Is the FCA about to shut down the over 50s plan market?

Over 50s plans have long been a contentious member of the insurance landscape. Every few years, a TV programme or newspaper invariably digs up a long-standing customer, whose family has just realised that their mum or dad has paid thousands into a plan that will only ever pay out a fraction of that when their loved one dies. Yet if they stop paying, they will lose everything.

These have long been the rules of the over 50s market. But providers have never done a particularly good job of ensuring that all customers understand this trade off when they buy the product. And while these plans certainly have value for certain customer groups (more on that in a moment), the problem is that at their worst, they offer some of the poorest value of any products in the financial services landscape.

Last month, a long-anticipated FCA market study into the whole protection sector was announced. And there was a special shout out for over 50s plans in the initial scope paper – which would suggest that this market is set to come under particularly intense scrutiny.

Some providers in this market have not done themselves any favours over the past few years – ignoring the shortcomings in their communications and product design - and failing to up their game in response to Consumer Duty.

Now – they are facing a potentially market-ending event. Let’s be clear – it is well within the powers of the FCA to introduce new regulations that effectively shut this entire market down. And in my humble opinion, some firms could have done much more to prevent the inevitable scrutiny which is now arriving.

The case for over 50s plans

I started out as a fierce critic of over 50s plans. But after working with Royal London – when they made a surprise entrance into the market 10 years ago, my views were changed.

It was clear to me from watching focus groups that there were a group of customers for whom these products made sense. One of the key benefits of over 50s plans is that you can sign up from as little as £4 a month. Many low income households choose to buy a plan when a close friend or relative dies – and they realise just how expensive a funeral can be. The target customer base tends to be very pessimistic about their mortality. So if they do grasp the fact that they could end up paying in much more than they get out – they often don’t mind. They simply don’t believe they are going to live that long – and if they do, it’s a nice problem to have.

For those that have the financial means, almost any alternative to over 50s tends to be better value. Putting the money into a savings account would be one simple option – which should at least mean that your pot is protected against inflation. But many of those on low incomes don’t trust themselves not to raid that pot at some time in the future. So the idea of paying into a pot they can’t touch is appealing.

If they can afford a funeral plan – then this is likely to be a more dependable and cost-effective way of saving for their funeral. But these tend to start from upwards of £20 a month. 

A failure of communication

So for some people, over 50s plans are a reasonable solution. But it’s vital that customers go in with their eyes open.

They need to understand that if they buy a fixed payout plan – then they have no protection from inflation. Indeed many of those who bought plans over the last few years will have now seen the value of their plans heavily diluted by the high inflation we’ve seen. But I doubt that all of them understand this clearly.

There are also a number of other elements to over 50s plans which are not great practice – and don’t really stand up to scrutiny in a Consumer Duty world. Some plans in the market, for example, leave you paying into your plan until you die – even if you live well into your hundreds. Most plans do include some kind of premium cessation age (the age when you can stop paying in) – but even then, you may end up paying till you’re 95 before you get to stop and retain your full benefit.

Some plans include a feature which Royal London invented and called “protected payout”. This meant that once you got past the point where you had paid in as much as you were going to get out – you would still be able to claim something on your policy, even if you decided to stop paying. Royal London has since pulled out of the market altogether – but this is its legacy. And it’s good to see some providers still offering that benefit. Sadly, most firms have not added this into their products – meaning that if you stop paying, you lose everything.

Eyes on the prize

The final element of the over 50s market which is a bit sleazy is the way it chooses to sell these policies. Much of the market is driven by daytime advertising – fronted by trusted celebrities, offering the promise of a free gift.

This has never felt like the right way to help people make a considered financial decision.

 I think that shutting down the over 50s market altogether would probably be a step too far. But the industry has not done itself any favours up till now – and has missed the opportunities and cues to clean up.

It’s no coincidence that Phoenix announced this week that Sunlife – the biggest player in the market – is no longer up for sale. No one is going to buy it with a potentially market-ending event looming on the horizon. If the over 50s market is going to survive, the players in the market need to get to work on improving communication and strengthening the value equation as soon as possible.