MOD 5 - R05

Question 1

What is the tax treatment of a policy determined by?

Answer 1

Whether it is a ‘qualifying policy’ or a non ‘qualifying policy’.

Question 2

Generally speaking, where a policy is ‘qualifying’, is the gain taxable?

Answer 2

No.

Question 3

Is a gain on a non-qualifying policy subject to higher and additional rates of income tax?

Answer 3

Yes

Question 4

The gain on an _________ policy could be fully taxable.

Answer 4

Offshore policy

Question 5

What is the calculation of any gain based on?

Answer 5

The surrender value or maturity value of the policy.

Question 6

What is the calculation of any gain based on?

Answer 6

The surrender value or maturity value of the policy.

Question 7

If the policy does not build up a surrender value (e.g. most TA policies & some WOL) the provider is likely to issue the policy as __________________.

Answer 7

Non-qualifying.

Question 8

The qualifying rules vary slightly according to the types of the policy. What are the main types of policy?

Answer 8

-temp insurance lasting 10 years or fewer
-temp insurance exceeding 10 years
-WOL
-endowment
-exempt policies

Question 9

What are the qualifying rules for temporary insurance exceeding 10 years?

Answer 9

-Must secure a capital sum on death (or earlier disability) and no other benefits.
-Term must be at least 10 years
-Premiums must be payable at annual or shorter intervals for at least 10 years or 3/4 of the term (whichever is shorter)
-The total premiums payable in any one year must not exceed twice the total premiums payable in any other year, or 1/8 of the total premiums payable over the whole term.
-Permitted ‘other’ benefits are:Surrender values, annuity values, increasable options, WOP on disability and disability beneifts of capital nature.
-The capital sum on death must be no less than 75% of the premiums that would be payable if death were to occur on the life assureds 75th birthday.
-Where the SA can be paid as a lump sum or as a series of sums, the rule operates on the smallest total payable.
-The 75 rule does not apply to a temporary assurance that has no surrender value and does not beyond age 75.

Question 10

What are the qualifying rules for temporary insurance for 10 years or fewer?

Answer 10

-Must secure a capital on death (or earlier disability) and no other benefits.
-Permitted ‘other’ benefits: Participation in profits, surrender values, annuity options, increasable options, WOP on disability and disability benefits of capital nature.
-The policy must provide that any surrender value must not exceed the premiums paid.
-The term cannot be less than one year.
-There is no minimum required life cover.

Question 11

What are the qualifying rules for WOL assurance policies?

Answer 11

-Must secure a capital sum on death (or earlier disability) and no other benefits.
-Permitted ‘other’ benefits: Participation in profits, surrender values, annuity options, increasable options, WOP on disability and disability benefits of capital nature.
-Premiums must be payable at annual or shorter intervals for at least 10 years or until death (or disability).
-The total premiums payable in any one year must not exceed twice the total premiums payable in any other year or 1/8 of the total premiums payable over the whole term (or over the first ten years where premiums are payable throughout life).
-There is no set term, Whole of Life.
-The capital sum on death must be no more than 75% of the premiums that would be payable if death were to occur on the life assureds 75th birthday.
-Where the SA can be paid as a lump sum or as a series of sums, the rule operates on the smallest total payable.

Question 12

What are the qualifying rules of endowment assurance policies?

Answer 12

-Must secure a capital sum payable on survival to the end of the term or earlier death (or disability)
-Permitted ‘other’ benefits: May be included except those of a capital nature payable before death, disability or maturity and Surrenders and bonus encashments are ignored.
-The total premiums payable in any one year must not exceed twice the total premiums payable in any other year or 1/8 of the total premiums payable over the whole term.
-Premiums must be payable at annual or shorter intervals for at least 10 years or until death (or disability).
-There is no set term, whole of life. The term of the policy must be at least 10 years.
The SA on death must be at least 75% of the total premiums payable if the policy ran for its full term.
-Where the SA is payable in instalments, the total of the instalments is used for this purpose.
-If a cash option is shown in the policy, this will be used.
-The 75% is reduced by 2% for each year by which the age of the life assured exceeds 55 at the outset.

Question 13

Policies set up with the sole objective of providing sum equal to the outstanding balance under a mortgage on the policyholders home (or business premises) may be ___________ from the qualifying rules.

Answer 13

Exempt.

This sum can be paid on death or disability and only applies to decreasing TA where the SA decreases with the mortgage. It does not apply to an endowment house purchase policy. This is because this aims to repay the loan on maturity as well as on death.

Question 14

What is the 75% rule?

Answer 14

At a minimum, any death benefit paid under the policy must generally be 75% of the premiums payable if death were to occur on the life assured’s 75th birthday in order for the policy to be qualifying.

Question 15

In applying 75% rule for WOL and temporary assurances to joint life policies the 75th birthday is to be taken how?

Answer 15

1) Joint life first death policy: older life
2) Joint life second death policy: younger life

Question 16

In applying the 75% rule to WOL and temporary assurances, when does the policy qualify?

Answer 16

If premiums are expressed to be payable until the first death or the expiry of 10 years, whichever is the later.

Question 17

What is a contingent policy?

