Notes About Life Assurance

Life Assurance Premiums

The best type of protection contract and basis of cover to protect a joint life mortgage is decreasing term assurance on a joint life first death basis.

Life assurance cover provided by an employer is usually part of a pension scheme and can be up to £1.25m in 2014/15.

Life Assurance Premiums

The level premium system replaced the natural premium system so as to form a reserve of funds to cover the greater risk of claims in the later years of the policy.

The major loading on a net premium is to cover the expenses of the life office including such things as: medical fees during underwriting, costs of office buildings, commission paid to sellers of the policies and salaries of employees.

It is normal to add a policy charge to the loaded premium to arrive at the final premium. This policy charge is a handling fee.

Life Assurance Multiplans

Life assurance Multiplans can be called Universal Life Plans and have these features: lower charges; less overlap of cover; greater flexibility than single contracts; can include general insurance as well as long-term insurance, eg unemployment insurance underwritten by a general insurer.

Life Assurance Trusts

The owner of an existing life policy can put it in trust by assigning it to trustees using a Deed Of Assignment. The advantages of using trusts for life policies are:

  • The beneficiaries receive the proceeds without having to wait for probate to be granted.
  • Payments paid into the trust (the premiums paid into the policy) could be Potentially Exempt Transfers (PETs).
  • The proceeds may not be subject to IHT.
  • A trust can make certain that benefits are distributed according to the settlor’s wishes.
  • There is better protection against creditors if the settlor goes bankrupt.
  • Settlers can ensure the proceeds go to the right beneficiaries outside their will.

For the claim of a life assurance in trust, the life office must get the discharge of the trustees because they are the legal owners. They will require:

  • deeds of appointment
  • details of trustees who have retired
  • all trustees to sign the discharge
  • death certificates for any trustees that have died

Large Sums In Discretionary Trusts

Each discretionary trust has its own nil rate band for IHT purposes so, where large sums are concerned, it may be more appropriate to consider writing a number of smaller policies. The provisos are that each policy is put into trust on a different day and each policy is not connected or related.

Flexible Trusts

The settlor in a Flexible Trust determines a list of potential beneficiaries and nominates one or more to have an interest in possession. Changes to trust law in 2006 meant that the IHT treatment of new flexible trusts was the same as Discretionary trusts and meant that assets put into trust are treated as chargeable transfers and the trust could be subject to a periodic charge every 10 years based on its value.

Life Assurance Moratorium Underwriting

Larger schemes may have little or no individual underwriting.

Some short term schemes may apply a moratorium rather than full medical underwriting and a typical moratorium excludes pre-existing conditions for the past five years for two years; might exclude all pre-existing conditions; excludes pre-existing conditions for two years after any treatment or check-up during the moratorium period.

Full underwriting that leads to a higher premium being charged for higher risks is most usually found in long term policies.

The Consumer Insurance (Disclosure and Representations) Act 2012 puts the onus on insurers to ask clear questions to obtain full disclosure from consumers.

Life Assurance Assignments

An ‘Assignment by way of mortgage’ is different to an ‘Absolute assignment’ because:

  • An absolute assignment is the complete transfer of the policy by way of a sale or gift.
  • The lender must reassign the asset to the borrower on full repayment of the loan.
  • The borrower retains an interest in the mortgaged property called an equity of redemption.

Documents Of Title

It is the claimant’s duty to prove title and they must produce all the documents to prove their ownership. These are called the ‘Documents of title’ and include:

  • payment of all due premiums.
  • proof of title – the onus is on the claimant.
  • proof of death on a death claim.
  • production of the policy.
  • proof of age on a death claim

There are two types of claims: maturity and death. For maturity claims such as an endowment, the life office’s form of discharge must be signed by the person with the legal title to the policy.

Proof of title

Proof of title will be required for a death claim on an unassigned own life policy using Grant Of Probate where a valid will naming executors was left and Grant Of Letters Of Administration where no valid will was left.

Life Assurance Surrender Values

A surrender value is generally treated the same was as a claim and the FCA requires life offices to make sure that endowment policyholders who seek information on surrender values are told of other options. These include selling the policy on the open market and making the policy ‘paid up’ (which is only possible where the policy has an underlying value and is not, therefore, a pure protection policy such as term assurance, critical illness, etc.

Claims Using Proof of Age

Proof of age is needed when making a claim to verify that the life assured’s date of birth was correctly stated on the proposal as the premiums are based on their age. An official birth certificate can be used. For married women, the marriage certificate will also have to be produced to link the name on the birth certificate with the current name.

If there is a discrepancy with the life assured’s age then the relevant adjustments that would be in line with the correct premiums may be made by the life office.

