Thousands of life insurance policyholders across the UK are being warned they could be denied crucial payouts due to restrictive clauses buried in older contracts.
Hidden Clauses in Older Policies Pose a Major Risk
The alarming risk stems from life insurance policies sold during the 1990s and 2000s, many of which contain little-known rules that can prevent a successful claim. A key area of concern involves terminal illness cover, which is designed to allow individuals to access funds before death to help with care and living costs.
However, many of these older agreements included specific exclusions. If a policy is due to end within the next 12 to 18 months, the policyholder may be stopped from making an early claim on their terminal illness benefit. This means individuals facing a terminal diagnosis could be unable to access the money when they need it most.
Experts Issue Stark Warnings for Policyholders
Insurance experts are urging anyone with older contracts to check the terms immediately. Dale North of insurance broker Pure Protect highlighted the severe consequences. "What's more, if the policy expires this year and the policyholder doesn't die until next year, then the family doesn't get anything," he stated, adding grimly, "I hope I die within this period so my family gets the money."
Holly Tomlinson from wealth management firm Quilter explained the shift in industry standards. "Older life insurance policies can contain exclusions that simply wouldn't be acceptable today, particularly around terminal illness cover close to the end of the term." While most insurers stopped this practice in 2013, those with pre-existing contracts remain vulnerable.
Life Insurance Used as a Shield Against Inheritance Tax
The warnings come as wealthy UK households are increasingly using life insurance to mitigate potential inheritance tax (IHT) liabilities. With Labour Chancellor Rachel Reeves' policies leading to concerns over a higher IHT burden, financial advisors report a surge in using policies placed in trust.
Edward Durrell from life insurance specialist Cover Direct told The Times: "There are a lot of positives to these policies as it will immediately pay out and cover that IHT bill, meaning there is no need to sell property, or get into difficulties paying it." When a policy is held in trust, the payout sits outside an individual's estate, making it an effective tool for covering future tax bills without forcing asset sales.
This dual context underscores the critical importance of understanding policy details. For some, life insurance is a vital inheritance tax planning tool; for others, outdated clauses threaten the very safety net it promises. Policyholders, especially those with contracts dating back decades, are strongly advised to review their documents or seek professional advice to ensure their cover meets their needs.
