July 2005

31.5.40 Life assurance policies - bankruptcy

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.

31.5.41 Protecting life assurance policies

In all cases the policy documents should be recovered from the bankrupt. The bankruptcy Preliminary Information Questionnaire [note 1]  instructs the bankrupt to take or send all insurance policies to the official receiver immediately. The official receiver should also 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 [note 2].

31.5.42 Consequences of non-payment of premiums 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 payment 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. 

31.5.43 Realising life assurance with a surrender value 

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, 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. 

See also paragraph 31.5.46 on the sale of endowment policies.

31.5.44 Realising life assurance with no surrender value (amended November 2007)

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 [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 assigment then any payment due from the policy will be an asset in the bankruptcy estate.  The standard letter advises the bankrupt of this circumstance.

In any case where the official receiver has been unable to surrender or dispose of a policy prior to the condition for payment on the policy being fulfilled (including where the policy pays out on the disablement of the bankrupt) the official receiver as trustee will be entitled to receive the proceeds as and when they become payable, whether before or after discharge Re Cork v Rawlins [2001] 3 WLR 300.

31.5.45 Joint policies

Where a policy with a surrender value is in joint names, the trustee may realise the bankrupt's interest, although the only practical method to effect such a realisation may be by offering the interest to the other party to the policy based on the surrender value of the policy. 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. 

Again the trustee would 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.

31.5.46 Endowment policies

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 [note 2].

Endowment assurance policies can be surrendered or sold either through an auction or by market makers, 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 than from surrendering it. More information on the sale of policies can be found on the Association of Policy Market makers website at www.apmm.org

31.5.47 Endowment policies assigned to mortgage lenders

In the recent past it was common for mortgages to be taken out on an interest-only basis, with an endowment policy being taken out at the same time and for the same term period. The intention of such an arrangement is that the proceeds from the endowment policy when it matures will pay the capital amount outstanding on the mortgage and might also result in a surplus. This type of policy has become less popular as returns from endowment policies have substantially reduced in recent years, with many failing to produce a sufficient return to clear the outstanding mortgage debt at the end of the mortgage term. Although these types of mortgages are not as popular with individuals starting a mortgage now they are still commonly encountered by the official receiver.

The official receiver should check whether the policy has been formally charged to determine whether any policy surrender or resale value is a free asset for the benefit of the estate. The insurance company should be asked to note the official receiver’s interest where applicable.

Where a policy is formally assigned to the mortgage company, the official receiver should treat the policy as being part of the secured assets, along with the property purchased with the funds advanced by the mortgage company as the mortgage loan. The surrender or sale value of the policy should be included in any calculation of the equity in the property. Even if the bankrupt continues to make premium payments in respect of the policy the policy will not vest in the trustee.

Increasingly, endowment policies are not being formally assigned to mortgage lenders, and it is sometimes difficult to establish whether an equitable charge might be held by the mortgage lender over the policy. An equitable charge might exist if there is a standard condition in the mortgage loan agreement that the borrower would take out a life policy in support of the loan (and he/she did so.) Further, if the policy document is deposited with the lender and/or the lender's interest is notified to the assurance company, it might be presumed that the parties intended that the policy proceeds would be used to repay the loan and thus the lender would have an equitable charge over the policy. The official receiver should in this case deal with the policy as a secured asset. Although the official receiver could not sell or surrender  the policy he/she should take its value into account when calculating the equity in the property purchased with the mortgage loan proceeds.

On the other hand, if the policy was retained by the bankrupt borrower and its existence has not been communicated to the lender it would be doubtful whether the lender would have an equitable charge over the policy. In this case the official receiver might deal with the policy as an unsecured asset which he/she may realise if he/she is trustee. A case should not be transferred to a Regional Trustee and Liquidator unit because there is a life policy to be surrendered or sold unless the policy is jointly owned and the joint owner does not agree the surrendering or sale of the policy where the matter will become protracted. 

The official receiver should take into account all the relevant circumstances in each case and make a decision as to whether an equitable charge exists over a policy on a case by case basis.

See also Chapter 33 Part 3 - Bankrupt's interest in the Family Home

31.5.48 Lost policies

Assurance companies may differ in their procedures for the surrender of a policy where the policy document has been lost. Generally, a letter of indemnity will be required, signed by the trustee. The company may also request that an indemnity insurance policy be taken out in their favour, particularly in cases where large sums of money are involved although this may not be necessary 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.

See Chapter 49 Part 2 - Insurance for details of the procedure to be followed to obtain indemnity assurance.

31.5.49 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. Where the official receiver is trustee, he/she should claim such a payment as property arising out of or incidental to property (the insurance policy) that vests in him/her as the trustee under section 436. Some assurance companies have in the past argued that membership of the assurance company does not pass to the trustee when a policy vests, and therefore that the trustee has no automatic right to receive the bonus payment. Where such a payment is to be made before the bankrupt is discharged, the official receiver should not encounter difficulty claiming the payment, as he/she could in any case claim it as after-acquired property under section 307. Where a bankrupt has been discharged from bankruptcy, the official receiver should ask the former bankrupt to sign the appropriate authority to the assurance company so that they make the payment to the official receiver, with the former bankrupt's consent being obtained on the basis that the payment is property arising out of or incidental to the policy, and therefore vests in the official receiver as trustee of the bankruptcy estate. If the discharged bankrupt refuses to give his/her consent, the official receiver may consider making an application to the court under section 363(2) ordering the discharged bankrupt to pay the monies received to the official receiver. 

Where a joint policy is held it is usual that the bonus would be payable only to the first named policy holder. In such circumstances, the official receiver should agree to an equal division of the bonus with the other policy holder. 

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