Life Assurance

Annuity and
Pensions
Administration

F03
Life Assurance,
Annuity and
Pensions
Administration
F03
 ©
The Chartered Insurance Institute of Nigeria
2020

All rights reserved. Material included in this publication is copyright and may not be
reproduced in whole or in part including photocopying or recording, for any purpose
without the written permission of the copyright holder. Such written permission must also
be obtained before any part of this publication is stored in a retrieval system of any nature.
This publication is supplied for study by the original purchaser only and must not be sold,
lent, hired or given to anyone else.

Every attempt has been made to ensure the accuracy of this publication. However, no liability
can be accepted for any loss incurred in any way whatsoever by any person relying solely on
the information contained within it. The publication has been produced solely for the
purpose of examination and should not be taken as definitive of the legal position. Specific
advice should always be obtained before undertaking any investments.

ISBN 978-978-57332-2-8

Published by Chartered Insurance Institute of Nigeria (CIIN)

27, Lagos Street, by Freeman
Ebute Metta, Lagos, Nigeria.
Tel: +234 817 204 0914-5
Email: info@ciinigeria.org
Website: www.ciinigeria.org
facebook: Chartered Insurance Institute of Nigeria
twitter: @ciinigeria
The Authors
Akolade, Abdul-Rasheed A. (FIIN)
Abdul-Rasheed is an erudite life assurance practitioner. He was Head of Life Business
Operations at Continental Reinsurance Plc, Nigeria and Deputy Director-General at the West
African Insurance Institute, Banjul, The Gambia between 2006 and 2014. He joined Africa
Reinsurance Corporation in December 2014. He followed Life and Pensions Specialist Route
in his Associateship Diploma Professional Examinations.

Olufunmilayo OlawunmiOgunbiyi (AIIN, CAMS)

Funmi is Head, Life Operations at NSIA Insurance Limited and a facilitator at College of
Insurance Financial Management. Before joining NSIA, she had worked with Leadway
Assurance, Custodian Life and Liberty Holding & Co. She holds a BSc degree in Actuarial
Science, MBAin Marketing and MSc in Risk Management and Insurance.

Reviewer
Mr. Chilekezi, Obinna B.Sc, M.Sc, MBA, FCIB, FIIN
Obinna Chilekezi is a multi-skilled professional with background in library science, book
publishing, finance and banking, marketing and Insurance. He was once the editor of the
Nigeria Insurance Digest published by the Nigerian Insurers Association and had won the
African Insurance Organisation award for one of his published books in 2016. He is currently
an insurance researcher and consultant; having worked in the various arms of the industry.

Typesetting, page make-up and editorial services done by the Examination Directorate CIIN.

Printed in Lagos, Nigeria by Expertcity Network Ltd +234 806 079 1778, 8099825825
 Course Aims and Objectives

To provide knowledge and understanding of the basic principles of life

assurance, annuity and pensions, including the main legal principles related to
these insurance contracts, the main regulatory principles relating to them and
the key measures in place to protect consumers as well as life reassurance
principles.

It is expected that a good understanding of the course contents will enable the
candidates to understand:

 the nature of life assurance;

 the legal essential requirements of a valid life assurance policy;
 the scope of cover under the various types of life assurance policies;
 the various uses of life assurance products;
 the underwriting procedures in life assurance business;
 life assurance policy documentation;
 life reassurance administration;
 the nature of annuity product;
 types of annuity product;
 the nature of pension;
 the various types of pension;
 pension installation;
 the Nigerian Pension System.

iii
 Course Outline

PART 1
Life Assurance
Chapter 1 Historical Development and Nature of Life Assurance
Chapter 2 Types and Scope of Cover of Life Assurance
Chapter 3 Introduction to Life Assurance Underwriting Procedures
Chapter 4 Introduction to Policy Documentation and Administration
Chapter 5 Life Assurance Claims Administration
Chapter 6 Introduction to Life Reassurance

PART 2
Annuities
Chapter 7 Introduction to Annuity
Chapter 8 Types of Annuities

PART 3
Introduction to Pension
Chapter 9 Historical Development of Pension and Pension Provision
Chapter 10 Types of Pension Schemes

PART 4
Pension Planning and Administration
Chapter 11 Pension Installation
Chapter 12 Trusteeship and Privately Administered Schemes
Chapter 13 The Nigerian Pension System

iv
 Introduction

F03 Life Assurance, Annuity and Pensions Administration provides an overview of the life
assurance, annuity and pensions administration markets with its key elements. It will help
you to develop a knowledge and understanding of the basic principles behind these areas of
insurance, the main regulatory principles relating to them and the key measures in place to
protect consumers as well as life reassurance principles.

We shall begin by providing a brief overview of what are expected to be learnt in the
coursebook. The course book is divided into four parts.

Part 1 of the course book begins with the historical development and went ahead to explain
what life assurance is. The various types and scope of life assurance cover under each policy
type. Underwriting and claims procedures in life assurance and policy documentation as
well as life reassurance were equally considered in Part 1.

Part 2 of the course book started by introducing the students to annuity and went on to
explain various types and uses of annuity products.

Part 3 of the course book provided us with the historical development and nature of pension.
Types of pension schemes as well as the various reasons for pension provision were also
considered in Part 3.

And finally, Part 4 of the course book covered pension planning and administration in
details.

v
Contents Pages

PART 1
Life Assurance
Chapter 1 Historical Development and Nature of Life Assurance 1-4
Chapter 2 Types and Scope of Cover of Life Assurance 5 - 36
Chapter 3 Introduction to Life Underwriting Procedures 37 - 49
Chapter 4 Introduction to Policy Documentation and Administration 50 -68
Chapter 5 Claims Administration and Introduction to Life Reassurance 69- 78
Chapter 6 Introduction to Life Reassurance 79 - 85

PART 2
Annuities
Chapter 7 Introduction to Annuity 86 - 87
Chapter 8 Types of Annuities 88 - 90

PART 3
Introduction to Pension
Chapter 9 Historical Development of Pension and Pension Provision 91 - 94
Chapter 10 Types of Pension Schemes 95 - 99

PART 4
Pension Planning and Administration
Chapter 11 Pension Installation 100 - 101
Chapter 12 Trusteeship and Privately Administered Schemes 102 - 115
Chapter 13 The Nigerian Pension System 116 - 118
INDEX 126 - 128

vi
 Chapter 1
Historical Development
and Nature of Life Assurance
Learning Objectives
After studying this chapter, one should be able to know:
 the historical development of life assurance in Nigeria;
 earlier life assurance companies in Nigeria;
 the mortality table.

