IMPORTANT! This blog post has now been replaced by an updated and more detailed blog: Beware Axa Sun Life and other over-50s plans.
I was intrigued seeing a Michael Parkinson advert for the Sun Life Over 50s plan the other day. It pays a fixed lump sum when you die, in return for paying in a set monthly amount. As the payout’s fixed, you can easily work out the relative returns and thus see if it’s any good…
So I’d jotted down in my ‘things to do list’ that at some stage I should get a spreadsheet out and calculate it. Yet this weekend’s Saturday Times money section beat me to it, with a great article by Laura Whateley called Pensioners warned about insurance policies endorsed by celebrities (remember you need to pay to read Times articles), so I thought I’d quickly jot down some further musings.
The basic, unattractive maths
In a nutshell, it did the maths and worked out it’s a poor return for many, listing the following example…
- Who? Man aged 65
- How much? Monthly payment £6/month
- What will it pay? The fixed cash payout is £570
Thus you can work out after (£570 / £6 = ) 95 months, just under 8 years, you have paid more in than it’ll pay out. Yet the article states the stats show on average most 65 year old men will live another 18 odd years, meaning the vast majority of those taking the plan would actually seriously lose out.
Note: This blog was originally written in 2010, by Jan 2012 the rates were slightly improved – so you need live a few years longer before you get back less than you put in.
Now let me take it a step further, as there are two other factors in this.
- You could earn interest in a savings account. Put the money aside in a top savings account each month and you’d earn interest on it. At a 3% interest rate after 95 months (the point after which it’s not worth it) you’d actually have £643, so that’s £73 more than the payout of the Sun Life plan. For a basic rate taxpayer it’s £628, higher rate £613.
Taking this into account, you’d actually be worse off nearly a year quicker than the initial maths suggests.
- The impact of inflation. Remember too, the longer you live (if we assume inflation stays positive over those years ie prices keep rising), the real value of that fixed payout for your relatives is diminishing. Of course, to balance that the longer you live, the lower, in real terms, the monthly payout is too.
In summary, with this example, unless you’re likely to die relatively soon, this plan is particularly poor. Though for someone seriously ill when they take it out, as there’s no medical, it could be worth it. Though even that cover equates to ‘die within the first 2yrs all you get back is what you paid in plus 50%’, so for our nominal 65 year-old man, to max this out you’d need to live between two and eight years!
Is it always awful? This is just one scenario, the odds may be better for others. To work it out for yourself simply divide the likely payout by the monthly pay in – that’ll tell you after how many months, you’d been better off just putting the money in the bank. If that period is a lot longer than your typical life expectancy then this may be a decent deal for you.
Is it worth cancelling if I’ve already got an over 50s plan?
This is where emotion batters up against mathematics. Stop paying into a plan and you’re no longer entitled to a penny, even if you died the next month. So I suspect those who’ve started these plans will be heavily reluctant to stop paying, feeling like they’re throwing away cash already used.
Yet let’s focus on the maths of working out whether it’s likely to be good or bad for you.
Here’s an example (sticking with our 65 year-old man, ignoring inflation and savings interest for ease)
- Who? Man aged 65 when he got plan (now 69)
- How much? Monthly payment £6/month
- What will it pay? The fixed cash payout is £570.
- How long has he been paying in? Time been paying in 4 years (£288 paid in)
To work this out you MUST ignore what you’ve already paid in as the payout is fixed. Paying more each month doesn’t mean you’ll get more, only that you’ll maintain what you’re already entitled to. The money you have paid in has already gone, so we must now focus on whether it is worth you carrying on.
The answer, yet again, is if he lives a further eight years or more he’d be better off stopping and putting the cash into savings. If he lives less than eight years he’s better sticking with the plan. Again looking at actuarial charts, most 69 year-old men are on average likely to live far longer than another eight years, so unless you’ve health issues, the odds are it’s not worth it (though of course for some it will work).
Yet, based on these prices, if it were a 90 year-old man who’d been paying in for 25 years already, this will have been an awful product having already cost £1,800, even though it’ll only pay out £570. The logic again says ignore what’s been paid in and focus on the future. Here, unless he lives more than 8 years, which on average is unlikely, it’s actually worth continuing.
Do let me know what you think, or any pros or cons I may have missed in my musings. Especially if you or someone you know are one of the apparent 700,000 (according to the Times) who have one of these.