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Money Talk

ANDREW WARWICK-THOMPSON answers your questions. Q) When I acquired a mortgage four years ago, my building society insisted that I took out its life assurance policy. I had to attend a medical and the doctor's report said I was overweight, but otherwise healthy. The insurance company then added Pounds 7.50 a month to my premium.

I was not allowed to see the report or told how overweight I was considered to be. I have now lost weight (about three stone) and am likely to lose more.

I think the building society should stop charging me the extra premium. Do I have a case? Can I apply for a refund for the time I have been losing weight but paying the Pounds 7.50?

A) Generally speaking, a premium "loading" in respect of medical underwriting can be removed from a life assurance policy if the medical condition to which it relates no longer exists. I hope that the following points will be a useful general guide.

The type of life assurance policy you were sold will depend on whether you have a repayment or "interest only" mortgage.

Under a repayment mortgage your monthly payments to the building society will comprise an interest and capital repayment element. Thus, the amount of capital outstanding is reduced to zero over the term of the mortgage. In this case, most borrowers take out some form of mortgage protection term assurance policy, the sum assured under which is sufficient to repay the outstanding capital should the policyholder die during the term of the mortgage. Because the amount of capital outstanding under a repayment mortgage reduces over the term of the mortgage, most mortgage protection term assurance policies have a decreasing sum assured to reflect the reducing debt.

If you have an interest-only mortgage, the monthly repayments comprise interest only. Therefore, at the end of the term of the mortgage, the amount of the original capital loaned will be outstanding. In order to meet this debt, some form of investment policy is normally arranged to run side by side with the mortgage. Such investment policies are, most commonly, a life assurance endowment policy or a personal pension plan or a personal equity plan. The first of these is most likely to have been sold to you.

Premiums to a life assurance endowment policy comprise two elements. The first is a premium for the life assurance provided, which is equal to the amount of the mortgage, and the second is an investment content that is invested to provide a lump sum to pay off the mortgage at the end of the mortgage term. A traditional endowment policy will provide a guaranteed sum on maturity to which bonuses are added on an annual basis. The combination of the guaranteed sum and the reversionary bonuses over the term of the policy combine to provide a lump sum to repay the mortgage debt.

If you have a mortgage protection term assurance policy, it should be relatively straightforward to undergo another medical examination and, provided that this proves satisfactory, have the Pounds 7.50 premium loading removed. None of the other policy terms and conditions should be affected.

The situation with an endowment policy may be different. If you have a more traditional qualifying endowment policy a variation might be possible, subject to a satisfactory medical report, for example, by continuing to pay the same premium, including the additional Pounds 7.50 per month, but with an increased investment content to reflect the reduction in the cost of the life cover in recognition of the reduced mortality risk as a result of your weight loss. Alternatively, the Pounds 7.50 premium loading could simply be removed with the other policy terms and conditions remaining unaffected.

I am afraid that there is nothing that can be done by way of a refund in respect of the premiums paid up until the date of the policy variation.

Andrew Warwick-Thompson is a lawyer who works for Bacon and Woodrow, the international firm of actuaries and consultants. Readers who wish to put questions to him (no names will be published) should write to the Personal Finance Desk, The TES, Admiral House, 66-68 East Smithfield, London E1 9XY. No personal correspondence will be entered into and no legal liability will be accepted for the advice offered.

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