Journalists are interested in new things. Often, newness is, in itself, a reason to write about something. And rarely do journalists look later to see what the product or concept really achieved.
But the acid test of a new product is whether it is followed up in the marketplace with “me-too” products – the ultimate accolade.
Journalists love giving their opinions of new products. We like – and readers do too – “star ratings” so that the best gets five stars while products which offer no advantages over existing lines end up with one or two.
But every so often, a new product comes along which is so appalling, so unwanted, so unneeded, and so dreadful for consumers (and for the reputation of the financial system) that the star system utterly fails.
These are products which are so bad that you wonder who or what could have conceived them. Did the designer pause for one second to think how the creation would play in the market, how critics would see it? They are so awful they deserve minus five stars – although designers have yet to come up with a symbol for that amount of negativity.
The very fact that a minus five product has obviously not been tested in this way suggests those behind it ought to go back to financial services primary school.
So, step forwards The Children’s Mutual (the relabelled Tunbridge Wells Equitable Friendly Society) for the ultimate minus five stars protection product accolade (how do you do a reverse roll of drums?).
The plan it has come up with is the “Return of Premium Term Life Insurance” which is hailed with: “At last. A term life policy that pays out if you die. Or if you don’t.”
That appears to be wonderful. In fact, ACE Europe, the underwriter working “in association with The Children’s Mutual”, says: “Sounds too good to be true, doesn’t it? After all that’s not how term life policies usually work. They only pay out if you die before they end. If you survive, you and your family get nothing and you can’t help thinking you’ve wasted your money. Well, that’s not how our policy works. We still pay out to your family if you die during the policy term. But if you don’t, we give you all your premiums back when the policy ends. So you’ll have something to look forward to at the end of the policy term.”
But as the Office of Fair Trading, Trading Standards departments and Scambusters, so often tell us, if something looks too good to be true, then it probably is. For while this product is totally legal and totally Financial Services Authority-regulated, anyone who signs up is a bound to be a loser.
So look at what a typical policy with the cash-back deal promises. And because of The Children’s Mutual link, let’s go for an 18 year term (that covers a child from birth to adulthood). The maximum cover is £100,000 which few independent advisers would claim is sufficient. A 35 year-old non-smoking male would have to pay £57.99 a month for this cover – (reduced to 99p for each of the first two months as an introductory offer).
Now, you don’t have to have term assurance rates on your screen to think that this is perhaps at the top end of the price range. In fact, it is so top end that it is off the scale. It’s around eight times as much as conventional term assurance. You would need to be a very serious impaired life case to pay so much.
According to MoneySupermarket.com, the best value term assurance for this risk is Legal & General via Helpucover at £6.40 a month (one-ninth of the Ace deal). There’s Aviva cover at £6.81 and the AA at £6.87. And there’s plenty of others a few pennies more expensive. None of these is reviewable.
The appeal of the £100,000 maximum and the Children’s Mutual name is to lower income groups. But if policyholders miss just one premium – and it’s much harder to find £57.99 each month than £6.40 – the life insurance is invalidated, as you would expect, but the return of premium offer ends as well. There is no surrender value.
Now for the compound interest arithmetic. At the end of the 18 years term, our policyholder, assuming he survived, will get back £12,525.84. But had he instead gone for one of the better value policies, he would have had around £50 a month to invest.
Saving £50 a month over 18 years and ending up with £12,525 is an annual return of just 1.3%. And that’s assuming the policyholder pays each month. Now had he invested the excess £50 a month this policy will cost him at 3% over the 18 years, his return would be £14,297, and at 5% £17,460 without worrying about penalties.
I am willing to bet with anyone that at some time over the next 18 years, interest rates will be much higher than 1.3% – and substantially higher than 5%.
If I was disgusted of Tunbridge Wells, I would splutter that this is a disgrace of a product. It is absolutely without merit, but takes advantage of those who do not seek advice – or don’t even spend half a minute with an online search engine.
The with-profits endowment has been vilified by the media. But to re-invent an endowment without surrender value and whose profits are limited to 1.3% a year takes some doing. And, should policyholders die during the term, then they will have paid a lot more for cover than they would otherwise.
It’s hardly a “win-win situation” as the Return of Premium website makes out. It’s a win for the provider – the number who will drop out will more than make up the 1.3% needed to ensure the arithmetic works – but a lose for the policyholder.
It’s so appalling that you wonder why the regulators – or the mainstream press – failed to spot it.
And how can David White, chief executive officer of The Children’s Mutual, and a leading child trust fund provider, say the following with a straight face? “We are delighted to announce the launch of what we believe to be the only product of this kind in the UK. We have worked closely with ACE to develop a form of Term Insurance that will offer our customers reassurance and value throughout as well as giving them an added reward at term end.”
Perhaps he should check online quotes and do his own calculations.