Introduction
This chapter gives us the early years history of life assurance in Nigeria as well the earliest set
of life insurance companies. The chapter later explains what life assurance is and describes
the early mortality tables in use.

1.1 Early Life Assurance in Nigeria

Early insurance began as life assurance where group of people in the community came
together to share their individual and communal risks through common pool of resources. It
is in line that Heubner (1959) defined insurance from the community stand-point as an
arrangement between groups of people who come together to pay into a pool of fund in
which member(s) who suffer losses (insured peril) are compensated from the pool. Insurance
is a device that spreads the risk of loss among a group of individuals who have contributed
funds for the possibility of financial losses. It is a method of transferring the risk to the group
whereby the individual pays a prescribed premium based on the probability of possible loss
instead of having to borne the entire loss alone should it occur.

Apampa (2017) talks about the old contributory savings schemes as its success depends on
the clan nature of its members. He said clans are able to pool risks and share rewards without
the strict valuation that a market system calls for or without an intricate system of laws that a
bureaucratic form of control requires. It was also discovered that clan (also called “adashe”,
“esusu”, “ajo”) are not solely Nigerian phenomenon as the concept can also be traced to some
other Africa countries. He concluded that a clan mechanism (i.e. traditional system) of
control is a simple way to improve corporate governance practices across board, which will
also help to attract sustainable investments that would contribute to the growth of this
nation. The traditional Insurance as a form of social insurance in the Nigerian society has
evolved through the existence of extended family system and social associations. These
traditional insurance policies include periodical contributions such as Ajo, Esusu, Adashe,
and Oha practiced among age grades and other unions (Ujumadu, 2017). Benefits of the
accumulated funds are taken depending on priority needs of participants or in order of turns
(Remi, 2004). Nwite (2004) opined that traditional insurance as 'brothers' keeper' fraternities
include age grades, extended family structures, social clubs, kinsman sting and other various
1
forms of communal contributions which were put in place to help victims of theft, flood, fire,
windstorm and communal clashes.

The idea of mutual assistance is not unknown to our traditional society. Various town unions
as well as social clubs have ways of showing benevolence to their members who are
bereaved. It is customary in various towns for people to pay condolence visits to the family of
the deceased and convey condolences as well. These practices are forms of mutual life
assurance. As long as a person extends such gesture to others who are bereaved, he would
expect and would surely receive reciprocal gestures when he is bereaved. The gesture one
gives amount to the premium he pays to receive reciprocation from others. This is not an
organized insurance scheme; its existence to the person depends on social consciences of our
lives.

However, life assurance as practiced today in Nigeria is part of the nation's colonial heritages.
Obviously, the British introduced life assurance into Nigeria; hence the practice closely
follows the British pattern. The earliest colonial insurance interest in Nigeria was directed to
the general insurance of goods and cargo. Few life businesses which tickled in were referred
to British home officers in London for processing. Only the affluent could afford them
because it was considered as enormous risk to insure persons living in the tropics and cost of
providing such life cover was very expensive and uneconomical.

1.2 The Earliest Life Assurance Companies in Nigeria

With our independence in 1960, life assurance started to develop in Nigeria. African Alliance
Insurance Company Limited (now African Alliance Insurance Plc) was incorporated as a
Private Limited Liability Company on May 6th 1960 and was the first Indigenous Life
Assurance Company in Nigeria. African Alliance Insurance Plc is currently among the life
offices transacting life business in Nigeria.

Over the years, there had been a quite number of life assurance companies in Nigeria and as
at Year 2019, there are 29 insurance companies authorised to transact life assurance business
in Nigeria. Out of these 29 companies, 9 of them are specialist life assurance companies which
have been licenced to transact only life businesses, while the remaining 20 companies are
composite insurance companies which have been licensed to transact both life and non-life
businesses. The scope of operations of these companies covers all aspects of the globally
acceptable life assurance practice with the exception of the pensions business. The pension
aspect of the business has been moved to the pension fund administrators following the
enactment of the Pension Reform Act 2004 (which was amended in 2014).

2
The table below shows the insurance companies in Nigeria as at 2017 transacting life
assurance business in Nigeria:

Table 1.1

S/N Name of Insurance Company Nature of Operational

License
1 African Alliance Insurance PLC Life Specialist Company
2 AIICO Insurance PLC Composite Company
3 Alliance & General Life Assurance PLC Life Specialist Company
4 ARM Life PLC Life Specialist Company
5 AXA Mansard Insurance PLC Composite Company
6 Capital Express AssuranceLimited Life Specialist Company
7 Cornerstone Insurance PLC Composite Company
8 Custodian Life Assurance Limited Life Specialist Company
9 Allianz Insurance PLC Composite Company
10 FBN Insurance Limited Life Specialist Company
11 Goldlink InsurancePLC Composite Company
12 Great Nigeria Insurance PLC Composite Company
13 Industrial & General Insurance PLC Composite Company
14 LASACO Assurance PLC Composite Company
15 Leadway Assurance Company Limited Composite Company
16 Metropolitan Life Insurance Nigeria Limited Life Specialist Company
17 Mutual Benefits Life Assurance Limited Life Specialist Company
18 NICON Insurance PLC Composite Company
19 Niger Insurance PLC Composite Company
20 NSIA Insurance Limited Composite Company
21 Old Mutual Nigeria Life Assurance Company Life Specialist Company
Limited
22 Prudential Zenith Life Insurance Limited Life Specialist Company
23 Royal Exchange Prudential Life PLC Life Specialist Company
24 Spring Life Assurance PLC Life Specialist Company
25 Standard Alliance Insurance PLC Composite Company
26 UNIC Insurance PLC Composite Company
27 WAPIC Life Assurance Limited Life Specialist Company
28 JAIZ Takaful Insurance PLC Composite Takaful
Company
29 Noor Takaful Insurance PLC Composite Takaful
Company

3
1.3 Early Mortality Tables
The early burial and funeral societies were not run on sound mathematical principles as there
were no statistics on which to base the contributions. Civilisation had not yet developed to
the extent of recording births and deaths and thus there was no real idea of what a human's
expectation of life was. The first efforts in this direction were made by the parish clerks of the
City of London, who collected record of baptisms and burials from about 1582. Their records
were later issued as 'Bills of Mortality’. These bills were studied by a London merchant,
John Graunt, who analysed them to construct the first mortality table in 1662. This was
very imprecise but was used by the Rev. Dr Assheton who founded the Life Assurance
and Annuity Association in 1699 . Unfortunately, this was not successful as premiums
turned out to be far too low.

