Last week's column considered the contractual arrangement that exists between a life assurance company and the policyholder together with the principle of insurable interest. This week's column takes a look at issues related to the ownership of a life assurance policy which is another topic covered by the CeMAP paper one syllabus.
It is important to be able to distinguish between the parties who are involved with a life assurance policy and to know what their involvement is. The policyholder is the owner of the policy and is responsible for paying the premiums. The proceeds of the policy will be payable to the policyholder unless other arrangements have been made. If the policyholder has died the proceeds will be paid to his estate and will be dealt with under the terms of the will if he has died testate or under the rules of intestacy if he has died without leaving a valid will.
The life assured is the person upon whose life or death the payment of the sum assured depends. The life assured may or may not be the same person as the policyholder. If he is, then the policy is said to be on an 'own life' basis. If he is not then he has no claim at all on the ownership of the policy. In such cases the policy is said to be on a 'life of another' basis and the rules of insurable interest, which were covered in last week's column, will apply. One advantage of a policy written on a life of another basis is that the proceeds of the policy, if paid on death, do not form part of the deceased's estate and therefore can be paid out without any of the delays caused by waiting for the award of grant of probate or letters of administration.
There can be more than one life assured on the same policy in which case the contract is known as a 'joint life' policy of which there are two kinds. In the case of a 'joint life first death' policy the proceeds are paid on the death of whichever of the two lives dies first. In such cases the two lives assured are usually also joint policyholders and the proceeds would be paid direct to the survivor. In the case of a 'joint life second death' policy the proceeds are paid on the death of the second of the lives assured. Nothing is payable on the first death. The main use of joint life second death policies is to provide funds to pay an inheritance tax liability.
A policy is said to be assigned when ownership of the policy is transferred to another person or organisation. A deed of assignment is drawn up and signed and the policy itself is often given to the assignee. A notice of assignment must be sent by the assignee to the life assurance company which will then register details of the assignment in its records. When a claim is made on an assigned policy the policy benefits are paid to the assignee and not to the policyholder.
With-profits endowment policies were at one time commonly assigned to mortgage lenders where such policies were being used by borrowers in connection with interest-only mortgages. Nowadays this does not usually happen although the Mortgage Code does require that certain information be given to customers in respect of the types of investments which may be used to repay the mortgage debt together with an undertaking that the lender will remind the customer annually of the need to make sure that an adequate repayment method is in place. However, policies are still assigned in other circumstances such as on the sale of an endowment policy or where a policy is given to trustees to hold for the benefit of the beneficiaries of a trust.
If a policy is written in trust the policy benefits are paid to the trustees who have a legal duty to deal with the proceeds in accordance with the terms of the trust deed. There are two particular advantages to placing a policy in trust. These advantages also apply in the case of a policy that is written on the life of another. In both cases the policy benefits do not form part of the estate of the person who has died. Consequently the proceeds of the policy can normally be paid out relatively quickly as it is not necessary to wait for the granting of probate or letters of administration. Also, there is no inheritance tax liability in respect of the policy proceeds as they do not form part of the deceased's estate.
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