Policy review clauses: mandatory premium reviews
Some mortgage endowment policies contain a clause that obliges the insurer to increase the premiums if a review shows that the current level is insufficient to meet the mortgage loan. As any increase would be under the terms of the policy, there is no variation to the policy when it is imposed, which means that, unlike optional increases under an advisory review clause - see IPTM8195 - there can be mandatory increases in the last ten years of the policy.
Mandatory premium increases: qualifying policy tests
Any mandatory changes to the policy must be such that, under its terms, the basic qualifying policy tests continue to be met, otherwise the policy could not be treated as qualifying. This means that the increase in premiums must be limited to ensure that the premium spreading tests - IPTM8055 - are met and the sum assured may need to be increased to meet the minimum sum assured test - IPTM8030. The basic qualifying policy tests following a mandatory change must be applied to the policy from the date of the last significant variation or the start of the policy if there were no earlier significant variations.
Rejection of a mandatory premium increase
A policyholder may invite the insurer not to impose a premium increase under a mandatory review clause. If the insurer agrees to this then that would be a significant variation of the terms of the policy as the premium increase under the original terms has not been applied. The policy must then be re-tested as after any other significant variation. The position can be complex and depends on the history of the policy.
Mandatory reviews would commonly take place only in the last ten years of the policy. On that footing, and assuming also that there have been no other significant variations in the policy, on a first refusal to accept a mandatory premium increase the relevant test is at ICTA88/SCH15/PARA17 (2)(c) - see IPTM8170. The only way that the policy can remain qualifying is if the premiums payable following the refusal do not exceed the premiums paid in any 12 month period before the refusal.
Even if the policy stays qualifying following a first refusal it would automatically become non-qualifying on a second refusal to accept a premium increase if the mandatory review clause remains in the policy. This is because the policy would have fewer than ten years to run and the second refusal will be a significant variation occurring fewer than ten years since the previous significant variation. Therefore, the protection given by ICTA88/SCH15/PARA17 (2)(c) cannot apply. Agreeing to remove the premium review clause from the policy at or before the decision to accommodate the first refusal to accept the mandatory increase would overcome this difficulty.
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