A qualifying policy must secure a
minimum capital sum on the death of a life
assured. In most circumstances the minimum sum assured must be not
less than 75% of the premiums payable over the term of the policy.
If the policy conditions give the insurer the right to
increase the premiums under the policy then the 75% test must be
applied to the maximum total premiums that may be imposed under the
policy over the term. Where the
capital sum is made up of two or more amounts, the
75% test has to be satisfied against the smallest amount payable.
Where the
death benefit is payable in instalments but can be
commuted to a smaller lump sum, it is the smaller amount that must
satisfy the 75% test.
If there is a variation of the policy altering the premiums
payable then the policy will need to be re- tested to see that it
meets the qualifying policy conditions, including the 75% minimum
sum assured test.
IPTM8165 onwards explains about
re-testing policies on variations.
Some exceptions to the general minimum sum assured test are
described in
IPTM8035.
For the purpose of establishing the minimum sum assured,
premiums include policy fees, stated administration fees in the
policy conditions and the cost of any additional benefit.
It does not, however, include any
premium loading for exceptional risk of death or
disability - see
IPTM8075.
Nor does it include any amounts payable because
premiums are paid more frequently than annually,
for instance where the monthly payments effectively include an
element of interest to account for the insurer not receiving the
specified annual premium as a lump sum in advance. Where no annual
premium is specified in the policy, this disregard is 10% of the
total premiums, that is, the 75% test should be applied to only 90%
of the total premiums payable.
Where the policy provides for the insurer to
waive premiums because of a person’s
disability the 75% test must be applied to all the
premiums payable, on the assumption that the waiver is not invoked.
The minimum sum assured is not reduced if the premiums payable are
reduced on operation of a waiver.
Where the policy is issued as part of
industrial assurance business, 10% of the premiums
payable are disregarded in the 75% test, that is the test applies
to 90% of the total premiums payable. Industrial business involves
domestic collection of premiums at frequent intervals.
Where the policyholder pays a
discounted premium instead of receiving commission
or a cash- back in respect of his or her own policy, it is the
actual discounted premium payable under the policy which must be
used in the minimum sum assured test.
Where a policy provides for payment of a reduced sum in the
event of a death by suicide, that sum must still be large enough to
meet the minimum sum assured test.
If, however, the terms of the policy provide that it will be
made void in the event of death by suicide, with or without a
refund of premiums, that will not have a bearing on whether the
policy qualifies. Refund of premiums in these circumstances would
not constitute the payment of a capital sum on death.
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