A number of other scientists started to look into mortality, including the astronomer Edmond
Halley and Isaac Newton. In 1756, James Dodson showed that scientific life assurance was
possible by charging level premiums based on age at outset, drawn from a mortality table.
The Equitable used his principles when it was founded in 1762.

One of the earliest mortality tables was the Northampton Table based on deaths in the years
1735–80 in Northampton. This was followed by the Carlisle Table published in 1815 based on
deaths in that town from 1780 to 1787. This was used by life offices for many years. In the
nineteenth century, accurate mortality tables became possible because the Government
introduced a census in England every ten years from 1801. This gave much more reliable data
and from a whole country rather than just one town. The English Life Table No. 1 was based
on the 1841 census and further English life tables were based on subsequent censuses. These
became more comprehensive and reliable as the years passed. However, the English life
tables were based on the population as a whole and not on insured lives, where the
experience might be different, so there was a need to revise same and construct a life
mortality table which is based on the experience of insured lives.

1.3.1 Life Office Mortality Tables

During the nineteenth century, attempts were made by life offices to construct mortality
tables based on lives insured by various offices, as opposed to the public at large. These
reflected insured mortality experience of life offices, rather than general mortality. This
eventually resulted in the British Offices Life Tables published in 1903, from the data of forty-
eight offices from 1863 to 1893. Since then, life office tables have been improved and refined.
One way this has been done is by the introduction of the Continuous Mortality Investigation
started in 1921. Subsequent tables have become more and more accurate and specialised. The
current tables in most general use are the Assured Life Tables (AM00 and AF00). Mortality
tables and premium calculation are dealt with more fully in chapter 3.

The Nigerian Insurance industry is currently working on its own mortality table which shall
solely be based on the Nigeria experience. This is being worked on in conjunction with the
Actuarial Society of Nigeria and when this is done, it would replace the English Mortality
Tables being used in the market.

4
 Chapter 2
Types and Scope of Cover of
Life Assurance
Learning Objectives
After studying this chapter, you should be able to:
 define the basic types of life assurance policy;
 the various types of life assurance covers;
 the scope of cover under each type of life assurance;
 give examples of variations on all the basic types;
 understand how life policies are written;
 give details of income protection insurance;
 list the types of group contracts available.

Introduction
This chapter explains the different types of cover available in the life assurance market today.
The life assurance market is not static and candidates should therefore endeavour to keep up
with developments from other platforms.

This chapter discusses the covers provided by the life office for the following:
 death – life policies
 terminal illness – life policies;
 critical illness – life policies;
 disability – income protection insurance;
 illness or accident – income protection insurance;
 income in old age – annuities.

2.1 How Policies Are Written

These are how life policies may be effected. Most policies are single life policies, with only one
life assured; the life assured is the person on whose life the policy depends and when that
person dies, the policy will pay out the benefit assured against. The assured (or insured
person) is the name given to the person who effects the policy and is the original owner. This
is the person who is entering into the contract with the life office. The assured and the life
assured are frequently, but not necessarily the same person. For example, when Mr. Ajao
takes out a policy on his own life; this is called an own life policy. However, the assured does
not have to be the same as the life assured. Mr. Azu can take out a policy on the life of Mr. Ajao,
subject to having a valid insurable interest. This scenario is referred to as life of another policy.

Policies can also be effected jointly by two assureds, for example, husband and wife, on their
joint lives. Furthermore, although the vast majority of joint life policies have two lives assured,
it is theoretically possible to have more than two lives, provided insurable interest exists and
any type of policy can be effected on a joint life basis.
5
There are two basic kinds of joint life policy; these are the first death joint life policy and the
second death joint life policy. A joint life first death policy pays out on the death of the first life
assured to die. First death term assurance and family income policies are used for family
protection purposes.Whereas, a joint life second death policy pays out on the death of the
second life assured to die. These are sometimes called joint life last survivor contracts. They
are frequently used in inheritance tax planning and also sometimes for investment purposes.

A joint life first death policy will always be more expensive than a joint life second death
policy. This is because the death claim is payable at an earlier time and, therefore, the element
of premium which pays for the death risk is higher.

2.2 Basic Types of Policy

There are three basic types of life assurance policy:

 term assurance
 whole life assurance and]
 endowment assurance.

Term assurance policies just provide cover against death within a specified period. The
cover is pure protection with no investment element. A payout is possible but not certain, i.e.
the life assured may not die during the term of the policy.

Whole life and endowment policies are different in that a payout is certain. Thus, there is an
investment element in these policies and most have a surrender (cash-in) value. For this
reason, they are sometimes called substantive policies. A whole life policy pays out on the
death of the life assured, whenever that occurs. An endowment policy will pay out on the
maturity date, or earlier death.

2.2.1 Term Assurance

Term assurance is the most basic form of life assurance. It pays out if only the life assured dies
during the term of the policy. If the life assured survives, no payment is made and the policy
expires. There are a number of different forms of term assurance and these are explained
below.

2.2.1.1 Level Term Assurance

The simplest form of term assurance is level term assurance. This contract provides that the
life office will pay the sum assured only if the life assured dies during the term of the policy,
i.e. before the expiry date. The sum assured does not vary during the term of the policy and
once it has expired the policy has no value. This is the cheapest form of life assurance since the
cover is only temporary and there is normally no surrender value available on early
termination. If a premium is unpaid, the policy will lapse at the expiry of the 'days of grace'. It
is frequently used to provide protection for the family of a breadwinner.

