IPTM8195 - Policy review clauses: advisory premium reviews

A mortgage endowment policy may contain a review clause whereby the insurer reviews the level of premiums from time to time and may recommend an increase. The policyholder has the choice under the policy whether or not to accept the recommended increase.

As explained in IPTM8175, if a policy contains an option then the terms of that option must be limited to ensure that the policy would not become non-qualifying if the option is exercised, otherwise a policy made on or after 1 April 1976 cannot be qualifying at the outset.

Exercise of the option where the policy still has at least ten years to run

Exercising an option to increase the premiums is a significant variation in the policy and so the policy must be tested to see if it would qualify after the variation.

Would the policy after variation qualify if tested as a stand-alone policy?

The initial test is whether the policy after a variation to increase the premiums would qualify if tested as a stand-alone policy running from the date of the variation.

The varied policy would provide for payment of regular premiums, albeit at a higher level than before the variation and it would have a term of at least ten years as the policy has at least ten years to run. But the 75% minimum sum assured test - see IPTM8030 - might not automatically be met because the premiums have increased. The terms of the option would need to ensure that the minimum sum assured test was met following the premium increase, either by increasing the sum assured or by limiting the premium increase to meet the test.

Would the test in paragraph 17(2)(b) be met?

If the first test is passed then the final test to be applied is that in ICTA88/SCH15/PARA17(2)(b), which is explained at IPTM8170. If the policy has run for at least ten years since the last significant variation or since it was made, then the test is automatically met. If not, the premium comparison test must be applied. If the policy is such that premiums under the policy can only increase then this test would automatically be met, since the premiums after the variation would not be less than half of those in any 12 month period before the variation.

This means that an optional increase in premiums when the policy has at least ten years to go need not be limited, provided it is within the terms of the option, and may increase to more than twice-times the earlier levels of premiums. The premium spreading rules - see IPTM8055 - only apply to the level of premiums that the terms of the policy require to be paid.

Exercise of the option where the policy has less than ten years to run

The policy after a variation to increase the premiums with less than ten years to go would not qualify as a stand-alone policy because the term would be too short. It could only qualify if the test in ICTA88/SCH15/PARA17(2)(c) were met – see IPTM8170. But as the premium would be increased, the policy would automatically fail this test.

Therefore the terms of a qualifying policy cannot allow for an optional premium increase in the last ten years of the policy unless they also provide for a corresponding extension of the policy term.

From 21 March 2012, the annual premium limit would also need to be considered following a variation – see IPTM2080.