In what could be the next major mis-selling scandal, UK consumers are collectively paying as much as £420m unnecessarily each year because life insurance premiums arranged by mortgage advisers are being inflated - or ‘loaded’ to use the technical term - without their clients' knowledge.
In the mortgage industry, many larger broker firms and networks currently agree secret backroom deals with life insurance companies. They push the insurance companies to load (increase the cost of) the insurance premiums by a specific percentage so that more commission is generated on the back of life insurance sales when a customer takes out a new mortgage.
Loading premiums, often by as much as 30%, is most common where firms tend to have only one insurance provider, but it happens in some of the country's largest mortgage and financial networks.
There are an estimated 20 million adults with life insurance in the UK, with the average premium thought to be £30.40. Based on this average premium, policyholders whose premiums have been loaded are paying £7.02 per month more than they need to. The extra £7.02 per month equates to £84.24 per year.
If we assume that half of the 20 million life insurance policies in place were arranged through mortgage advisers, and that half of these 10m policies have been loaded by 30%, that works out at an extra £420m per year in premium paid across 5m policies that does not need to be, which consumers are completely unaware of.
Recently, an article was written in FTAdviser where some firms have tried to justify the way they operate — but it's a smokescreen. The bottom line is that these large firms want more profit, and they're happy for their customers to pay the price, almost always without their knowledge. Does that constitute TCF (Treating Customers Fairly)? I'd argue not.
The reality is that there has never been a need to increase the amount paid in commission by insurers as it's always been one of the most lucrative aspects of mortgage and financial planning anyway. Loading premiums on top is pure greed.
Equally, it should be noted that many brokers often don't get a choice as to whether premiums are loaded or not as they are operating through networks, whose practices they are obliged to accept. The vast majority, I suspect, would happily sacrifice the extra commission from a loaded premium as they genuinely have their clients' best interests at heart.
But if life insurance companies do persist in loading premiums due to pressure from networks and certain brokerages, everyone involved should at least be transparent about it and place on an insurance quote something to the effect of:
"This premium has been loaded by X%, which means you will pay an additional £Y over the term of this plan, which means that we will receive extra commission as a result".
At least that way consumers have a choice and are being treated in a fair and transparent manner.
Myself and a broker from a large network ran quotes for a hypothetical identical client to see what the difference was in both cost and commissions paid out. For an identical client with an identical insurance plan, my quote was £42.45pcm, whereas theirs was £50.78pcm, a loading of almost 20% for the exact same policy.
My commission in this hypothetical scenario would have been £1,049.36. Their commission would have been a significantly higher £1,675.74. The difference in premiums and commission paid says it all.
"I have been banging the drum about the unethical practice of loading insurance premiums for some time now, knowing that at some point, when it gets exposed, it will reflect badly on all mortgage brokers and networks, many of whom actively avoid inflated premiums. It is simply wrong and greed at its worst."