Life Policies

March 2006  

Introduction

1. What is life assurance ?

Generally, insurance companies use the term "assurance" when dealing with life policies, and "insurance" when relating to policies covering events such as fire, theft or accidental damage to cars, houses, boats etc.

 

2. What is a life policy ?

A life policy is a legally binding contract between the policyholder(s) and the life assurance company.

Modern life policies come in a variety of forms ranging from whole life or term policies (where the obligation on the insurer is to pay on death or death within a specified time) through endowment policies (where the obligation is to pay on death or survival for a specified time) to annuities and policies linked to investments in property. They are valuable items of property which can be used as security, sold or otherwise disposed of.

 

3. What is meant by life assured ?

The person whose life is covered must be specified and is known as the life assured. It is also possible to have a policy covering the life of more than one person and this type of policy is known as joint lives assured. 

 

4. Who owns the policy ?

The policyholder owns and is the beneficiary of the policy. The policyholder must have what is known as an "insurable interest" on the life assured which means that they are entitled to be compensated for something that will be lost as a result of the death of the life assured such as loss of earnings.

The policyholder and the life assured can be one and the same person and it is possible to have joint policyholders and lives assured. This type of cover can extend to cover business partners as well as married couples, co-habitees and civil partners.

 

5. The policy document

The policy document will show the full policy details, such as: the policyholder, life/ lives assured, amount of cover (sum assured), commencement date, maturity date, type of policy, conditions, etc.

It is a significant document and in all cases the policy documents should be recovered from the bankrupt .The bankruptcy preliminary information questionnaire (PIQ) and debtor's statement of affairs instruct the bankrupt to take or send all insurance policies to the official receiver immediately.  Any original policy document should be stored in safekeeping according to local office procedure pending realisation. However, the fact that a policy document has been mislaid does not prevent the official receiver from realising the policy, see paragraph xiv below.

On the instructions of the examiner  write to the life assurance company with whom the policy is held to inform them of the bankruptcy order and to confirm the type and surrender value (if any) of the policy, using form NTASS(DO73). Refer replies to the examiner to establish if further enquiries need to be made, particularly in cases where the policy may have been used to secure borrowing against a property ( see paragraph xii below).

 

6. What is a 'Term Assurance' policy?

In general, term assurance policies provide cover for a specified number of years (the term), e.g. 20 years, and only if the life assured dies during that term does a lump sum (the sum assured) become payable. This type of policy does not normally acquire a surrender value and the policy will lapse without value if premiums are not paid and kept up to date.

 

7. What is a 'Whole Life' Assurance policy?

This type of policy provides protection with or without investment and pays a guaranteed sum on the death of the policyholder. It offers cover for the whole of life. This insurance can be without-profits, with profits or unit-linked and therefore could acquire a surrender value.

 

8. What happens if premiums are not paid on an assurance policy?

(Amended August 09)

A policy may lapse without value if premiums are not paid. Alternatively, the assurance company may treat the policy as being "paid up" which will mean that it will pay out if the condition for payment is fulfilled, but usually the payment will be much lower than the original sum insured for.  If a bankrupt continues to make payments in respect of a policy taken out before the bankruptcy order, the whole benefit will be claimable by the trustee when it is paid out.

It should be noted that some assurance companies have policies which have the ability to be revived within a certain period of time. These particular policies might be considered by the assurance company not to have lapsed and remain on their file as dormant. If these policies are revived after the bankrupt’s discharge, the policy still remains as an asset in the bankruptcy estate and the official receiver will retain his/her interest.

 

9. What action can the official receiver take if the policy has no value?

(Amended August 09)

The official receiver should inform the bankrupt of the consequences of continuing to pay premiums into a policy which vests in the trustee (form LTBPOL). Where the policy does not have a surrender value, the official receiver should consider allowing the debtor to purchase the trustee's interest in the policy. The Insolvency Service has adopted a standard fee of £50 to cover the administrative costs of any assignment of the policy. The standard letter (form LTBPOL) should be sent to the bankrupt which outlines the possible action he/she may take in respect of such a policy. If the policy is kept in force by the bankrupt (for example, by continuation of payment of premiums) and the bankrupt does not effect an assignment, then any payment due from the policy will be an asset in the bankruptcy estate. The standard letter advises the bankrupt of this circumstance.

