‘The impact of Consumer Duty on legacy life insurance policies’ by Paula Steele published in FTAdviser

The 31^st July has come and gone and we are now in the new (or not so new) world of Consumer Duty on legacy products.

John Lamb Hill Oldridge is a specialist life insurance broker for high- and ultra-high-net-worth clients. It has a legacy book of over 1,300 policies and remains responsible for ongoing advice to the clients. Dan Garcia, head of the legacy policy team at John Lamb Hill Oldridge, has commented:

“We should all have carried out a fair value assessment on all legacy life policies – at the very least having asked insurers to confirm that their legacy products represent fair value for the clients. Our experience is that some insurers have published statements on their websites to say that current products offer fair value but their response on their legacy books has been patchy with a typical response being ‘we will tell you on a case-by-case basis if the policy is not fair value’. We have done what we can in this regard.”

However, in terms of Consumer Duty the issue is not only about fair value of the product, but also about offering the client an ongoing service where you are in receipt of ongoing income – a big issue is that advisers may not have the systems or records to be able to do this. It is becoming increasingly difficult dealing with insurers as they are losing the staff with expertise on their pre-Retail Distribution Review 2013 (RDR) contracts and consolidation within the industry has magnified this issue.

What advisers need to be considering

In many cases the client will actually be the trustees of the policy and advisers should have taken the trustees on as clients and have carried out anti-money-laundering checks on them. Industry back-office systems are not good at identifying trustees but rather hold assets by life insured.

Trustees have assets worth millions of pounds tied up in insurance policies and spend little or no time on reviewing them and often receive very poor information from insurers and advisers. Trustees should be reviewing the sufficiency of cover and whether a policy remains appropriate. If clients have made gifts then perhaps cover can be repurposed to cover a seven-year tail? If gifts have been made, is the level of cover now too high? If assets have increased in value then should trustees think in terms of increasing cover?

Trustees should also be reviewing any contractual options within the contract – are there renewal or conversion options? Should these be exercised? If a contract is written to age 65 or 70 but the client will want to maintain cover through to age 90 or will be wanting permanent cover, then should the trustees be advised to extend the contract immediately or wait until the last possible date?

When there are renewal or conversion options to term insurance then it will almost invariably be worth taking the option at an earlier date rather than deferring the decision, but for younger clients looking to maintain permanent coverage then this is likely to be more marginal. Many pre-RDR 2013 contracts have investment elements and surrender values. Whether the current investment selection is correct for the trustees given the very long-term nature of the contracts is something that should certainly be considered.

Advisers need to be helping trustees to review the trust’s arrangements and in particular flagging if a policy is held through a relevant property trust (discretionary trust) that they will need to be filling a decennial return to HMRC. If the value of the policies (which will be the higher of premiums paid or any surrender value) along with any other assets held through the trust exceeds the nil-rate band for inheritance tax (IHT) (£325,000 in 2024/25) then 6% tax will have to be paid on the balance over £325,000. Many trustees and lives insured are not aware of this and the trustees need to plan for any tax that will have to be paid and consider how they will meet the tax charge when typically they have no liquid assets in the trust. Many trustees will be holding policies that are approaching (or have been through) the 30-year anniversary of inception and if the premiums are more than £10,833 a year, there will have to be a return made.

Insurer data and the client/clients’ adviser’s data is frequently out of date with regard to current trustees and beneficiaries. Insurers will only pay out benefits to the current trustees on their system in the event of surrender or claim and, in our experience, there is more often than not a mismatch. It may be as simple as a trustee having died (insurers will need to see an original death certificate) or new trustees having been appointed. If the assets are earmarked for paying IHT and the cash will be needed in order for the executors to obtain probate then a delay while the insurer’s records and the reality of the trustees is aligned, which can take months, is not advisable.

Author: Paula Steele, Director