Answer 17

A contingent policy pays out only on the death of the life assured, and as long as another person (known as counter life) is still alive.

Question 18

Contingent policies are rarely seen, but for qualifying purposes, they are treated in the same way as if payment on death of the life assured _________ depend on the contingency.

Answer 18

Didn’t

Question 19

The qualifying rules for _____________ _______________ include Family Income Benefit (FIB) policies.

A WOL or endowment policy may also include income benefits similar to FIBs. Where such benefit applies, the policy will qualify provided what?

Answer 19

1) Temporary Assurances

2) The policy qualify provided that either the basic assurance and income benefit would have qualified seperately, or the overall policy meets the conditions for a WOL or endowment assurance (as the case may be).

Question 20

Children’s policies:

Policies on the lives of young children often have life cover ____________ say to the age of 16. In order to qualify, the policy cannot pay out a benefit exceeding the amount of premiums paid if death occurs during the ____________ period.

Answer 20

1) Deferred
2) Deferred

Question 21

Friendly society policies:

The qualifying rules are modified for friendly society tax-exempt policies, which are subject to a maximum premium of _______ or an annual premium of ______.

The premium counts towards the annual allowance of ________.

Answer 21

1) £25
2) £270
3) £3,600

Question 22

What are the qualifying rules for friendly society tax-exempt policies?

Answer 22

-The policy must be for a term of at least 10 years and premiums must be level and payable at shorter intervals for at least 10 years. However, the term can be reduced to 5 years for an assured under age 18 if premiums do not exceed £13 in any year.
-Commutation of premiums is allowed after half term, or 10 years if earlier, and if the policyholder ceases to live in the UK.
-Any term or whole life sum must be at least 75% of total premiums payable up to age 75.
-Any endowment SA must be at least 75% of total premiums payable, subject to the normal age 55 rule.

Question 23

Connected policies:

Where the terms of a policy provide that it is to continue in force only as long as another policy does so, neither policy is _______________ except where they together constitute a single policy, in which case, the ____________ policy would be the qualifying policy.

Answer 23

1) Qualifying
2) single

Question 24

Extra Premiums and Debts:

When applying the qualifying rules, any extra ____________ charged as a result of underwriting (for any exceptional risk of death or disability medical or otherwise) are ______________.

This applies only if there is evidence of exceptional risk of disability or death and not merely because the proposer declines to provide medical evidence or the insurer decides not to ask for any. When applying the 75% rule, any loading for paying premiums more frequently than annually can also be ______________.

Answer 24

1) Premiums
2)Disregarded
3)Ignored

Question 25

Backdating:

If a policy is backdated by up to ____ months, it will be regarded as having been made on the date to which it is backdated. However, if the policy is backdated more than ____ months, it will be regarded as having been made on the date the contract was completed.

Answer 25

1 & 2) 3 months

NOTE - this may result in an otherwise qualifying policy being regarded as non-qualifying, often because the one-eighth rule is broken as a result of more than one years premiums being payable in the first year.

Question 26

Reinstatement:

If a qualifying policy lapses due to non-payment of premiums, this can affect its qualifying status.

What is the outcome if the policy is reinstated within 13 months and if it is reinstated after 13 months.

Answer 26

1) If reinstated within 13 months, this is ignored and the policy can continue to qualify but only if the policyholder gets exactly the same policy as they had before. This means that it is treated as a new policy if the premium is increased because a health problem is revealed on the declaration of health.

2) If reinstatement occurs after 13 months, then it is also treated as a new policy which may prevent it qualifying (for example, if there are less than 10 years left to run).

Question 27

Substitutions and variations:

There are complicated rules surrounding the substitution of new policies for existing policies or the variation of existing policies. Depending on circumstances, a new policy could be qualifying, restricted relief qualifying or non-qualifying.

Significant variations can affect the qualifying status of a policy, but changes that ____________ would regard as insignificant would not.

Answer 27

1) HMRC (HM Revenue and Customs).

Question 28

Substitutions and variations:

The conversion of a convertible term assurance into an endowment assurance or the addition or removal of a life is normally considered a ________________ variation, while adding new illnesses to critical illness cover without charge is not.

Answer 28

1) Significant variation

Question 29

Substitutions and variations:

The benefits provided by the policy after the alteration must be substantially _______________ to those payable before the alteration. The premiums under the policy must also not be reduced to a nominal amount on the exercise of an option if that reduction is connected with a right to make partial surrenders.

Answer 29

1) Equivalent

Question 30

1)For the purpose of the qualifying rules, HMRC considers a change of life assured to be a fundamental change necessitating what?

2)How does this affect the qualifying status?

Answer 30

1)A new contract to be made on the date of the change.

2)This may result in it becoming non-qualifying, for example, if there are fewer than 10 years left to run.

Question 31

1)Where a policy is replaced by a new qualifying policy as a result of a change in the life/lives assured, the new policy is then treated as _______________…

2)What does this reduce the chance of?

Answer 31

1) Starting at the date of the original policy for purposes of the income tax on the benefit.

2) This reduces the chance of any chargeable gain arising by preventing the ten-year period from starting again. However, this only applies if no one receives any consideration as a result of the replacement policy.

