IPTM8065 - Non-payment of premiums: action by insurers and reinstatement of policies: ICTA88/SCH15/PARA20ZA

Cessation of regular premium payments

Where regular premiums that are due under the policy are not paid, the insurer would ordinarily take some action to respond to the non-payment.

For example, if premiums are paid annually and the policy were to continue to exist in full force after 12 months from the first unpaid premium, then it would be disqualified because the twice-times rule - see IPTM8055 - would be contravened. Disqualification could also arise earlier than 12 months from the first unpaid premium where premiums are paid at more frequent intervals.

What action is taken is up to the insurer, and will be reflected in the terms of the policy under what is commonly known as a ‘non-forfeiture clause’.

Within 12 months of the due date of the first unpaid premium the policy will

  • lapse, that is, the insurance policy comes to an end – this is a surrender and if there is value in the policy it will be replaced by a debt contract under which the insurer owes money to the policyholder
  • be converted to paid-up, that is the policy continues but there is a permanent cessation of premium payments – there is more on policies made paid-up under the terms of the policy in IPTM8210, or
  • be surrendered for cash by the policyholder.

Reinstatement of lapsed and paid-up policies

Reinstatement within 13 months

Where a policy (including a Friendly Society tax exempt policy) lapses or is converted to paid-up within 12 months of the first unpaid premium, ICTA88/SCH15/PARA20ZA allows the policy to be reinstated as a qualifying policy on the same terms provided:

  • reinstatement is within 13 months of the due date of the first unpaid premium, and
  • the policyholder pays all the missing premiums before reinstatement, including any arrears of premiums being paid in instalments.

Then the policy will be treated as if it has run without any interruption. The insurer may charge a fee for reinstatement or interest on the unpaid premiums without upsetting this treatment. But the insurer cannot, for instance, impose a premium loading following further underwriting.

This approach only applies where the policy lapses or is made paid-up under the terms of the policy through a non-forfeiture clause. Since February 1988, it does not extend to policies made paid-up by agreement or under exercise of an option in the policy. Nor will it be extended beyond the end of the 13th month under any circumstances.

Whilst the term ‘13 months’ is used for convenience, strictly speaking it is 30 days following the first anniversary that the first unpaid premium became due. For example, a policy where the first unpaid premium due date was on the 30 April 2017 would have to be reinstated by 30 May 2018, not 31 May 2018.

Where a policy lapses, a surrender is deemed to have occurred, and a chargeable event certificate is due for issue within the usual timescales, HMRC will not ordinarily seek a penalty where the insurer delays the issue of certificates until there is no possibility of reinstatement under the 13-month rule.

Reinstatement at any other time

An insurer may agree with a policyholder to reinstate a policy at any other time but it will not qualify unless the terms of the policy following reinstatement satisfy the necessary conditions. Reinstating a lapsed policy or paid-up policy other than under the 13-month rule described above is treated as bringing a new policy into existence. IPTM8120 onwards describes the tests for substituted policies.

Policies that have been surrendered cannot be reinstated

Where a policy has been surrendered for a cash payment it cannot be reinstated. Any policy provided in replacement would simply be a new policy that would need to be tested on its own terms. IPTM7325 has guidance on how and when, contractually, a surrender takes place.

The annual premium limit and reinstated policies

Where a policy is made paid-up through exercise of a policy option, or a policy variation, the annual premium limit will apply on reinstatement – see IPTM2080.