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Working Lunch Wednesday, 28 May, 2003, 17:02 GMT 18:02 UK
Money for nothing
Working Lunch viewer Angus Janaway was shocked to discover that the 140,000 his grandfather had invested in a policy designed to pay the Inheritance Tax bill (IHT) was now worthless.

These policies are becoming increasingly popular.

So you should be aware of the pitfalls.

The Bidden Grange Farm in Hampshire has been both a home and business for generations of the Janaways.

Angus is the latest member of the family to run the grass-seed growing company based here selling produce all over the world.

Advice

Back in 1987 Angus' grandfather Joseph was advised by his IFA to invest 143,000 - his life savings - in an Inheritance Tax Protection Plan run by Axa.

The policy was unit-linked; money was invested into two separate funds and a proportion taken out each month to pay for life cover.

Mr Janaway died earlier this year, by which time the fund was meant to have accumulated 250,000 - but the reality was very different.

"We didn't hear from Axa at any point," says Angus

"Basically in 1998 we found out, by accident really, that the policy was worth nothing," says Angus.

"No records of the policy were given to us.

"We found that the fund was worthless so we're going to get nothing now, as opposed to the 250,000 we expected.

Accountability

"We feel there ought to be some accountability really.

"We didn't hear anything from Axa at any point, and there was no correspondence.

"This policy could have been cashed in but we heard nothing from them.

"It seems that in 1993 there was some kind of computer error which meant my grandfather's records were wiped from their files, and so he received no communications."

Premiums not fixed

"Whole of life" insurance policies like the one that Mr Janaway took out back in 1987 are designed to produce an agreed lump sum (in this case 250,000).

On the death of the client this would be paid to his family in order to help them pay the Inheritance Tax on his estate.

The problem is that the premiums one pays in these policies are not fixed.

In fact they can rise dramatically over time, and this is exactly what happened in Mr Janaway's case.

The first month's premium that Axa deducted from just one of Mr Janaway's two investment funds back in 1987 was 379.

But as he got older the cost of insuring him rose until in 1998 it had reached more than 2,000.

Add to that the deductions of the other fund and each month the investment was losing 4,000, or an incredible 49,000 a year.

Double whammy

Because of these premiums the fund effectively ran out of money, and unbeknown to Mr Janaway his policy lapsed.
Christine: "It's crucial to monitor your investments."

"The trouble with this kind of policy is that there can be a double whammy effect," says Christine Ross, head of financial planning at SG Hambros.

"In this case, not only did these stock market related investment funds suffer from a crash in equities, the cost of the life insurance premiums increased because he got older.

"It shows just how important it is to actively monitor the state of your policies and investments.

"But Axa clearly should have done better with their communication and informed Mr Janaway of the rising cost of their policies."
It was unfortunate we did not tell him his policy was about to lapse.

In a statement Axa admit it was unfortunate they did not contact Mr Janaway to tell him his policy was about to lapse and say they are reviewing their processes for the future.

But this of course is little comfort to Angus Janaway; his grandfather's estate is now in probate so the exact Inheritance Tax that will have to be paid on it is yet to be decided.

But he knows it will be considerable, a blow made worse by the fact that the fund designed to help pay for it it has now gone.

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