LAM01070 - Introduction and long-term insurance business overview: types of life insurance products

There is no single legal definition of insurance. Commentary on the main characteristics of insurance and the different types of insurance is set out in the General Insurance Manual (GIM). FA12/S64 links the definition of a ‘contract of insurance’ and a ‘contract of long-term insurance’ to the regulatory definitions.

General insurance policies will pay out to indemnify loss in events such as fire, accident and theft and are normally for a one year term. Life insurance policies can run for many years with pay-out contingent, to varying extents, on human life: for example pay-out on death of the insured or pension annuities payable during the annuitant’s lifetime.

In commercial terms, life companies write two main types of business (and often hybrids of both):

  • protection type policies where pay-out is mainly dependent on human life or may relate to incapacity or diagnosis of terminal illness
  • savings policies, where regular or one-off investments are made in life policies which may pay out at a specified future date, on surrender or on earlier death. The element of dependency on human life must be there as a lesser or a minimal element of the policy

Examples of long-term insurance savings policies are:

  • Life insurance bonds: typically regular or single premium products with a specified term in excess of a year, with earlier pay-out on surrender or death
  • Personal pensions including stakeholder pensions (pension savings)
  • Corporate pension schemes

Personal pensions and corporate pensions are examples of pension accumulation products, where policyholders (and in some cases their employers) are saving for their retirement. There are also pension de-cumulation products which are set up to enable policyholders to draw pension benefits to provide funds on retirement. Pension annuities are one example as are pension draw down products.

Some products, such as annuities, have significant elements of dependency on human life while at the same time providing an investment type return to policyholders. Pension annuities are the most common type of annuity and guarantee an income for life in return for a lump sum up front.

Any of these types of products may be written as with-profits or non- profit policies. A common form of non-profit policy is a unit-linked policy which typically links the benefits under the policy to the value of a specified fund or pool of assets and are generally priced on a daily basis. With-profits policies aim to provide a smoothed investment return and the benefits are paid from within a designated ‘with-profits fund’ in the life company. Further explanations are in LAM05110.

Examples of protection products are:

  • term assurance with the premium fixed for a specified term and pay-out only on death
  • Permanent Health Insurance ‘PHI’, which in return for a regular premium over a period of not less than 5 years, provides a pay-out on illness or incapacity. This is long-term business for regulation but not life insurance for tax purposes (see LAM01140 for definitions)

Life policies are a contract between the insurer and the policyholder. The insurer receives the premium in exchange for paying out amounts determined under the contract in specified circumstances. Any underlying assets purchased by the life company to support the payment of claims are beneficially owned by the company, not the policyholder. This is not withstanding that policy pay-outs may be directly linked to the value of specific assets held by the insurance company.

Insurance companies are prohibited by regulation from carrying out business other than insurance business. Most insurers are only authorised to carry out either long-term business or general insurance business. There are a small number of ‘composite’ insurers, writing general and long-term business but such composite licences are no longer granted. Reinsurers may still be authorised to reinsure both long-term and general business.

There is a specific definition of life assurance for tax purposes in FA12/S56 linked to the regulatory definitions of long-term business but not including all types of long-term insurance business. LAM01140 explains the definitions of long-term business and life assurance business and the differences between the two which are important for tax purposes