B1.01: LIFE ASSURANCE BACKGROUND

Transcription

1 B1.01: LIFE ASSURANCE BACKGROUND SYLLABUS Insurable interest Utmost good faith and the ABI Code of Practice Viatical settlement Life of another Underwriting Access to Medical Reports Acts Reinsurance Writing a policy in trust Insurable interest Insurable interest is required before a valid life assurance policy can be established on a life of another basis Insurable interest exists if an individual would suffer financial loss on the death of another person Individuals are always regarded as having unlimited insurable interest in their own life and that of a legally married spouse From 5 December 2005, the automatic existence of insurable interest also applies to a registered civil partner Otherwise, insurable interest is limited to the amount of the potential loss A lender has an insurable interest in a borrower to the extent of the loan An employer has an insurable interest in an employee to the extent that the loss of the employee would result in a reduction in profit, or other financial loss The recipient of a gift has an insurable interest in the donor if an inheritance tax (IHT) liability would fall on the recipient if the donor dies (generally within seven years) However, a potential beneficiary under a testator s will has no insurable interest as a result of the expectation of the bequest, since he would benefit rather than suffer financially on the testator s death Insurable interest is required at the inception of a life policy but does not necessarily have to exist at any other time At outset, the sum assured cannot exceed the amount of the insurable interest If the insurable interest ceases after the policy has come into force, the policy can remain in force if the policyholder so chooses Utmost good faith and the ABI Code of Practice The doctrine of utmost good faith (uberrima fides) applies to life assurance This requires a proposer to disclose all information relevant to the risk

2 This reflects the fact that the proposer may have knowledge the insurer could not have and so the usual buyer beware ( caveat emptor ) basis of contracts generally would not be realistic In law, the requirement can go beyond what is specifically asked for on the proposal form and in the event of non-disclosure, the insurer can void the policy (but does not have to do so) This is the case even if the policyholder has died in circumstances where the cause of death was nothing to do with the non-disclosure Similarly if the proposer has given false information, the policy is voidable (ie can be declared void) at the option of the insurer As with non-disclosure, this is the case even if the cause of death was nothing to do with the false statement(s) The Association of British Insurers (ABI) has introduced a Code of Practice (which is binding on members) and this is intended to ensure that ABI members act consistently and fairly The Code is regarded as going beyond the current legal position (though it does not replace the law) The Code distinguishes between three categories of non-disclosure, which are Innocent, Negligent and Deliberate (or without any care) Innocent non-disclosure covers situations where the individual acted honestly and reasonably, or where a reasonable person would have considered that the information which was not disclosed was not relevant to the insurer or where the non-disclosure would not have affected the underwriting decision In these cases, the Code requires the insurer to pay the claim in full Where there is negligent non-disclosure, for example because the individual has not exercised reasonable care, the insurer must apply a proportionate remedy For example, if the information would have resulted in a loading being applied to the premium, the insurer should pay whatever would have been the amount of cover that could have been purchased under a policy for the premium paid, but taking account of the loading Where the non-disclosure was deliberate or resulted from the individual taking no care, the claim would not be paid, but premiums would be returned (ie the policy would be cancelled from outset) The full wording of the Code is available on the ABI website at Viatical settlement Viatical settlement is unusual in the UK, but is permitted It provides a means by which an individual who is terminally ill can sell his policy to a third party for a sum which takes into account his state of health The amount received can significantly exceed the surrender value, but would be less than the sum assured Viatical settlements can apply to term assurance policies, even though there would normally be no surrender value The sale proceeds are treated as if they were a surrender value from a tax point of view, and a tax charge at higher and/or additional rate can therefore arise, subject to normal rules

