IPTM8140 | Premium paid out of sums due under previous qualifying policies: test of whether new policy qualifies

Application of maturity or surrender proceeds to a new policy

There may be an arrangement whereby a policyholder leaves all or part of the proceeds of a maturing qualifying policy, or of a qualifying policy that is being surrendered, with the insurer as a premium for a new policy. Such an arrangement may be a substitution of the old policy, but need not be, as explained below.

The sum retained by the insurer will then be used as:

• a single premium for a new policy, or

• as the first, or part of the first, premium of a new regular premium policy.

Disregard of premium spreading tests in testing the new policy as qualifying

Such an arrangement would normally mean that the premium spreading tests described in IPTM8055 would not be met for the new policy and, in the case of a single premium policy, neither would be the requirement for regular premiums to be payable.

However, under ICTA88/SCH15/PARA15, provided the new policy meets all the other qualifying policy tests, such as a minimum term of ten years and a minimum sum assured, it will nevertheless qualify if:

• the old qualifying policy ran for more than ten years before it matured or was surrendered

• the new policy is issued by the same insurer to the same person who held the old policy, and

• the proceeds applied as premium to the new policy have been retained by the insurer throughout.

Annual Premium Limit from 6 April 2013

ICTA88/SCH15/PARAA3

With effect from 21 March 2012, so much of the first premium payable under a policy that must be considered for the purposes of the annual premium limit does not count towards the premium limit if it is discharged in accordance with paragraph 15(2), as outlined above.

Meaning of ‘new policy’ in this context

In contrast with the tests in ICTA88/SCH15/PARA17, there is no requirement for the new policy to be issued in substitution for the old policy, although substitutions would be included. However, commercial practice would normally mean that the new policy would follow the old policy, immediately or soon after, as the insurer cannot hold the proceeds indefinitely. A short delay to allow administrative procedures to be completed would be acceptable.