Critical Illness Cover

The Association of British Insurers (ABI) has a Best Practice guide for Critical Illness Cover (CIC) that encourages the use of common generic terms and model wordings for CIC, a common format for the way CIC is described and exclusions that meet appropriate minimum standards.

Model Critical Illness Definitions

The ABI provides a series of model critical illness definitions rather than stating which illnesses should be covered. Where an illness is not listed in the ABI list and is covered by an Income Protection Insurance provider, they must give a definition of the illness to a similar level of detail.

Critical Illness Cover

Features Of Critical Illness Cover Policies

Critical Illness Cover policies can be Guaranteed or Reviewable, pay cash lump sums and/or pay regular instalments. They can have a limited term or can be whole of life.

Some policies provide menu-style contracts enabling clients to choose from a list of conditions.

The onus is on the policyholder to prove a CIC claim and the cost of medical evidence will be at the policyholder’s expense.

CIC can be an added extra to term assurance, whole life or Private Medical Insurance policies.

Critical Illness Cover Policy Survival Period

The survival period of CIC policies are usually 14-30 days. However, there is no set survival period specified by the ABI Best Practice and survival periods are relevant to stand-alone policies rather than combined policies where the policy will pay out on the first event of death or critical illness.

Definitions For Total And Permanent Disability

There are five possible definitions for total and permanent disability and the definition for a claim is specified by the ABI:

  1. Unable to do one’s own occupation ever again.
  2. Unable to do a suited occupation ever again.
  3. Unable to do any occupation ever again.
  4. Unable to do 3 specified work tasks ever again. These are: walking, climbing, lifting, bending, getting in and out of a car, writing.
  5. Unable to look after one-self again. This is defined as failure to do 3 of: washing, getting dressed and undressed, feeding oneself, maintaining personal hygiene, getting between rooms, getting in and out of bed.

Underwriting Critical Illness Cover Policies

CIC underwriting uses morbidity risks relating to the illnesses covered so it is closer to Income Protection Insurance underwriting. Previous medical history is an important factor and premiums are based on morbidity statistics with expenses being less important and investment minimal.

Income Protection Insurance covers significantly more conditions than Critical Illness Cover – notably mental illness and debilitating conditions such as back pain.

Group CIC Cover

The premiums paid under a Group CIC are taxable on the employee as a benefit in kind and claims are tax free.

Real Life Cover

A development in CIC cover is called ‘real life cover’ which means that the policy offers payment for heart attacks, cancer and strokes but also permits incapacity payments to be made under an IPI for other illnesses if they result in incapacity.

A protection ‘fund’ is created from which payments are made in the event of claims and each payment reduces the fund until there is no payment on cancellation.

Shareholder and Partnership Protection Insurance

Shareholder Insurance

When looking at corporate life assurance and shareholder protection, the starting point should be the articles of association.

Automatic Accrual Arrangement

With automatic accrual shareholder arrangement:

  • it is essential that life cover is kept up to date.
  • the directors look after their family by taking out a life assurance policy on their own lives under trust for the benefits of their dependents.
  • interest in the business passes to the surviving partner automatically, with no payment being made.
  • it is normally only used for partnerships, where the main asset of the business is goodwill
  • each partner takes out a life policy on their own life, held in trust for their dependents as compensation for the fact that they will not receive anything from the business.

Buy and Sell agreements

The features of Buy and Sell agreements are:

  • Surviving parties must purchase and inheritor must sell
  • Binding contract
  • Not eligible for business property relief for IHT

Double Option (Cross Option) agreements

The cross option agreement is generally preferred to a Buy and Sell agreement for IHT reasons. The features of double Option (Cross Option) agreements are:

  • Not a binding contract.
  • Surviving parties have the option to purchase.
  • If one side exercises the option, then the other side must comply.
  • IHT Business property relief may be claimed.
  • Option is exercised or not within a relatively short time period, eg six months from death.

Single Option Agreements

A forced sale due to ill health could result in Capital Gains Tax liability for the ill director and exchanging an IHT-free asset (in the form of unlisted shares) for cash which would be subject to IHT.

A single option is designed for critical illness because:

  • it allows the ill partner/shareholder to force a sale to the other parties.
  • a double option (on death) means the partner/shareholder has to sell.
  • the remaining partners/shareholders cannot force a sale of the ill party’s share because they might get better and return to the business.

Business Property Relief (BPR) provides relief from Inheritance Tax (IHT) on the transfer of relevant business assets at a rate of 50% or 100%. The relevant property must be held for at least two years in order to qualify for relief.

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