Premium spreading tests: premiums paid
Premiums must be paid
Apart from premiums waived for disability, the premium spreading tests are only satisfied if premiums are actually paid. A premium is not paid if it is ‘taken out of value’, that is, a policy cannot fund itself. So, for instance, unpaid premiums cannot be deducted from the value of units on a unit-linked policy. Payment of premiums by the policyholder may, however, be through a separate loan agreement that is not related to the policy.
An alteration to the payment terms under the policy will be a variation, potentially causing it to become non-qualifying - see IPTM8165 onwards.
Consequences of non-payment of premiums by policyholders and the scope for reinstatement of the policy are covered in IPTM8065. Where an insurer chooses to stop collecting premiums the position is different. This is covered at IPTM8050.
Premiums paid in advance
A policyholder may wish to pay some premiums as a lump sum in advance, for instance if the premiums are small. This would almost certainly cause the premium spreading rules to be failed and the policy to become non-qualifying.
Premiums paid by a person other than the policyholder
Premiums may be paid to the insurer as they fall due by a person other than the policyholder, with no effect on the qualifying status of the policy.
Backdating of policies
IPTM8045 explains that if a policy is backdated by up to three months then the qualifying policy rules must be applied as if the policy was made on the earlier date. But if it is backdated by more than three months then the rules must be applied from the date that the policy was actually made.
Premiums paid under a policy that is backdated must be included in applying the premium-spreading rules. Whether a backdated policy satisfies the rules would depend on the figures but it is not possible to backdate a qualifying policy by more than 12 months as the twice-times rule would be broken.
As an example,suppose a policy was made on 1 June 2005 with premiums of £50 a month, backdated to 1 January 2005. The qualifying policy rules are applied from 1 June 2005, as the backdated start date is more than three months from the date that the policy was made.
The premiums for the first 12 months of the policy include not only the 12 regular monthly premiums for this period totalling £600 but also the premiums of £250 for the five-month period of backdating. So, the total premiums payable in the first 12 months are £850, but as the premiums payable in a normal 12 month period are £600, the premium-spreading rules are still met.
Infringements by trivial amounts: Extra Statutory Concession A41
If the premium spreading rules are broken by a very small margin, for instance by a matter of pence because of rounding errors, then it is likely that ESCA41 will operate to allow the policy to remain qualifying. ESCA41 allows trivial infringements of the qualifying policy rules to be disregarded.
Further reference and feedback IPTM1013