IPTM7335 - Surrenders: fundamental reconstruction of the policy

Where the terms of a policy are changed, those changes may be so fundamental as to constitute a reconstruction, bringing to an end the old contract and bringing into existence a new policy in substitution. If so, then the ending of the old policy is treated as a full surrender of the rights under the policy, with all the chargeable event consequences that might follow.

There is an exception to this rule where there is a change of life assured on a qualifying policy in certain circumstances – see IPTM7340.

What is a fundamental reconstruction?

Whether a change to a policy is fundamental is a question of contract law and can only be answered by reference to the particular facts and circumstances. But it is possible to give some general principles - see IPTM8110.

Although the guidance in IPTM8110 specifically applies to qualifying policies, advice about the distinction between changes which are merely variations and those which are fundamental reconstructions has application to non-qualifying policies also.

A variation of a policy, whether significant within the meaning of the qualifying policy rules or not, has no chargeable event implications for non-qualifying policies.

The main changes which are regarded as fundamental are:

  • addition or removal of a life assured under the policy
  • switch from an endowment policy to a whole of life policy or vice versa
  • change of contingency, for instance addition or removal of disability benefit and critical illness cover, or a change to the cover under a joint policy from first-to-die basis to last-to-die, or vice versa.

A change in the way benefits are calculated, extending the term of the policy or making a regular premium policy paid up are not in most cases fundamental reconstructions (see IPTM8150). Where the policy in question is a qualifying policy, these changes may have to be considered for the purposes of the annual premium limit (see IPTM2080).

A transfer of business from one insurer to another under the Part 7 FSMA2000 process sanctioned by the court will not normally result in the fundamental reconstruction of the policies transferred, but each case would need to be carefully considered on its own facts.

Converting a qualifying policy to paid-up, whether by agreement with the policyholder or pursuant to the terms of the policy, is not treated as a surrender and substitution. But depending on when a policy is converted to paid-up, chargeable events may arise as described in IPTM7310.

Surrender date of old policy and insurance year of new policy

In line with the general advice given in IPTM7325, the date of the surrender on a reconstruction is the date on which the insurer agrees to make the fundamental change.

The new policy comes into existence on the same date and starts a new insurance year, see IPTM3505. So, following a reconstruction, the insurance year will in future end on the day before the anniversary of the date on which the reconstruction happened, not the day before the anniversary of the date on which the original policy was taken out.