If a salesperson gets commission on the new policy, the rule does not apply because, under contract law, HMRC regards the commission a ‘consideration’.

Question 32

A change of life assured sometimes happens on divorce, and HMRC also views a divorce settlement (unless it is a result of court order) as ______________________.

Answer 32

Consideration.

Question 33

What is the meaning of consideration?

Answer 33

It is concerned with what one party gives or promises in exchange for a promise or performance from another party. It requires ‘something of value’ to be given for the promise.

Question 34

Offshore policies:

A policy issued by a non-UK life office cannot be certified and thus will not qualify until what?

Answer 34

-The life office becomes UK-authorised and premiums are payable to a UK branch or;
-The policyholder becomes resident in the UK and the life fund is chargeable to UK corporation tax.

Question 35

Certification:

Prior to 6 April 2013, any insurer wishing to offer a qualifying policy was required to submit the full particulars of the policy to HMRC for _______________. Any policies that were not certified by the HMRC was not a _________________ policy.

Insurers are no longer required to submit the policy but must till conform to the HMRC standards for qualifying policies.

Answer 35

1) Certification
2) Qualifying

Question 36

Do policies need to be re-certified where there is a change of name of the insurer or a transfer of business to another insurer and the terms of the policy are unchanged?

Answer 36

No, however, HMRC does need to be informed of the change.

Question 37

With effect from 6 April ________ , the Government acted to prevent individuals using the tax-favourable status of qualifying policies as an alternative source of _____________.

This change fell in line with the lowering of the annual allowance for _________________ and was made because of the concerns that the wealthy would revert to endowment-type policies to save significant sums and avoid higher or additional rate taxation on gains.

Answer 37

1) 2013
2) Savings
3) Pensions

Question 38

There is now a limit of £________ for premiums payable in any 12 month period by an individual policy beneficiary under any qualifying policies’ and/or tax-exempt policies issued by friendly societies.

Answer 38

£3,600

Question 39

The annual premium limit of £3,600 applies to all policies issued:

Answer 39

-From 06 April 2013
-Within the transactional period from 21 March 205 and 5 April 2013
-Before 21 March 2012, where these become restricted relief qualifying policies.

Policies issued before 21 March 2012 are protected policies, and will not be subject to the annual premium limit unless they are subject to some forms of variation or assignment on or after 06 April 2013.

Question 40

The annual premium limit of £3,600 does not apply to __________ protection qualifying policies issued from 06 April 2013. However, these are normally issued on a non-qualifying basis.

Answer 40

1) pure

Question 41

What is pure protection?

Answer 41

Term is generally considered “pure” insurance, where the premium buys protection in the event of death and nothing else.

Question 42

The premiums limit is applied at ‘policy beneficiary’ level. A policy beneficiary is the sole owner, or all the joint owners of a qualifying policy that is not held in __________.

A policy beneficiary is also the settlor(s)of a non-bare trust and all the beneficiaries of a bare trust, if a trust holds a qualifying policy.

Where there is more than one beneficiary, whole of the __________________ payable under the qualifying policy count in full towards each individual policy beneficiaries annual premium limit.

Answer 42

1) Trust
2) Premiums

Question 43

A new policy can now be qualifying provided the premiums are no more than £_______ a year.

However, a policy that appears to fall within this limit might also be non-qualifying because at least one beneficiary has breached the premium limit in respect of other existing policies. These include:

Answer 43

1) £3,600

2) -Any existing policies issued on or after 6 April 2013;
-Any qualifying policies issued in the transitional period from 21 March 2012 to 05 April 2013; and
-Any pre-21 March 2012 qualifying policies that have become restricted relief qualifying policies on or after 06 April 2013.

Question 44

What is a restricted relief qualifying policy?

Answer 44

A restricted relief qualifying policy (“RRQP”) is a qualifying policy that will not have full tax relief when a chargeable event occurs.

Question 45

Exemptions to the annual limit of £3,600:

What policies are exempt from the limit?

Answer 45

-Qualifying policies issued before 21 March 2012 are exempt unless they are varied at any time from 21 March 212 onwards or assigned at any time from 06 April 2013 onwards.
-Pure protection policies that do not have, and cannot acquire, a surrender value are exempt. Similarly, pure protection policies, where the benefits payable cannot exceed the amount of the premiums paid except on death or disability are exempt.
-Existing mortgage endowment policies maintained or altered for the sole purpose of repaying an interest only mortgage in maturity or earlier disability are also exempt.

Question 46

Restricted relief qualifying policies (RRQPs) are effectively ____________ on a partly qualifying and partly non-qualifying basis.

Answer 46

1) Taxed

Question 47

RRQPs include qualifying policies issued during the transitional period between 21 March 2012 and 05 April 2013 and if premiums exceeded £3,600pa from the outset. If more than one policy was issued, the first policy exceeding the limit is an RRQP, as are all subsequent policies issued during the ________________ period.

All premiums paid up to 05 April 2013 benefit from _______________ policy treatment, and the annual premium limit applies from 06 April 2013.

Answer 47

1) Transitional
2) Qualifying