6
2.2.1.2 Renewable Term Assurance
Some term assurances are 'renewable'. This means that on the expiry date there is an option to
take out a further term assurance at ordinary rates without further evidence of health, as long
as the expiry date is not beyond an earlier specified age, say, the age of 65 years. Each
subsequent policy will have the same option. Thus, instead of purchasing a 20-year term
assurance, a 45-year-old man might effect a five-year renewable term assurance which gives
him the option of renewing every five years. Whenever the policy comes up for renewal, the
premium will increase since it is based on the current age of the life assured. If the insured
elects the option, the life office cannot decline it. Renewable term assurances are used when
there is a definite initial need for cover but it is not known how long the need will last. The
policy can then be renewed as many times as required.

2.2.1.3 Convertible Term Assurance

This is a level term assurance with an option which enables the assured to convert at any time
during its existence, to a whole life or endowment assurance, without further evidence of
health. The premium for the new policy will be that normally applicable to a whole life or
endowment assurance policy for a person of the life assured's age at the time of conversion. If
the original policy was issued with some form of extra premium, then the premium for the
new policy will be similarly treated. Often part conversion is allowed instead of total
conversion. If only part of the policy is converted, the sum assured on the first policy will be
the original amount, reduced by the amount of the sum assured on the new policy. The
premiums charged for convertible term assurance will be slightly higher than for the
ordinary level term assurance to allow for the cost of the conversion option. The policies are
used where there is a current need for term assurance and a likelihood of a need for a
substantive policy in the future.

2.2.1.4 Decreasing Term Assurance

Term assurance of this type has a sum assured which reduces each year (or possibly each
month) by a stated amount, decreasing to nil at the end of the term. It is normally used to
cover a reducing debt, such as the capital outstanding on a house purchase mortgage, with
the sum assured being linked to the reduction in the capital outstanding under the loan.
Although the cover decreases each year, the premium remains constant and these premiums
are sometimes payable for a shorter period than the policy term itself. This is because there
might be a temptation for the assured to lapse the policy in the last year or two, when the sum
assured has reduced to a comparatively low level. Therefore, for a 25-year policy, some life
offices usually impose a premium paying period of 20 years. Premiums for decreasing
termassurance are either slightly cheaper than for a level term assurance for the same initial
sum assured and term, or the same but payable for a shorter period. Some decreasing term
policies also have a conversion option, although this is limited to the sum assured which
remains at the time of conversion.

2.2.1.5 Increasing Term Assurance

A term assurance with a level sum assured gives a reducing amount of real cover as the value
of money declines year by year due to inflation. Consequently, attempts have been made to
combat this by introducing term assurance policies with some form of increasing sum

7
assured.

Some offices offer policies where the sum assured can be increased each year by a set
percentage (often 10%) of the original sum assured. Other offices have short-term policies
which can be renewed at the end of the term for a higher amount. For example, the holder of a
five-year level term assurance may have the right at the end of the five years to effect a new
policy for a sum assured of up to 50% more than the original. Whenever the sum assured
isincreased, the premium is correspondingly raised.

In addition, because the life office is giving the right to increase the cover substantially
without any medical evidence, the initial premiums for these increasable contracts are higher
than those for ordinary level term assurances with comparable sums assured. Furthermore,
short-term policies with renewal options usually provide for the premium to be based on the
life assured's age at renewal. Some offices have guaranteed insurability options, enabling the
sum assured to be increased on events such as marriage, birth of a child or an increase to a
mortgage. Many of these policies incorporate conversion options. Cover can usually
continue up to the age of 60 or 65 years.

The ideal type of increasing policy is an index-linked one, where the sum assured can be
increased each year by the increase in the Retail Prices Index (RPI). Some offices offer RPI-
linked policies, possibly with a maximum increase of 10% in any one year. Other offices
provide cover that is level for, say, five years with a right on expiry to effect a new policy with
a sum assured increased to match inflation over the five years. A common feature of this type
of policy is that, if a policyholder does not exercise the right to increase the cover, the sum
assured is fixed at that level and future index-linking is not allowed.

2.2.1.6 Unit-Linked Term Assurance

Some life offices issue unit-linked term assurances. These are term assurances in the sense
that the sum assured is payable only on death during the term of the policy. However, they
work very much like the regular premium unit-linked whole life policies which are
explained in the later part of this chapter. In unit-linked term assurance, each instalment
premium will buy units and each purchased units are utilized to pay for that instalment's life
risk: the difference between the death sum assured and the value of units. If the units perform
exactly as per the growth rates assumed in the policy costings, the sum assured can be
maintained for the term of the policy. There will be regular policy reviews to see how unit
performance is going. If the units over perform, there will be a cash value in the policy which
the policyholder can take at the expiry of the term. If the units under perform, then the
premiums will have to be increased or the sum assured reduced. Many unit-linked term
assurances now include indexation options (to maintain the real value of cover), increasing
cover options and conversion options.

Some unit-linked protection policies are sold as “money back protection policies” or “no
claims bonus” policies. They are actually endowments with a very high death sum assured
and a maturity value which should equal the total premiums paid at the end of the term, if the
units perform as assumed. They are often sold in the direct market on the basis that if the

8
policyholder dies then the policyholder's family is paid; but if the policyholder does not die
then the money is given back to the policyholder. Such policies are aimed at clients who
perceive term assurance as a waste of money as there might not be a claim. Whilst this is not
true, there does seem to be a demand for this type of policy. The maturity value of such
policies is not guaranteed and the value of units attaching at any time would be available as a
surrender value.

2.2.2 Family Income Policies

Instead of having a term assurance paying out a lump sum on death, it is possible to have a
policy which pays out an income instead. This type of contract is known as a family income
policy because it is intended to replace the income which the life assured would produce for
their family if they were still alive. The term 'family income' is, in a way, a misnomer since the
policy is really written to provide a capital sum payable by instalments for a selected period.
This will then avoid liability for income tax. The policy pays the selected level of income each
year from the death of the life assured until the expiry date of the policy. Instalments can
usually be paid monthly, quarterly or yearly, and often a commuted value (a lump sum) will
be available at death in lieu of the instalments. This lump sum is often not guaranteed in
advance and will depend on interest rates prevalent at the time. These policies are relatively
cheap because the cover, in effect, decreases over the term of the policy; the nearer the life
assured gets to the expiry date, the less will be the total of the instalments payable.