3 On the subsequent death of the life insured (during the policy term), the policy proceeds would be payable to the person(s) who acquired the policy The result of the viatical settlement is that the life insured receives money during his lifetime, whilst the new policy owner aims to achieve a good return on the death of the life insured Life of another A policy taken out by one person on the life of another is known as a life of another policy Insurable interest is required at outset, as described above This is a straightforward method of arranging family protection between spouses or civil partners for example It can be used by others who are not in a formal relationship, subject to the requirement for insurable interest It is also sometimes used in business assurance arrangements for shareholders and partners It may also be relevant where an individual or a business lends money to another and takes a policy on the life of the borrower to protect the loan In practice, most lenders either require assignment of a policy arranged by the borrower or simply rely on the borrower arranging any protection needed to ensure repayment on death Underwriting Before an insurer accepts a proposal for cover, the risk needs to be assessed through the process of underwriting This is mostly concerned with medical aspects (medical underwriting) The health details on the application form are considered, and many policies are issued based only on the details contained on the form if the underwriter considers the insured to be within the standard risk category If the underwriter feels it to be necessary, he will request further information, either through a medical attendant s report (MAR), usually from the proposer s own doctor, or in the form of a medical examination Medical examinations are generally carried out by a doctor other than the insured s doctor, to ensure impartiality Sometimes a medical examination will be requested after consideration of the medical attendant s report, to provide further information Where fees are involved (as is usual for an MAR or a medical examination) these are generally met by the insurer Insurers generally have a non-medical limit which is the level they are prepared to underwrite without automatically requiring an MAR or medical examination This does not prevent them requiring an MAR or medical examination after considering the application however Where the insured is not regarded as a standard risk, various special terms might be offered In extreme cases, the risk may be declined

4 Special terms can include: - a loading in the form of a higher than normal premium rate - a debt ie a reduction in the sum assured payable in the event of a claim during the initial period the policy is in force - a decreasing debt, where the debt gradually reduces over the initial period - an exclusion, where a particular risk is excluded from cover (eg hang-gliding) The insured is under no obligation to accept the special terms offered Underwriters will also consider financial underwriting aspects, particularly for large cases This may involve their seeking further information if the level of cover applied for seems high in relation to the insured s financial status generally, or the insurable interest which is present The intention is to reduce the likelihood of fraudulent claims arising Access to Medical Reports Acts These Acts give an individual various rights in relation to medical reports obtained by insurers In particular, the individual must consent to the insurer requesting the report from a medical practitioner In addition, he has the right to see the report before it is made available to the insurer He can withdraw his permission for the report to be provided to the insurer (though the insurer is then likely to decline to provide cover) In practice, it is unusual for the proposer to ask for a copy of the report Reinsurance In the case of a particularly high level of cover, an insurer may reinsure part of the risk with another company, or with a specialist reinsurance company The level of risk the insurer will take on without reinsurance is its retention limit or retention level and this can vary significantly between insurers The terms reassurance and reassure are also used and have the same meaning as reinsurance and reinsure The insurer may arrange reinsurance on an individual basis, or may have a standard agreement with one or more reinsurers, to cover certain types or levels of risk The insurer pays a premium to the reinsurer in return for the reinsurer taking the agreed portion of the risk The intention is to avoid too great an exposure to a single risk or group of risks However, the insured is not affected by, nor usually aware of the role of the reinsurer, and any claim is met by the insurer who will then make a claim on the reinsurer Writing a policy in trust If a life insurance policy is taken out by the insured on an own life basis, the proceeds would fall into his estate on death This may be inappropriate from a number of points of view, for example, the proceeds may increase any IHT liability on the estate

5 Also, access to the policy proceeds could be delayed by the need to obtain probate on the estate Writing a policy in trust means that the policy is owned by the trustees rather than the individual, and usually falls outside of the individual s estate on his death As a result, the sum assured will not be subject to IHT Premiums paid by the insured on behalf of the trustees are transfers from the insured to the trust for IHT purposes (though they are often exempt under the normal expenditure exemption) The payment of the sum assured is not a transfer for IHT purposes In addition, there is no need to await the grant of probate (or letters of administration) before benefits can be paid out to beneficiaries The use of a trust gives the insured certainty that the proceeds will be distributed according to his wishes He can also impose conditions on potential beneficiaries, for example, a minimum age at which benefits could be paid to them The insured may be a trustee and so can exercise control over the policy during his lifetime, including altering beneficiaries (if the trust itself is worded to allow this) The insured can act as a trustee and there are no adverse tax consequences as a result Generally the insured should not be a beneficiary, or the IHT advantages may be lost (under the gift with reservation provisions) Although a trust will generally allow IHT to be avoided, it does not prevent an income tax liability arising on the policy in some circumstances (the normal rules regarding the income tax treatment of benefits on death and surrender apply, though the existence of the trust may affect who is liable) This section of notes has given only brief details of the use of trusts for life policies; there are other advantages to the use of a trust, and various requirements and rules, which are dealt with in the Trusts sections of these notes