There's one dying every minute

One of the advertisements that I have imposed on me when I visit the gym in the morning is a Sun Life Direct Over 50 plan, pushed hard by cuddly Michael Parkinson ("and if you enquire, we'll send you this free pen", he says, displaying something almost certainly worth less than a quid).

Although it's hard to ascertain the exact actuarial nature of this plan, I suspect that the profit margin to Sun Life Direct is huge.

Let's have a look at the numbers and run them through.

The insurer is cagey about how much the premiums are, but those I can see seem to indicate a minimum of £74 a month for £20k of cover. You get back 1.5 times premiums paid if you die during first two years (unless it's a travel accident). Then you get the full cover, unless you stop paying, in which case Sun Life Direct keeps the lot.

So, let's take a worse-case scenario for SLD. That would be everyone dying after precisely two years and a day.

100 subscribers at £74 a month = £185,000 in
100 deaths at £20k = £2m out.

Loss per 100 customers = £1.915m, less investment income of about £9,000

Now let's take another extreme. Each subscriber takes out the cover at 50 and lives to be 100.

100 subscribers at £74 a month = £44m
100 payouts of £20k = £20m.

To that sum can be added the investment income on the sums taken in, which equals 50 years of £22m, at 5%, or roughly £160m. So, at the other extreme, the gain to Sun Life Direct is £140m per 100 subscribers.

Of course, admin for this kind of stuff adds up (Michael Parkinson does not come cheap). 50 years at 0.5% admin costs would come to £10m or so.

On the other hand, we have the defaults. I have no idea what number Sun Life Direct can assume here, but I bet it's not far short of 10%. And the average default period is likely to be short(ish). Say, a year. That's 10 subscribers per 100 who get no payout but who only give up a total of about £7.5k.

Throwing all of those numbers together, I reckon that Sun Life Direct coulmaking something like £10m per 100 customers on these policies, or about £100k per customer, even though the maximum payment taken per customer is only £20k.

And remember (as the advert has to point out, inflation can (indeed, will) erode the value of the cash sum. How much will £20k be worth if you live for another 20 years? Certainly no more than £10k today and quite possibly less than £5k.

It looks to me as if the punter "makes" money on this product only if he or she pegs out between two years and eight years. Anything else and Sun Life makes oodles, while you get back (in real terms) less than you pay. Or, in other terms, I reckon that the estimated profit margin on this product is somewhere between 55% and 65%.

Should companies be allowed to advertise such products on daytime TV, pushing the "peace of mind" concept hard? After all, advertising aimed at children is currently heavily regulated, but advertising aimed at the unsophisticated (and quite probably mentally not as sharp as they once were) elderly is not regulated at all. They are, as it were "adults".

There are rules against loan-sharking, but no rules against loan-sharking-type rates. There are rules against misselling, but no rules against grossly overpriced products (because the actual "price" is hard to calculate).

Hell, if there were such rules, daytime television would lose its entire business model.

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