Midweek Money: Pennies that can add up to pounds

Cheap insurance for a previous generation, `penny policies' have matured well - but few people realise it

Insurance payouts on thousands of "penny" insurance policies may have to be recalculated after an investigation by The Independent which shows that policyholders are receiving incorrect surrender values.

Up to 40 million "penny policies", some dating back more than 100 years, are lying forgotten in Britain's homes, their owners unaware of the substantial value they carry. Due to a computer software problem, one company, Liverpool Victoria, is re-assessing its payouts.

"Penny policies" were a type of insurance policy taken out to cover a person's funeral costs, and they were extremely popular until the Sixties. Valuing them, though, is not easy. Although they were basic life assurance contracts, payable on death to cover funeral expenses, most companies added annual bonuses, even when they were not strictly "with-profits" policies.

One policyholder, Duncan Martin, from Bristol, saw the value of his 58- year-old penny policy, bought by his mother from the Liverpool Victoria on his birth, treble in two years. Mr Martin says: "I knew that these values couldn't be right. My main concern was how many other people were receiving strange quotations, but were doing nothing about them."

Mr Martin's suspicions were first raised by the wide gap between surrender values issued by Liverpool Victoria, and others from the Prudential on very similar policies. His mother had paid two old pennies weekly to the Pru since his birth in 1940, and one penny to the Liverpool Victoria. She began a second weekly policy with Liverpool Victoria for two pennies more when he was 10.

In 1996, Mr Martin decided to surrender the contracts and received a surrender value from the Pru of pounds 503.73. However, the Liverpool Victoria policy, taken out at the same time for admittedly half the premium, was worth only pounds 55 and the second contract was valued at pounds 75.

He took the money from the Pru, but kept the others going. When he inquired again recently about the Liverpool Victoria policies, the value of the first had all but trebled to pounds 146, while the second had grown to pounds 184.

"I was baffled," Mr Martin says. "How can policies taken out at the same time produce such widely diverse sums? And how can their value treble in such a short time?"

The Liverpool Victoria says the problem arose from a computer problem. Ian Blanchard, the company's group actuary, says he will take immediate action once the IT firm that provides the computer software has reported back on the nature and scale of the problem.

He says: "Right now, we do not know whether these are isolated blips affecting only particular kinds of policies, like the penny policies, or whether the problem is more widespread. Potentially large numbers of quotations could be hit. We will write to policyholders if necessary and re-calculate values where appropriate. Mr Martin received too much and we won't be asking him for the money back. However, it's possible others may have received too little."

The Financial Services Authority, the new financial watchdog, says it would be concerned if any company were found to be issuing false quotes, whether too high or too low.

A spokesman says: "Companies are obliged by conduct of business rules to supply quotations which are accurate. You can't have companies paying out the wrong amounts to their policyholders."

"Penny policies" are part of the history of British insurance, but many millions could still be paid out. The Prudential is trying to trace 625,000 owners of contracts worth pounds 34m which have matured. The Pru believes thousands more payouts have gone unclaimed on deaths, because younger generations think these penny policies are worthless.

Recently, Pearl, another insurer, received a claim on a policy begun in 1893, insuring the life of a woman who died 30 years ago. The sum assured was only one pound and 15 old shillings, but with bonuses the beneficiaries will receive much more. The policy came to light when her granddaughter was sifting through some old papers of her mother's, the policyholder's daughter, who had herself died in 1991, unaware the contracts were valuable.

A Pearl spokesman says: "This is typical of many claims we receive today. Young people find these ancient-looking policy documents when their parents or grandparents die, and they don't know what they are, or what they could be worth.

"Because the premium was so tiny, they often think they are worthless, when there can be quite significant values attached to them."

But the premiums were not small in the days when they were paid. Pru marketing manager, Norman Turner, says: "If you had a dozen children, it could be a real struggle to pay these weekly premiums out of a wage of a couple of pounds a week. But the coins were taken out of the wage packet and put on the top of the mantelpiece, ready for when the collector called.

"These were not insignificant investments at the time, but it is the addition of compound interest which has had such an astronomic impact on their returns. If you add interest to interest over 40, 50, 60 years or more, these policies' value can soar."

Last month, the Pearl paid out nearly pounds 700 on two policies taken out in 1896, following the death of a 104-year-old policyholder.

But thousands more go unpaid. The problems of keeping track were exacerbated when most of the insurers stopped collecting premiums, and contact with their policyholder was lost, especially if they moved house or were taken ill.

Door-to-door collection was the keystone to the success of these early insurance companies. Liverpool Victoria still collects its premiums, no matter how small, but the Pearl no longer offers a door-to-door service for premiums under pounds 5. The company makes the payments then deducts them from any final maturity value, without adding interest. The Pru no longer collects premiums on policies over 40 years old.

Policy pitfalls to avoid

l Keep a list of all your insurance policies (such as the Prudential policy pictured here) and their value and let your family know where they are.

l If you find some old strange-looking documents, always contact the company and ask for a valuation - no matter how unlikely that looks. You might be pleasantly surprised.

l If the valuation seems wrong, query it with the company. Ask for a detailed explanation of how it was calculated.

l Always keep paying premiums no matter how small. Failure to do so terminates the contract, and its value will be sharply eroded.