IPTM8205 - Policy review clauses: example of advisory and mandatory premium reviews
Basic terms of the policy
A 25-year policy was taken out with monthly premiums of £50. The terms of the policy give the policyholder the option to increase the premiums following regular advisory premium reviews in the first 15 years. The policy also provides for mandatory premium reviews annually in the last ten years. The policy terms also provide that the sum assured is adjusted where necessary to ensure that the 75% minimum sum assured test continues to be met following any premium increases. The policy was tested and certified as qualifying at the outset, in accordance with the rules on options - IPTM8175.
Advisory premium reviews
In year 11, the advisory review recommends a premium increase to £110 per month, which is accepted by the policyholder. Although this more than doubles the premium, the policy stays qualifying as the policy has more than ten years to run - as explained at IPTM8195.
In year 13, an increase to £120 per month is recommended but rejected by the policyholder. As the increase would be under an option in the policy, rejection has no consequence for the qualifying status.
Mandatory premium reviews
The policy was tested and treated as qualifying at the outset on the assumption that the requirement to increase premiums would be followed and that this would amount to a significant variation in the policy. Therefore the premium following a mandatory review must be limited by the terms of the policy to no more than twice the level of premiums immediately before the first mandatory review in year 16.
In year 16, a review shows that the premiums need to increase to £150 per month. A mandatory increase to £150 is imposed, which the policyholder does not challenge.
In year 18, a review shows that the premiums need to increase to £230 per month. However, under the terms of the policy the mandatory increase is limited to £220 per month, that is, twice the level of premiums (£110 per month) after the last optional increase and before the first mandatory increase.
The policyholder challenges this increase and the insurer agrees not to impose it. However, this is a significant variation of the policy in its last ten years and so it must be re-tested as described in IPTM8170 using the test in ICTA88/SCH15/PARA17 (2)(c).
The policy can only remain qualifying if the premiums following the non-imposition of the increase are reduced to the original level of £50 per month. The earlier optional increases must be disregarded. These are not treated as variations for this purpose because the potential effects of exercising the options were already considered when testing the policy at the outset - see IPTM8175.
In year 19, a review again shows that the premiums must be raised to the maximum of £220 per month and again the policyholder refuses the increase. Now the policy ceases to qualify as this refusal is a significant variation less than ten years since the last significant variation and so the protection in ICTA88/SCH15/PARA17 (2)(c) cannot apply. To prevent this, the premium review clause would need to have been removed at the same time as the significant variation in year 18.
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