If the bankrupt needs advice on the matter of life assurance in general, it should be suggested that he/she should contact an independent financial advisor.  

 

10. How do we realise the value of the policy?

The official receiver should only seek to realise the value of an assurance policy when he/she is trustee. The trustee is entitled to realise the surrender value of any uncharged life policies which could have been surrendered by the bankrupt prior to the bankruptcy order. Where the official receiver is trustee and on the instructions of the examiner  a letter should be sent to the  assurance company requesting the surrender documents. The official receiver should complete and return these forms in order to surrender the policy, unless a better return could be achieved by the sale of the policy. 

 

11.  Does the official receiver always have to surrender a policy with value?

(Amended August 09)

In addition to realising a policy by surrendering it to the assurance company, it is also possible to realise the value of a policy by selling it to a friend or relative of the bankrupt, the official receiver’s usual consideration for selling the policy being the full surrender value of the policy or, in the case of a jointly owned policy where only one of the parties to the policy is bankrupt, half the value of the policy. A letter should be issued to the bankrupt (SOPOL) or to the joint owner of the policy (JTPOL see paragraph xii), which sets out the official receiver’s position regarding the policy. This can be of particular significance to a bankrupt who is ill or elderly who, as a result, would be precluded from proposing a new life policy after discharge.

Where a third party does express an interest in purchasing the existing life policy from the official receiver, he/she will be required to obtain the consent of the assurance company to the assignment of the policy which will become necessary once the sale has been completed. The official receiver should not become involved in these negotiations. If the assurance company refuses to agree to the assignment, there is nothing to be done and the sale will not take place. 

 

12.  What if it is a joint policy with a surrender value?

Where a life policy is set up to cover the life of more than one person, the official receiver can still realise the bankrupt’s interest in the policy regardless of whether all of the policyholders are bankrupt. If all parties to the policy are bankrupt, as in a husband and wife for example, then the policy can be realised in the usual way.

Where a policy with a surrender value is in joint names, the trustee may realise the bankrupt's interest by offering the interest to the other party to the policy, based on the surrender value (form JTPOL). If the official receiver is trustee he/she will need to obtain the consent of the joint policy holder in order to sell or surrender the policy, and surrender or sale documents will need the signature of both the official receiver as trustee and the joint policy holder. If the joint policy holder is unwilling to purchase the official receiver's interest or surrender or sell the policy, the official receiver should ask the assurance company to note his/her interest in the policy and deal with it as a protracted realisation asset. The trustee will also have an interest in the policy proceeds should the bankrupt die.

If the bankrupt does not contribute to premium payments following the bankruptcy order, the joint policy holder who continues to make all the premium payments may be able to claim more than half of the policy proceeds. If the policy provided for the proceeds to pass to the bankrupt on the death of the non bankrupt policy holder, those proceeds would also vest in the trustee.

 

13.  What happens if premiums are not paid on an assurance policy?

A policy may lapse without value if premiums are not paid. Alternatively, the assurance company may treat the policy as being "paid up" which will mean that it will pay out if the condition for payment is fulfilled, but usually the payment will be much lower than the original sum insured for.  If a bankrupt continues to make payments in respect of a policy taken out before the bankruptcy order, the whole benefit will be claimable by the trustee when it is paid out. The official receiver should inform the bankrupt of the consequences of continuing to pay premiums into a policy which vests in the trustee. If the bankrupt needs advice on the matter of life assurance in general, it should be suggested that he/she should contact an independant financial advisor.

 

14.  How do we realise the value of the policy?

The official receiver should only seek to realise the value of an assurance policy when he/she is trustee. The trustee is entitled to realise the surrender value of any uncharged life policies which could have been surrendered by the bankrupt prior to the bankruptcy order. Where the official receiver is trustee and on the instructions of the examiner  a letter should be sent to the  assurance company requesting the surrender documents. The official receiver should complete and return these forms in order to surrender the policy, unless a better return could be achieved by the sale of the policy. 

