IPTM7325 - 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 chargeable event. The surrender of part of the rights (a ‘part surrender’) might be a chargeable event in its own right if a transaction-related calculation shows a gain; or it may give rise to an ‘excess event’. These matters are considered in detail in IPTM7600 onwards. However, before the tax position can be determined it is always necessary to establish what transactions have actually taken place.

Contractual position

The surrender, part surrender or maturity of a policy or contract is a legal transaction governed by contract law. The terms of the contract between the policyholder and 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 is possible 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 policy or contract it cannot be retrospectively restructured or reversed.

The insurer and policyholder cannot rewrite history to undo a surrender unless the insurer has clearly acted directly contrary to an instruction from the policyholder or from a person authorised to act for the policyholder in relation to the policy, such as an independent financial adviser (IFA). This point may be particularly relevant in the context of cluster policies - IPTM7330.

An option conferred by a policy, for example to extend the policy, must be legally completed before the policy matures. Otherwise, the policy ends on maturity and cannot be revived. After the policy has ceased to exist, all that can happen is that the insurer pays out the maturity proceeds or retains the proceeds for investment in a wholly new contract.

Completion of a surrender

A surrender or part surrender of a policy is completed in law when the surrender payment is effective. It is effective when received by the policyholder. If payment is made by cheque then it might be possible for the policyholder to prevent completion of the surrender by sending back the cheque uncashed. But where the payment is by electronic transfer, the completion can only be prevented if it is possible to reverse the payment without the intervention of the policyholder before it reaches the policyholder’s bank account. If this is not possible then the surrender will be effective as soon as the transfer is made.

Date of surrender or maturity

Although receipt of payment by the policyholder determines the completion of the surrender it does not indicate the date of the surrender. That depends on the terms of the policy or contract. For instance, a policy might say that the date of surrender is when the insurer receives a surrender request from the policyholder. Alternatively, in the less likely scenario where the policy only allows surrenders on agreement by the insurer then the date of surrender will be 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 terms of the policy.