IPTM1500 – Outline of the chargeable events regime: underlying theory

In economic terms, the insurer takes the premiums and invests them for income and/or capital gains that accrue until sums are withdrawn from the policy. The scheme of taxation waits until policy benefits are received from the insurer or the policy is assigned, including a partial assignment, to another holder for value, and a chargeable event arises.

The amount of charge is not directly related to the value of the fund, but to the amounts withdrawn. Although, over the lifetime of the policy, there will be a correlation between the change in value of the fund and overall return, it is quite possible for significant mismatches to occur on partial withdrawals or assignments. Broadly, over its lifetime, the total charges on the policy will equate to the net gain upon it, namely, the difference between benefits received and premiums paid.