In addition to realising a policy by surrendering it to the assurance company, it is also possible to realise the value of a policy by selling it to a friend or relative of the bankrupt, the official receiver’s usual consideration for selling the policy being the full surrender value of the policy or, in the case of a jointly owned policy where only one of the parties to the policy is bankrupt, half the value of the policy.

This can be of particular significance to a bankrupt who is ill or elderly who, as a result, would be precluded from proposing a new life policy after discharge.

Where a third party does express an interest in purchasing the existing life policy from the official receiver, he/she will be required to obtain the consent of the assurance company to the assignment of the policy which will become necessary once the sale has been completed. The official receiver should not become involved in these negotiations. If the assurance company refuses to agree to the assignment, there is nothing to be done and the sale will not take place.

 

15.  What if the policy has no value?

(amended March 2010)

Where the policy does not have a surrender value, the official receiver should consider allowing the debtor to purchase the trustee's interest in the policy. The Insolvency Service has adopted a standard fee of £50 to cover the administrative costs of any assignment of the policy.  The standard letter (form LTBPOL) should be sent to the bankrupt which outlines the possible action he/she may take in respect of such a policy. It should be noted that if the policy is kept in force by the bankrupt (for example, by continuation of payment of premiums) and the bankrupt does not effect an assignment then any payment due from the policy will be an asset in the bankruptcy estate.  The standard letter advises the bankrupt of this circumstance.

Once the debtor has purchased the official receiver’s interest in a policy in accordance with form LTBPOL, the official receiver should notify the insurance company that he/she no longer has an interest in the policy and any future monies due under the terms of the policy should be paid directly to the beneficiary to the policy. You may also wish to consider issuing a copy of the letter to the bankrupt.

 

16.  What if it is a joint policy?

(amended June 2008)

Where a life policy is set up to cover the life of more than one person, the official receiver can still realise the bankrupt’s interest in the policy regardless of whether all of the policyholders are bankrupt. If all parties to the policy are bankrupt, as in a husband and wife for example, then the policy can be realised in the usual way.

Where a policy with a surrender value is in joint names, the trustee may realise the bankrupt's interest by offering the interest to the other party to the policy, based on the surrender value (form JTPOL). If the official receiver is trustee he/she will need to obtain the consent of the joint policy holder in order to sell or surrender the policy, and surrender or sale documents will need the signature of both the official receiver as trustee and the joint policy holder. If the joint policy holder is unwilling to purchase the official receiver's interest or surrender or sell the policy, the official receiver should ask the assurance company to note his/her interest in the policy and deal with it as a protracted realisation asset. The trustee will also have an interest in the policy proceeds should the bankrupt die.

If the bankrupt does not contribute to premium payments following the bankruptcy order, the joint policy holder who continues to make all the premium payments may be able to claim more than half of the policy proceeds. If the policy provided for the proceeds to pass to the bankrupt on the death of the non bankrupt policy holder, those proceeds would also vest in the trustee.

 

17.  What is an Endowment policy?

There are two types of endowment policy you are likely to encounter - the ‘with profits’ policy and the ‘unit linked’ policy.

1. ‘With profits’ endowment policy

An endowment policy is a policy into which a premium is paid each month for a set period e.g. 10, 15 or 25 years. The premiums are usually invested by a fund manager in other investments. The most common type of endowment policy is a "with  profits" policy, which is a policy that includes the right to receive a share of any extra profits made by the company, over and above the basic sum assured. During the term of the policy, profits made from the investment are accrued to the policy, usually on an annual basis. At the end of the policy a payment is made which is the sum of the basic sum assured, the profits accrued and sometimes a terminal bonus. The total end payment reflects the success  of the investment and consequently the payment may be less than the total of the basic sum assured. 

Where a bankrupt is the policy holder or joint policy holder of an endowment policy, the official receiver should write to the assurance company to establish the surrender value of the policy and details of any charges on the policy, and to ask the assurance company to note the official receiver's interest in the policy if he/she is trustee.