2.2.2.1 Increasing Family Income Policies

As already been explained, a term assurance with a level sum assured provides a decreasing
level of cover in real terms and, of course, this is equally true of family income policies.
Therefore, a number of offices market family income policies where the income benefit
increases automatically, at a prearranged rate, during the term of the policy. The income
benefit might increase each year by 3, 5, or 10%, simple or compound. In some cases, the
increases will stop if a claim arises and, in other cases, they may continue throughout the
claim-paying period. The latter type will be more expensive but will be better protection
against inflation; either type will be more expensive than a level family income policy. As
earlier seen, the ideal is an index-linked policy, and some offices do offer these.

2.2.3 Investment Policies

With all the policies described so far, there is no investment element in the premiums from
the point of view of the policyholder. The policies are for protection only and, because this
protection is for a limited period, a pay out by the life office is not inevitable.

However, as we have said, life assurance can have an investment content. In the case of whole
life policies, as has been explained, a pay-out will occur on the death of the life assured
whenever this takes place. On the other hand, an endowment policy will mature and pay out
a sum of money after a fixed period, usually ten years or more. Both whole life and
endowment policies may be for a guaranteed sum only, in which case they are known as non-
profit.

9
Alternatively, the return can be linked to the office's investment performance; there are two
ways in which this can be done. The first is by having a with-profits policy, where benefits are
indirectly affected by investment performance. The second is by having a unit-linked policy,
where the link with investment performance is direct. Both whole life assurance and
endowment assurance can be either with-profits or unit-linked.

2.2.3.1 With-Profits Policies

Every year, the life office will carry out a valuation of the assets and liabilities of its life fund.
This will normally reveal a surplus, part of which can be allocated to the with-profits
policyholders in the form of an addition to the sum assured. This addition, called a bonus or a
profit, is usually reversionary. This means that it is only payable at the same time as the sum
assured, i.e. on death or maturity. It will, however, increase the surrender value. Most
companies will allow bonuses to be surrendered for a cash value which will be substantially
lower than the declared reversionary value. The cash value will vary with the age of the life
assured, the value increasing with age. The bonus systems of the various life offices vary
considerably and it is not possible to describe all the methods within the confines of this
book.

However, one fundamental distinction exists between normal bonuses and terminal
bonuses. A normal bonus is declared annually and increases the value of the policy year by
year as it gets older. The bonus is usually expressed as a percentage of the sum assured and
thus the higher the sum assured, the greater the bonus. It can be either simple (based purely
on the original sum assured) or compound (based on the sum assured plus previous
bonuses). Once allocated, normal bonuses cannot be removed or reduced. While a terminal
bonus is different in concept. This is added only when a policy becomes a claim and is not
payable on surrender. It is usually expressed as a percentage of the total normal bonuses and
will vary in accordance with market conditions.

Most offices operate a system using both normal and terminal bonuses, and the eventual
amount payable will comprise of three elements, which are:
 the sum assured
 a normal bonus and
 a terminal bonus.

Only the sum assured is guaranteed at the outset. Premiums for with-profits contracts are
always higher than those for the corresponding non-profit contracts for the same sum
assured. This is because they reflect the higher benefits which will be paid out at maturity or
death (whichever is earlier).

Under a with-profits policy, the policyholder does benefit to some extent from the
investment performance of the life fund. However, the link is not direct and it depends on the
annual valuation of the fund's assets and liabilities (where a multitude of factors are taken
into consideration) and the decision of the directors as to how to allocate any surplus. As a
result of this, the bonuses added to the policy only follow investment performance in a very
cushioned and distant fashion. Allowance must be made for the guarantees underlying the
10
basic sum assured. The bonus system therefore cannot directly reflect the value of the
underlying assets of the life fund. In addition, bonuses are only declared yearly and cannot
possibly match the daily fluctuations in the values of assets.

There is a strong trend for offices to pull out of writing conventional with-profits business, as
described above, in favour of unitised with-profits business as would be explained below.

2.3.3.2 Unit-Linked Policies

Unit-linked policies were introduced in the late 1950s as a way of offering investors policies
with values directly linked to investment performance. This is usually done by formally
linking the value of the policy to units in a special unitised fund run by the life office.
Alternatively, the link can be to the units of a unit trust. The values of the units directly reflect
the values of the underlying assets of the fund and fluctuate daily (or perhaps monthly)
according to the performance of those investments. Unit-linked policies vary enormously
but all operate on the same principle. All or part of the premiums will be used to purchase
units in the fund at the price ruling at the time of payment. The future value of the policy will
then fluctuate with the value of the units allocated to it.

2.3.3.2.1 Unit Pricing Structure

Many funds operate on a dual price structure: each unit has two prices, the offer price and the
bid price. The offer price is the price which the office uses to allocate units to a policy when
premiums are paid. If the offer price is N1.00 and the whole of the N100.00 premium is to be
applied to buy units, it will buy 100 units. The bid price is the price which the office will give
for the units if the policyholder wishes to cash in or claim under the policy. This is always
lower than the offer price; 100 units can be cashed in for N95.00 if the bid price is N0.95. There
is commonly a 5% difference between offer and bid prices. This is known as the bid-offer
spread or gap and is, in effect, a charge made by the life office to cover its expenses in setting
up the policy. There is also usually a monthly management charge, typically 1/12 of 1%,
which is deducted from the fund before the prices of the units are calculated.

There may often be two types of unit in any given fund: initial units and accumulation units.
Initial units have a higher monthly management charge (say, 1/3 of 1%) than accumulation
units (say, 1/12 of 1%). Initial unit prices are thus lower than accumulation unit prices. Initial
units are commonly used for the early years of regular premium unit-linked policies, where
heavy initial expenses need to be recouped. As with the bidoffer spread, the
initial/accumulation unit structure is, in reality, a form of charge imposed by the office. An
alternative arrangement is an initial non-allocation period during which no units are
allocated.Some offices now offer products (particularly single premium ones) with no bid-
offer spread. However, these will have penalties for early surrender to recoup the heavy
expenses incurred in the early years of the contract. These products may prove more
beneficial to clients who continue their policies to the expected maturity or expiry date.

