Non-payment of premiums: other points
Premiums met by loan against the surrender value
For the purpose of the qualifying rules, premiums must actually be paid and a policy cannot pay its own premium. So if a company maintains a policy by nominally advancing a ‘loan’ against the eventual surrender value for the unpaid premiums, that amounts to non-payment of premiums and the arrangement cannot continue after 12 months from the due date of the first unpaid premium. At that point, the policy must lapse, be converted to paid-up or surrendered for cash as described in IPTM8065.
Policies certified with ‘automatic premium loans’
In the past, some policies were certified as qualifying with terms that would automatically treat unpaid premiums as paid by a loan advanced at a commercial rate of interest, which could be repaid out of the value of the policy. The premium spreading tests were treated as satisfied, so long as the loan lasted.
Although such policies would not now be qualifying their qualifying status will be kept if policies were certified on the practice then prevailing provided the arrangements were consistent with the terms of the policy.
Occasional missed premiums
An insurer may decide not to collect the odd missed premium, instead setting it off against maturity or surrender value. Arithmetically, this would not normally breach the premium spreading rules described in IPTM8055 and so should not affect the qualifying status of the policy. However, where there is an agreement between policyholder and insurer to treat a premium in this way that would be a significant variation of the policy, necessitating a retesting of the policy as described in IPTM8165 onwards.
Collecting missing premiums by extending the term of the policy
Another possible arrangement is to collect missing premiums by extending the term by the number of months for which no premiums were paid. The maximum period for which premiums could be missed is 12 months, otherwise the policy must lapse, be converted to paid-up or be surrendered under the terms of the policy, as described in IPTM8065.
Extension of term would be a significant variation requiring re-testing of the policy - see IPTM8165 onwards. This is unless the policy provided an option for an extension of the term within the qualifying policy rules, including the premium spreading rules, and had been certified as such. IPTM8175 covers policies with options.
Collecting missing premiums in this way after 21 March 2012 may also require the beneficiary under a policy to make a statement and consideration of the annual premium limit (see IPTM2070).
Further reference and feedback IPTM1013