IPTM8185 - Options: deposit options

A ‘deposit option’ (or ‘reinvestment option’) is an option under which the policyholder can choose to pay no more premiums once the policy has run for over ten years. Exercise of the option substitutes a whole of life policy. All or part of the policy value would be held ‘on deposit’ in the new policy with the policyholder having the facility to make part surrenders of the policy.

Option in the policy

In testing at the outset whether the policy qualifies the effect of exercising any of the options in the policy must be considered. A policy containing a deposit option cannot be qualifying as explained below.

Substitution

If the deposit option were exercised, it would give rise to a new policy on substitution. The new policy would fail the conditions to be qualifying as a stand-alone policy, because no regular premiums are payable under it.

The new policy would not qualify under the protection given by ICTA88/SCH15/PARA17(2)(c) unless the transfer value from the old policy applied as premium to the new policy was nil or very small, which is not likely to be the case. This is because in applying the test, the premium of the new policy relating to the transfer value must be included, and it will almost certainly exceed the smallest total of premiums paid in any 12 month period under the old policy.

It would, however, still qualify if it meets the conditions in ICTA88/SCH15/PARA15, which applies where premium in a new policy is met from the proceeds of an old policy that has run for more than ten years and the proceeds are retained by the insurer - see IPTM8140. This rule allows the new policy to qualify if the only breaches of the basic qualifying policy tests are the requirements for payment of regular premiums and to meet the premium spreading tests described in IPTM8055.

Significant variation

The new policy following the exercise of the deposit option would, however, fail to qualify if there is a part surrender within ten years for the same reasons as for policies with a peppercorn option. The premium paid under the new policy that relates to the transfer value from the old policy would mean that the test in ICTA88/SCH15/PARA17(2)(b), described at IPTM8170, could not be met.