for the ISA investment.
• While there was information about regular reviews and about what would happen to the ISA investment if payments were increased, there was no mention of reviewing the life assurance portion or what alternative options the policyholder would have if the premiums were insufficient to maintain it.
• Mr C asked to reduce his life cover to £5000 and pay the leftover premium into his ISA, which ReAssure should have considered possible.
• It would be difficult to calculate what compensation Mr C would be due, as there were several changes to his policy and his wishes had changed over time.
• Mr C held another similar policy with ReAssure and this should also be considered in the Ombudsman’s decisions.

The Ombudsman ordered ReAssure to compensate Mr C for the loss of investment in both of his ISAs from April 2023, on the basis that the life assurance cover should have been reduced to £5000 and his additional premiums diverted to the investments. The calculation should take into account the monthly payments plus the percentage growth achieved, and Mr C should also be paid the £500 compensation for the distress and inconvenience caused, if not already paid.

Sarah Spruce, Legal Director at TLW Solicitors, comments:

“These case examples remind us that the Financial Ombudsman Service is a vital resource for consumers. Life insurance is something many of us may have taken out years ago without fully understanding the small print. The FCA are understandably concerned about the possibility of large-scale mis-selling over the years, with the prospect of many people having been sold the wrong type of policy or not having the terms and conditions explained clearly. My team and I welcome the FCA’s industry-wide review and look forward to the regulator’s findings.

Reviewable policies are subject to regular review, but it is not always apparent by how much the premiums may increase over time or that the sum assured can decrease significantly, in turn making them unaffordable.

At TLW Solicitors, if you are worried that you or a loved one have been mis-sold a policy of insurance, we can assess your case and determine whether you have grounds for making a claim. The claims and appeals processes can be tricky and time-consuming, so having us by your side offers peace of mind. Get in touch for a confidential, no-obligation discussion and we will explore whether you are eligible to make a ‘no win, no fee’ compensation claim.”