IPTM8030 - Minimum capital sum assured on death: general rule
A qualifying policy must secure a minimum capital sum on the death of a life assured. In most circumstances the minimum sum assured must be at least 75% of the total premiums payable over the term of the policy (ICTA88/SCH15/PARAS 1(5), 2(1)(d) and 3(5)-(7)).
If the policy conditions give the insurer the right to increase the premiums under the policy then the 75% test must be applied to the maximum total premiums that may be imposed under the policy over the term. Where the capital sum is made up of two or more amounts, the 75% test has to be satisfied against the smallest amount payable (ICTA88/SCH15/PARAS 1(9), 2(3) and 3(10)).
Where the death benefit is payable in instalments but can be substituted for a smaller lump sum, it is the smaller amount that must satisfy the 75% test.
If there is a variation of the policy altering the premiums payable then the policy will need to be re-tested to see that it meets the qualifying policy conditions, including the 75% minimum sum assured test (ICTA88/SCH15/PARA18). IPTM8165 onwards explains about re-testing policies on variations. From 21 March 2012, the annual premium limit must also be considered following a variation. The definition of a variation for the purposes of the annual premium limit is detailed at IPTM2080 (ICTA88/SCH15/PARA19).
Some exceptions to the general minimum sum assured test are described in IPTM8035.
Premiums to be taken into account in the minimum sum assured test
For the purpose of establishing the minimum sum assured, premiums include policy fees, stated administration fees in the policy conditions and the cost of any additional benefit.
It does not, however, include any premium loading for exceptional risk of death or disability - see IPTM8075 (ICTA88/SCH15/PARA12).
Nor does it include any amounts payable because premiums are paid more frequently than annually, for instance where the monthly payments effectively include an element of interest to account for the insurer not receiving the specified annual premium as a lump sum in advance. Where no annual premium is specified in the policy, this disregard is 10% of the total premiums, that is, the 75% test should be applied to only 90% of the total premiums payable (ICTA88/SCH15/PARAS 1(5), 2(1)(d)(i) and 3(8)(b)).
Where the policy provides for the insurer to waive premiums because of a person’s disability the 75% test must be applied to all the premiums payable, on the assumption that the waiver is not invoked. The minimum sum assured is not reduced if the premiums payable are reduced on operation of a waiver (ICTA88/SCH15/PARAS 1(8)(a), 2(3) and 3(4)(d)).
Where the policy is issued as part of industrial assurance business, 10% of the premiums payable are disregarded in the 75% test, that is the test applies to 90% of the total premiums payable. Industrial business involves domestic collection of premiums at frequent intervals.
Where the policyholder pays a discounted premium instead of receiving commission or a cash-back in respect of his or her own policy, it is the premium actually paid, net of any discounts, under the policy which must be used in the minimum sum assured test.
Suicide clauses
Where a policy provides for payment of a reduced sum in the event of a death by suicide, that sum must still be large enough to meet the minimum sum assured test.
If, however, the terms of the policy provide that it will be made void in the event of death by suicide, with or without a refund of premiums, that will not have a bearing on whether the policy qualifies. Refund of premiums in these circumstances would not constitute the payment of a capital sum on death.