11
2.3.3.2.2 Unit-Linked Funds
Most offices offer a variety of funds to which a policy can be linked. The most usual funds are
as follows:

Type of unit-linked fund Invested in…

Equity (or ordinary share) Ordinary shares quoted on the Stock Exchange.
Fixed interest (or gilt) fund Securities which carry a fixed rate of interest, normally
government securities and local authority issues.
Property fund Real property, usually commercial and industrial
premises. However, because of the high capital cost of a
single building, this fund will invest in other media
while it builds up enough capital to purchase a further
building.
International fund Assets abroad, usually shares on foreign stock markets.
Cash fund Short-term money ma rkets such as bank deposits and
Treasury bills, usually to provide a temporary refuge for
the investor who requires a high degree of security.
Index-linked gilt fund Government index-linked securities.
Building Society fund Building Society deposits.

Many offices have more specialised funds and the fund with the best performance will vary
from time to time. This has led to the concept of the managed fund, where the office's
managers invest in a mixture of whichever of their funds they feel is best at any particular
time. An extension of this idea is the switching facility offered by many offices. This facility
gives the policyholder the option to switch their investment from one fund to another. For
example, policyholders with policies linked to the equity fund may, if they wish, switch into
another fund where they consider prospects to be better. A small charge may be levied for
this service but it does allow investors to, as it were, back their own judgment. The switch
could be of existing units or for future premiums only. Obviously, the value of units can fall as
well as rise and therefore it is possible for the policy to fall in value, unlike a with-profits
policy. Thus, while the potential yield of a unit-linked policy may be higher than a non-linked
contract, the risks are greater.

Most funds are valued daily, weekly or monthly, and the policyholders can regularly follow
the progress of their investments because unit prices are published in the applicable sections
of the Stock Exchange and other national daily newspapers. In any event, the life office will
periodically issue statements showing the number and value of units allocated.

Many offices have introduced unitised with-profits funds. These are really with-profits
investments expressed as a unit-linked policy. The main difference from the other unit-
linked funds is that the unit price is guaranteed not to fall. There are two types of with-profits
fund; these are the fixed-price and variable-price with-profits fund. Under the fixed-price
system, the unit price does not vary. When the annual bonus is declared an appropriate
number of extra units, with the same price, are allocated to the policy. These extra units
cannot then be taken away. Under the variable-price system, the unit price remains static

12
throughout the year, until the annual bonus is declared, when it will rise accordingly and is
guaranteed not to fall.

An element of the annual bonus may be guaranteed and there may also be a terminal bonus
on a claim at maturity or death. There is a wide variation between the unitised with-profits
funds of the different life offices. However, the main aim is to express the traditional with-
profits investment as a unit-linked policy, allowing the policyholder the chance to switch
between with-profits and true unit-linked funds.

Most life offices reserve the right to apply a market value reduction factor (MVR) to
surrenders and switches out of the with-profits fund. The MVR enables the life office to
reduce the surrender or switch value if it would otherwise be in excess of the value of the
underlying assets, for example, in times of stock market crashes. The objective is to protect
the interests of those staying in the funds and maintain fairness between those who cash in
early and those who stay the full term. For this reason, MVRs are not applied to claims on
death or maturity. The amount of unitised with-profits business being written is increasing
rapidly as offices are moving away from conventional with-profits business. However, it is
usual for offices not to maintain a separate unit-linked with-profits fund but to continue to
use the main with-profits fund. With-profits funds will thus contain increasing proportions
of unitised business in the future.

Generally, life offices should be able to manage their unit linked funds effectively having
spelt out the following procedures:
 Policy conditions should explain how funds are managed.
 Where discretion is exercised the primary requirement is treating customers fairly.
 Unit prices should be calculated in a fair and transparent manner.
 The pricing basis of the fund must be kept under regular review to protect continuing
policy-holders.
 Transactions should be processed and settled in a timely manner.
 Rounding should be kept to a minimum, should not normally exceed 0.5% of the unit
price, should be neutral and should not be used as a way of levying a charge.
 All charges should be clearly defined and disclosed to policy-holders.
 Errors should be quickly identified and rectified. Compensation should normally be
paid where a unit pricing error is 0.5% or greater.
 Significant or persistent pricing errors should be reported to the regulatory authority.

2.3.4 Whole Life Policies

A whole life policy is a very simple policy which pays out a sum assured whenever the life
assured dies. Unlike term assurance, it is a permanent policy, not limited to an expiry date
and since a claim is certain, premiums will be more expensive than for a term assurance,
where a claim is merely possible or at worst probable. Whole life policies are substantive
policies and can often be used as security for a loan either from the life office or from another
lender.

13
2.3.4.1 Non-Profit Whole Life Policies
A non-profit whole life policy has a level premium, payable throughout life. It pays only a
fixed sum assured, whenever death occurs. There are also policies which offer a cessation of
premiums on attainment of a certain age, often 70 years. These contracts are slightly more
expensive because premiums will be payable on average for a shorter period and were also
very rarely sold over the last few decades. Some life offices now market a simple whole life
policy by direct mail offers, typically to the over 50s. The proposal form tends to be very
simple with few medical questions. The sum assured is a fixed sum with no bonus or unit
linking. However, it is common for the sum assured only to be payable if death occurs more
than two years after the start of the policy, with only a refund of premiums payable on death
within that period. There will usually be no surrender value.

2.3.4.2 With-Profits Whole Life Policies

These policies are almost the same as non-profit whole life assurances, the only difference
being that the amount payable on death is the sum assured plus whatever profits have been
allocated up to the date of death. Again, premiums can be payable throughout life or can
cease at, for example, 80 or 85 years. They are used for family protection and for inheritance
tax funding.

2.3.4.3 Low-Cost Whole Life Policies

These policies are with-profits whole life contracts with a guaranteed level of cover. Low-cost
whole life policies are written with two sums assured. The amount payable on death is the
greater of:
(i) the basic sum assured plus bonuses; or
(ii) the guaranteed death sum assured.

Bonuses are calculated on the basic sum such that (i) above increases yearly with the
declaration of bonuses until it overtakes (ii) above. Premiums for this type of contract are
lower than for ordinary non-profit whole life contracts; the benefits will not be as high as
those of a full with-profits whole life policy. Some offices allow the difference between the
basic and guaranteed death sums assured to be converted into the basic sum assured, subject
to the appropriate increase in premium. They are used for family protection and inheritance
tax funding.