Endowment assurance policies can be surrendered or sold either through an auction or by market makers, who are firms which buy such policies to sell on to investors. Where a policy has a surrender value of £1500 or more a better return may be made from selling the policy rather than surrendering it. More information on the sale of policies can be found on the Association of Policy Market makers website at www.apmm.org.

2.  'Unit linked' endowment policy

The unit linked policy consists of a formal savings policy which invariably has life assurance attached.

A unit linked policy allows the policy holder to buy into funds, which are managed by the assurance companies in the main. These funds are linked to the Stock Market and can increase and decrease in value depending on the state of the market. The policyholder therefore has to rely on the skill of the assurance company fund managers to invest in those funds with the best return. Each fund is divided into units which have a price and the policy holder will own a certain number of units according to the amount of money introduced. Unlike a with profits endowment, there is no bonus scheme and without introducing more money into the policy, the policy holder will not acquire more units. The units purchased can be cashed in at any time, usually less a 5% charge, and their realisation value will depend on the performance of the fund in the markets at the date of cashing in.

These unit linked policies can earn a tremendous amount in the long term and the chances are that a unit linked policy will earn more than a with profits policy but there is also the risk that the policy may end up worthless. If the market crashes, for example, and the fund has no value, then neither will the units, which is why it is important to check the value of the fund before realising the policy. Refer to the examiner for clarification if you are unsure.

 

18. What if the endowment policy is assigned to a mortgage lender?

A life policy may be assigned to a lender by way of collateral security for a loan or mortgage. A formal deed of assignment should be drawn up by the loanee/mortgagee who will also hold the original policy document in safekeeping. When the policy matures or becomes payable upon the death of the life assured, the sum assured is paid in the first instance to this assignee with any remainder being payable to the policyholder.

If the debt secured by assignment of the life policy is no longer outstanding. the policy can be re-assigned and realised  in the normal way. The information detailed on the completed form NTASS will establish whether further enquiries need to be made. If in doubt refer to the examiner for further instructions.

Some recent cases have revealed that several of the major lenders are not having endowment policies associated with the mortgage debt formally charged or assigned to them. If this is the case, the policy could be regarded as a "free" asset and available for realisation by the official receiver as trustee in the usual way. However, in such cases it is probable that a court would find that an equitable charge over the policy had been created in favour of the mortgagee, if it was clear from relevant documents that it was intended that the life policy in question be used for repayment of the mortgage advance. The official receiver would therefore have no claim over the policy. Check with the examiner if any claims of this nature are made by the loanee/mortgagee.

It is possible to borrow against the value of a policy from the assurance company and it is therefore important to establish that the surrender value is not outweighed by any borrowings against it before attempting to realise the policy.

 

19. What if the policy is lost?

Even where the bankrupt is unable to produce the original policy document, the official receiver can still realise the surrender value. Usually, in such a case, the assurance company will issue the official receiver with what is known as a "lost policy declaration form". This form requires the official receiver’s signature and basically states that the official receiver has no knowledge of the whereabouts of the policy document but that he will forward it to the assurance company if it comes into his possession.

In the event that the policy is on joint lives, the joint policy holder will also be required to sign the form and it should be sent out for signature prior to the official receiver signing it.

 

20. OR’s indemnity insurance

If the official receiver is trustee and needs to surrender a life assurance policy, where the bankrupt is the beneficiary and the policy document  has not been recovered and is presumed lost, mislaid or destroyed , the assurance company may require the official receiver to sign  a letter of indemnity protecting them against any potential loss resulting from the passing of the surrender value to the official receiver. In cases where large sums of money are involved ,if the company is made aware that it is the official receiver's practice to obtain indemnity insurance as a matter of course when dealing with such a surrender, it may not be necessary to provide a signed letter of indemnity.

However , as the majority of policies dealt with are of a relatively low value and the instances of the indemnity being called upon are rare, the official receiver may give an indemnity to the insurance company in respect of the value of the policy without having to obtain a counter indemnity from an insurance company.

