RPSM05101245 - Technical Pages: Contributions and tax relief: Member contributions: Entitlement to tax relief: Policy variations

Variations to a protected non-group life policy

Only a change to the policy conditions that either

• increases the benefits payable, or
• extends the term over which benefits are payable

under the policy will cause a non-group life policy to lose its protected status

Options under contract wording

Where a change in the policy terms is due to the exercise of a policy option this will not be a variation that would trigger loss of protected status. An option is a change in the benefits or the term of the policy that applies without the need for any further agreement. For example the policy may set the level of benefits as a percentage of earnings, or increasing in line with inflation. Where the level of benefits is increased in this predetermined manner this is not a variation, as the insurer cannot refuse to increase the cover. Another example is where the policy may give the member the choice to increase the level of cover by up to 5% of the original benefit level and the insurer must provide the increased benefit.

Where the insurer has the right to refuse to increase cover under the policy on the same underwriting terms this would not be an option but a variation. Any increase in benefits would trigger loss of protection.

If a policy allows an individual to reduce cover and then increase it back to its original level with no further checks this would be the exercise of a contractual option and not a variation triggering loss of protected status.

Where the terms of a policy are altered because of a dependency on another contract this would not be a variation. However the substitution of a protected policy by another policy would be a new policy that would not be a protected policy. For example where one insurance company takes over another and wishes to replace legacy policies with one of the new insurer’s policies, albeit on the same terms, this would be a change that triggers loss of protection.

If a policy allows for a contribution holiday whilst cover of the same level and term remains in place then the restart of contributions will not trigger loss of protected status.

The insurer providing the policy is in the best position to advise a member, trustee or employer if a change is due to the exercise of a policy option. If you are uncertain of the situation in relation to a particular policy you should ask the insurance company that provides the relevant policy.

Errors in setting up the policy

An error may have been made in setting up the insurance policy. Whether or not correction of the error is a variation causing loss of protected status depends on the nature of the error.

Where the error is not connected with either the policy term or the amount assured, e.g. a misspelt name, correction of the error will not trigger loss of protected status.

If the mistake was made on the application form, e.g. the applicant said they wanted insurance of £100,000 when in fact they intended to apply for £200,000 the ‘correction’ would be a variation that triggers loss of protected status. Another example of a variation that would trigger loss of protection is where the date of birth was incorrectly stated on the application, and use of the correct date of birth gives a longer term to the policy. This is because the acceptance of the original application by the insurer constitutes a binding agreement which can only be altered by a variation of the terms of that agreement.

Where the mistake is made by the insurance company in setting up the policy by keying in the wrong information onto its systems the correction would not normally be a variation where the insurer’s intention was to accept the application on the terms applied for. The policy as set up would not reflect the contract entered into by both parties and the change would simply be to correct that.

Lapsed policies

When a protected policy lapses, for whatever reason, this will normally trigger loss of its protected status which cannot be restored if the policy is later reinstated. The only exception, is where the policy is reinstated before 1 August 2007 and all the conditions described in RPSM05101240 are met.

Change of premium payer

Where a member takes over responsibility for the payment of premiums to a protected policy from their employer, and there is no other variation that increases the amount or term of the benefits, the policy will retain its protected status.