Options: deposit options
A deposit option (or reinvestment option) is an optionunder which the policyholder can choose to pay no more premiums once the policy has runfor over ten years. Exercise of the option substitutes a whole of life policy. All or partof the policy value would be held on deposit in the new policy with thepolicyholder having the facility to make part surrenders of the policy.
Option in the policy
In testing at the outset whether the policy qualifies the effect of exercising any ofthe options in the policy must be considered. A policy containing a deposit option cannotbe certified as qualifying because using the facility to make a part surrender within tenyears of exercising the deposit option would give rise to a policy that does not qualify,as explained below.
If the deposit option were exercised, it would give rise to a new policy onsubstitution. The new policy would fail the conditions to be qualifying as a stand-alonepolicy, because no regular premiums are payable under it.
The new policy would not qualify under the protection given by ICTA88/SCH15/PARA17(2)(c) unless the transfer value from the old policy applied as premium to thenew policy was nil or very small, which is not likely to be the case. This is because inapplying the test, the premium of the new policy relating to the transfer value must beincluded, and it will almost certainly exceed the smallest total of premiums paid in any12 month period under the old policy.
It would, however, still qualify if it meets the conditions in ICTA88/SCH15/PARA15,which applies where premium in a new policy is met from the proceeds of an old policy thathas run for more than ten years and the proceeds are retained by the insurer - see IPTM8140. This rule allows the new policy to qualify if the onlybreaches of the basic qualifying policy tests are the requirements for payment of regularpremiums and to meet the premium spreading tests described in IPTM8055.
The new policy following the exercise of the deposit option would, however, fail toqualify if there is a part surrender within ten years for the same reasons as for policieswith a peppercorn option. The premium paid under the new policy that relates to thetransfer value from the old policy would mean that the test in ICTA88/SCH15/PARA17(2)(b), described in IPTM8170, could not be met.
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