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HMRC internal manual

Insurance Policyholder Taxation Manual

Conversion of a policy to paid-up under the terms of the policy

Meaning of conversion to a paid-up policy

Although the chargeable event legislation refers to a policy that has been ‘converted into a paid-up policy’ in defining the occasions on which chargeable events can arise on a qualifying policy - see IPTM7310 - there is no statutory definition of what is meant by a paid-up policy. Nor is there a clear definition in the insurance industry of what precisely is meant by a ‘paid-up’ policy. Paid-up policy conditions can vary between companies and between types of policy, although the concept always includes the cessation of premium payments. Often, it can include a reduction in the minimum sum assured.

For the purposes of the chargeable event legislation, a policy is said to be converted to paid-up when there has been a permanent cessation of premium payments, other than where premium payments have ceased at the end of the contractual premium payment term. There cannot be any possibility of resumption of payment of premiums.

It may be possible for a policy that has been converted to paid-up to allow other options such as switches of investment funds, although normally the scope for this will be limited under the terms of the policy.

Commonly, a policy is converted to paid-up under the terms of the policy through what is often referred to as a non-forfeiture clause because the policyholder ceases to pay the premiums due. A policy may also be converted to paid-up by exercise of an option in the policy by the policyholder, or by a variation in the policy terms, normally by agreement between the policyholder and the insurer - IPTM8215.

Restarting the premiums on a policy that has been converted to paid-up would be a fundamental reconstruction bringing into existence a new policy, since by definition no further premiums can be paid on the original paid-up policy - see IPTM8065.