2.3.4.4 Single Premium Unit-Linked Whole Life Policies

These contracts – often called bonds – are the simplest form of unit-linked policy. They are
normally written as whole life contracts so that the investor can continue the contract as long
as they like. When the policy is effected, the whole of the single premium is applied to
purchase units in the selected fund at the offer price ruling on the day of payment. The policy
can then be cashed in at any time, the surrender value being the total value of the units at the
bid price on the day of surrender. The contracts are used purely for investment purposes. If
the life assured dies, the death claim value will be paid out. In most cases, the amount payable
is 101% of the value of the units. This reduces costs and makes it easier for older lives to invest
by avoiding underwriting although this varies between offices. Some offices offer more
substantial levels of life cover; for example, 120% at the age of 50 years, or 200% at the age of
14
30 years.Many contracts allow the investor to pay in further single premiums at any time.
This topping-up facility is useful since it eliminates the necessity of taking out a completely
new policy. Most offices offer both single and joint life second death versions of this
contract.Almost all these policies allow the investor to take an “income” by making partial
withdrawals each year.

These withdrawals are achieved by cashing in however many units are needed to give the
withdrawal amount. If the annual amount withdrawn does not exceed 5% of the original
investment, the policyholder will pay no income tax at that time. There may be some liability
to higher rate income tax if the withdrawal rate exceeds 5% or its duration exceeds 20 years.
Although often described as income these payments are legally capital.
A number of offices offer distribution bonds. These are single premium unit-linked bonds
where the 'natural income' of the underlying funds (i.e. dividends, interest and rental
income) is paid out, usually half-yearly, to the bondholder. This is normally done without
cashing in units. The rate of income produced will vary, reflecting market conditions for the
underlying funds, and thus is not guaranteed.

2.3.4.5 Regular Premium Unit-Linked Whole Life Policies

These policies are now the most popular type of regular premium whole life assurance. Their
main advantage is their flexibility since they offer a variable mix between investment content
and life cover.The policies are regular premium contracts. The initial level of life cover is set
for the first ten years on the basis of an assumed growth rate (often 6%) in the fund to which
the contract is linked. At the end of the ten years, the policy is reviewed to see how the actual
growth rate compares with the assumed growth rate. This determines whether the value of
the units allocated at the time will be enough to maintain the sum assured.

The action taken as a result of this review varies from office to office but usually, if the actual
growth rate is higher than that assumed, the sum assured is increased; if the actual rate is
lower, either the sum assured is reduced or the premium correspondingly increased. Further
regular reviews are made, usually every five years but possibly more frequently once the life
assured reaches the age of 70 or 75 years. The level of life cover under these plans is higher
than on savings plans and, to help pay for this, unit allocation percentages in the early years
are very low, often nil for the first two years. Thus, the investment element of the policy takes
some time to build up. If the policy is cashed in the surrender value will be the bid value of the
units allocated. If the total unit value overtakes the sum assured, then the higher amount will
be payable on a death claim.The earliest policies had a fixed relationship between the
premium and the sum assured. However, most current versions allow policyholders to
choose their own sum assured, within certain limits, for any given premium. Policyholders
may then have the right to adjust their sum assured up or down (again within certain limits)
according to their circumstances. Obviously, the more premium that goes into life cover, the
less is invested in units. The attraction of this type of plan is that the level of life cover is
extremely flexible, enabling a high degree of protection to be given in the early years and then
reducing it to give higher levels of investment later in life, when protection for the family is
no longer the main aim.

15
A 'maximum cover' whole life policy provides a high level of life cover and, because it is
virtually all risk premium, is similar to a term assurance. However, it does not have an expiry
date and will have a substantial chance of an increase in premium after the first review date.
In order to maintain the qualifying status of the policy, the minimum sum assured is set no
lower than the regulatory minimum of 75% of premiums payable up to the age of 75 years
although some offices have higher limits. The maximum sum assured also varies from office
to office but is typically that which can be sustained throughout life, based on a growth rate of
6%.

If an increase in the sum assured is requested, this will be subject to fresh medical evidence
unless the policy has a guaranteed insurability provision.

The cost of the life cover is met by monthly cancellation of units. The amount cancelled is
based on the difference between the sum assured and the value of the units, and is calculated
with reference to the latest mortality tables. Enough units are cancelled each month to pay for
that month's life cover. The policyholder can thus benefit from future improvements in
mortality statistics. A further advantage is that as the value of the units builds up, the cost of
the life cover can reduce rather than increase as it would on a conventional policy. Once the
value of the units overtakes the sum assured, deductions for life cover will cease.

Some offices allow the policyholder to increase the sum assured regularly, in line with
inflation, without medical evidence. This guaranteed insurability provision is valuable
because it enables the policyholder to maintain the real value of the cover. However, some
offices cancel this option if it is not used every time it is available. The option may be available
every year, every three years, or every five years, depending on the office. This option usually
ceases at, say, age 65.

These contracts are used for family protection and inheritance tax funding. They are
available on a single life, joint life first death or joint life second death basis.

2.3.5 Endowment Policies

The third basic type of policy is the endowment assurance. Here, the sum assured is payable
on a fixed date – either on the maturity date or the life assured's earlier death. The standard
non-profit endowment assurance provides a level guaranteed sum assured on death or
maturity. Since there will be a pay out at some stage, endowment assurances are substantive
contracts and can be used as security for loans either from the life office itself or from other
lenders.

Level premiums are payable for the duration of the contract. Premiums for endowments are
generally more expensive than for whole life assurances because claim payments are
generally made earlier. The shorter the term of the endowment, the higher will be the
premium for a given sum assured because it will be payable for a smaller period. Terms of
less than ten years are rare because of the qualifying rules. However, since the abolition of life
assurance premium relief, they have become more common. With the exception of
flexidowment policies, the endowment policies described below are only suitable
16
investments if investors do not want their money before the maturity date and will not need
to cash in the policy earlier.

The best yield on an endowment policy is usually obtained by waiting until the maturity
date. The reasons for this are really twofold. First, surrender values on life policies are
generally on the low side. In many cases, the surrender value in the early years of a contract
can be less than the premiums paid in. Even in later years, the surrender value is often
substantially less than the maturity value. Second, under many offices' structures, a terminal
bonus is payable on death and maturity claims but not on surrenders. Terminal bonuses can
form a large proportion of the total claim value.