 

21. Windfall payments arising from assurance policies held

When an assurance company  is to merge with another financial institution or to demutualise and float on the stock exchange, financial incentives such as share options or cash bonuses are often offered to existing account holders. If this situation arises and the official receiver is trustee, the matter should be referred to the examiner to decide how the payment may be claimed. 

    Notes:

  1.   The realisation of any life policy must result in a net benefit to the estate. If the official receiver is required to obtain indemnity insurance, for example, the cost of which will mean that there will be no funds left over for the estate once the policy has been realised, the policy should not be surrendered. If there is any doubt as to the net worth of surrendering a policy, check with  the examiner first.
  2.   There are many different types of life policy on offer in today’s insurance market each of which can be tailored to suit the needs of the policy holder(s) and the life/lives assured, as a result of which, life assurance has become a complex area which may require specialist advice. The advice of Technical Section should be sought if there is any doubt as to the entitlement to the proceeds of a policy.
  3.     If, in the case of a joint policy, the non bankrupt policyholder dies and the policy provides that the proceeds pass to the bankrupt policy holder, the proceeds will vest in the official receiver as trustee.

 

Where can I find out more?

Technical  Manual :  

Chapter 31.5 Part 4 - Life Assurance

Chapter 49 Part 2 - Indemnity for lost policy documents (para 49.14)

Forms to be used:

JTPOL – Letter to joint owner re insurance policy

LTBPOL – Insurance policy letter to bankrupt

NTASS Notice and Schedule to Assurance Company

SOPOL -  Letter to joint owner re insurance policy

 

Life Policies Flowchart 

 

Procedure

LOIS references are given in brackets, e.g (DO73)

1  Receive instructions to issue form NTASS to life assurance company (DO73)quoting policy numbers if known. If policy document has been delivered up store in safekeeping according to local office practice.

2  When reply received check with examiner as to next course of action dependent on the type and value, if any, of the policy. Confirm whether the policy is to be surrendered or offered for sale to a third party.

Policy with no value

3  Confirm whether to offer the trustee's interest in the policy to the debtor. If so, issue form LTBPOL. If not, note LOIS (CA08,CA15) and file papers.

Single Policy with value

4 Receive instructions to offer the trustee's interest in the policy to the debtor using form SOPOL. If no offer received confirm with examiner to request the surrender documents from the assurance company, including a Lost Policy Declaration form, if the policy document is not available.

5  Once reply received complete forms and obtain official receiver's signature. Refer any questions about indemnity insurance to the examiner. Return all relevant documents to the assurance company together with certified copies of both the bankruptcy order and appointment of official receiver as trustee. Take copies for the office file.

6  Note LOIS (CA08/CA15) when funds received.

Joint Policy with value

7  If the policy is in joint names offer the official receiver's interest to the other party based on the surrender value using form JTPOL and note that any sale/surrender documents will require the joint policy holder's signature as well as the official receiver's signature.

8  Once the figure for sale of the official receiver's interest has been agreed, request the surrender documents from the assurance company, including a Lost Policy Declaration form, if the policy document is not available. Confirm that the assurance company has no objection to the re-assignment of the policy.

9 Once reply received complete forms and obtain official receiver's signature. Refer any questions about indemnity insurance to the examiner. Return all relevant documents to the assurance company together with certified copies of both the bankruptcy order and appointment of official receiver as trustee. Take copies for the office file.

10 Note LOIS (CA08/CA15) when funds received and refer to examiner for instructions on arranging to have the policy re-assigned.

11 However, if no sale is forthcoming the matter will become a protracted realisation. Check that the confirmation has been received from the  assurance company that they have noted the official receiver's interest.  Note LOIS(CA08,CA15)accordingly.

Endowment Policies

12 If the policy is an endowment policy confirm with the examiner if further enquiries are needed to establish if the policy is a "free" asset. If the policy is free of all assignments and has a surrender value of £1500 or more it may be possible to sell the policy rather than surrender. In all cases refer to examiner for further instructions.