Premium paying term: premium waivers and premium holidays
Some policies provide for premiums to be waived by the insurer in the event of disability. Where such a waiver applies, the premiums waived are treated under the qualifying policy rules as if they had been paid, ensuring that the policy may remain qualifying. But they are not treated as paid for the purpose of calculating the chargeable event gain if a chargeable event should arise.
The qualifying policy rules do not make any provision for waiver in circumstances other than disability, for instance in cases of financial hardship. It has, however, been agreed that in certain circumstances there can be a period where no premiums are collected by the insurer (a ‘premium holiday’) without the policy becoming non-qualifying, provided this does not arise from an alteration in its terms.
These circumstances are where, at the time the premium holiday begins,
- there are at least ten years to the maturity date, and
- no premiums will break the premium spreading tests described in IPTM8055.
In most cases, this will mean that the holiday may not last for more than six months, as otherwise the twice-times rule described at IPTM8055 would be breached. The permitted period may be shorter if the premiums payable are not of level amounts.
Non-payment of premiums
Where a policyholder fails for any reason to pay the premiums due under the terms of the policy, the period of non-payment is not a premium holiday and is treated differently. The distinction is that under a premium holiday, the non-payment of premiums is for a limited period under the existing terms of the policy. See IPTM8065 for more about the non-payment of premiums and a description of the circumstances where a policy may be reinstated as a qualifying policy after it has lapsed or been converted to paid-up following non-payment of premiums.
Insurer ceasing to collect premiums
If an insurer ceases to collect premiums on a qualifying policy, for instance because it is industrial assurance business and it is not cost effective to collect them, then that may affect qualifying status. This is because the cessation is an alteration to the terms of the policy that constitutes a variation or substitution.
If, however, the policy has run for at least 20 years and the insurer has made a decision to cease collection of further premiums on all policies of the same type and age then ITTOIA05/S488 and 489 (previously ESCA96) are likely to apply to disregard the alteration, preserving qualifying status.
Where the policy has run for less than 20 years but more than 10 years then it may be possible to convert the policy to paid up - see IPTM8215.
Further reference and feedback IPTM1013