'Pay £20 a month forever - or lose £2,800 now'

As with any insurance, the company “pools” premiums collected from every customer so that, in effect, healthy people in their 80s are funding those who die younger.

The trick for an insurer is to price the policy so that its obligations are met and an excess is left as profit. If customers such as Mr Francis cancel their policies – deciding, perhaps, that good money is being thrown after bad – even better: it’s tough luck, the company wins.

Mr Francis has been left in an awkward position. At 81, he is unlikely to find a company that will offer life insurance, let alone at £20 a month for £2,800 assured. All the same, he is loath to keep funding the bonuses paid to his insurer’s executives.

His cautionary tale demonstrates one of the many traps in the 30 million insurance and pension policies sold from the Seventies onwards. Many people should trade in policies initiated decades ago (see how, here ). Some, though, are stuck. In Mr Francis’s case, the funeral plan failed to take into account his good health, making its pricing opaque and, ultimately, the premiums exorbitant. Did company decide that its average customer lived 11 years? How much profit was factored in? Insurers should be forced to disclose this information.

These sorts of questions, in part, prompted the Government to liberate people from the need to buy an annuity to turn their savings into a retirement income. We highlighted in November how insurers were pocketing £63m a year by directing savers into policies designed for “super-healthy” people who would live to age 93.

In reality, so much tat was sold by insurers in the Eighties and Nineties that it will be impossible to undo every wrong. That is why the City regulator must ensure long-standing customers are fairly treated – Mr Francis’s insurer repeatedly ignored his letters – and free those trapped in rip-off deals.

But the fundamental dichotomy between our wants as customers and the profit-motive at insurers will never change. Every financial contract is a battle of wits. The trouble is that insurers employ teams of highly-paid staff to predict the future, whether for life expectancy or interest rates. Recognising that imbalance of power is the first step to outmanoeuvring an industry set up to earn money at our expense.

dan.hyde@telegraph.co.uk

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