Surrenders, part surrenders and maturity: how and when they occur
The surrender or maturity of all the rights under a policy or contract is a chargeableevent. The surrender of part of the rights (a part surrender) might be achargeable event in its own right if a transaction-related calculation shows a gain. Or itmay give rise to an excess event. These questions are considered in detail in IPTM7600 onwards. However, before the tax position can bedetermined it is always necessary to establish what transactions have actually takenplace.
The surrender, part surrender or maturity of a policy or contract is a legaltransaction governed by contract law. The terms of the contract between the policyholderand the insurer will apply in determining whether, and how, transactions have occurred.Clearly, each case will depend on the particular facts and terms of the contract but it ispossible to outline some principles.
Valid surrender or maturity cannot be reversed
Once a surrender or maturity has been validly completed under the terms of the policyor contract it cannot be retrospectively restructured or reversed.
The insurer and policyholder cannot rewrite history to undo a surrender unless the insurerhas clearly acted directly contrary to an instruction from the policyholder or from aperson authorised to act for the policyholder in relation to the policy, such as anindependent financial adviser (IFA). This point may be particularly relevant in thecontext of cluster policies - IPTM7330.
An option conferred by a policy, for example to extend the policy, must be legallycompleted before the policy matures. Otherwise, the policy ends on maturity and cannot berevived. After the policy has ceased to exist, all that can happen is that the insurerpays out the maturity proceeds or retains the proceeds for investment in a wholly newcontract.
Completion of a surrender
A surrender or part surrender of a policy is completed in law when the surrenderpayment is effective. It is effective when received by the policyholder. If payment ismade by cheque then it might be possible for the policyholder to prevent completion of thesurrender by sending back the cheque uncashed. But where the payment is by electronictransfer, the completion can only be prevented if it is possible to reverse the paymentwithout the intervention of the policyholder before it reaches the policyholdersbank account. If this is not possible then the surrender will be effective as soon as thetransfer is made.
Date of surrender or maturity
Although receipt of payment by the policyholder determines the completion of thesurrender it does not indicate the date of the surrender. That depends on the terms of thepolicy or contract. For instance, a policy might say that the date of surrender is whenthe insurer receives a surrender request from the policyholder. Or, less likely, if thepolicy only allows surrenders on agreement by the insurer then the date of surrender willbe the date that the insurer agrees to the surrender request.
The date of maturity of a policy should be obvious, as it will be reflected in the termsof the policy.
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