2.3.5.1 Non-Profit Endowments

These are the most basic form of endowment, with level premiums and a pay out of only a
fixed guaranteed sum assured on maturity or earlier death. They are very rarely sold these
days.

2.3.5.2 With-Profits Endowments

The principles that govern with-profits contracts have already been described earlier in this
chapter. These also apply to with-profits endowment assurances, where the amount payable
on maturity or earlier death will be the guaranteed sum assured plus the bonuses. If the
policy runs to maturity, bonuses will be higher than if it becomes a death claim because they
will have been added for a longer period. As with whole life assurances, it is not possible to
guarantee what the eventual payout will be because of the variable nature of future bonuses.
Premiums are higher than for non-profit endowments, to reflect the greater benefits that are
payable. With-profits contracts are the basic element in many savings and house purchase
arrangements.

2.3.5.3 Low-Cost Endowments

The low-cost endowment contract is, as its name suggests, a low-cost version of the with-
profits endowment. This utilises a combination of a with-profits endowment.

Low-cost endowment policies are written with two sums assured. The amount payable on
death is the greater of:
(i) the basic sum assured plus bonuses; or
(ii) the guaranteed death sum assured.

Bonuses are calculated on the basic sum, so that (i) increases yearly with the declaration of
bonuses until it overtakes (ii) at which point the term assurance element (the difference
between (i) and (ii)) is eliminated. The basic sum assured is pitched at such a level that, with
the addition of bonuses based on, say, 80% of the office's current normal rates, it will equal the
guaranteed death sum assured on the maturity date.

The amount payable on maturity is the basic sum assured plus bonuses and is thus not fully
guaranteed. These policies were introduced as a cheaper way of covering house purchase
loans, with the guaranteed death sum assured being equal to the loan since the basic sum

17
assured is less than it would be under a full with-profits endowment, the premiums are
cheaper. However, owing to the term assurance element, there is a guarantee that the loan
will be repaid on death. There is no such guarantee on maturity but, because of the
conservative bonus assumptions used in fixing the basic sum assured, there is every prospect
that the maturity value will comfortably exceed the amount of the loan. Many contracts of
this type carry the option for the policyholder to convert the difference between the two sums
assured (that is, the term element) into the basic sum assured.

2.3.5.4 Low-Start Endowments

A development of the low-cost endowment is the low-start, or increasing premium,
endowment. This is basically a low-cost endowment but with premiums starting at a low
level and rising gradually over a number of years to the full premium. This type of policy is
aimed at the house buyer who is working on a very tight budget but who has expectations of
pay rises in future years. The initial premium is very low but this is balanced by a full
premium which is somewhat higher than that for an ordinary low-cost endowment for the
same sum assured.

One office offers a policy for which the initial premium is 50% of the full premium, rising by
10% of the full premium each year until the full premium is payable in the sixth and
subsequent years. Another office offers an initial premium of 50%, increasing by 5% annually
for ten years. Yet another office offers a version where the premium increases by around 4%
each year throughout a 25-year term.
The low initial premiums do not affect the sum assured or the bonuses, which continue
throughout the term of the policy on the normal low-cost basis.

2.3.5.5 Flexidowments
The drawbacks of the traditional endowment, namely its fixed maturity date and low
surrender value, led in the 1970s to the introduction of a new type of policy. This was the
open-ended endowment or flexidowment. These policies can be cashed in without the
normal surrender penalty at any time after ten years. The surrender value is usually
guaranteed or part guaranteed and is more akin to an early maturity value than to the
traditional endowment surrender value. For convenience, the policies are usually written as
longterm with-profits endowments, for 25 years, say, or to the age of 65 years. In whatever
way the policy is written, however, its real purpose will be to provide a maturity value at any
time after ten years. Often the flexidowment is issued as a number of small identical policies
with a standard premium of, say, N1.00 or N10.00 per month per policy. This allows just one
or two policies to be cashed in whenever required, giving greater flexibility.

2.3.5.6 Unit-Linked Endowments

Many regular premium unit-linked savings plans are written as long-term endowments or
ten-year endowments with an option to extend for further ten-year periods. A specific
percentage of each premium is applied to buy units at the offer price ruling on the day of
payment. In the first year, either initial units (with their higher management charge) will be
allocated or a relatively low percentage will be applied to buy accumulation units.

18
Subsequent premiums will buy units at an allocation percentage, which will vary from office
to office. The basis will be that the older the life assured, the lower will be the allocation
percentage. As the policy progresses, more and more units will be bought and so its value
should continue to rise. The contract will have at least enough life cover to ensure that it is a
qualifying policy. This means that the sum assured will be at least 75% of the total premiums
payable over the full term of the contract. Thus, on death, the amount payable will be the
guaranteed death sum assured mentioned above or the bid value of the units, whichever is
the higher and as a result of this life cover, proposals will have to be underwritten. The
maturity value will be the bid value of the units. If the investor wishes to cash in his policy
before maturity, the surrender value will also be the bid value of the units. However, if
surrender occurs in the early years there may be a discontinuance charge or 'surrender
penalty', which has to be deducted from the value of the units before arriving at the final
figure. Most surrender penalty charges will apply only during the first ten years. Most
policies can be issued on a single life or a joint life basis. These plans are frequently issued as a
cluster of small, individual policies which can be dealt with separately. For example, a
N500.00 per month plan might be issued as a cluster of ten N500.00 per month policies. This
increases the flexibility of the arrangement and also has taxation advantages.

2.3.5.7 Pure Endowments

A pure endowment is not truly a life policy since it provides no life cover. The standard pure
endowment is simply a contract which pays out the maturity value if the life assured lives to
the maturity date but pays out nothing if he dies before that date. There is no life risk and thus
no underwriting. Some pure endowments may offer a return of premiums on death before
maturity. They have been used in arrangements to mitigate inheritance tax and, its
predecessor, capital transfer tax.

2.3.6 Other Types of Life Policy

These are life policies recently developed and sold abroad, especially in the UK, but they are
yet to be in the Nigerian market. Since life assurance is the future of insurance and it is
evolving globally, we shall be discussing these policies for possible adaptation into the life
products offering in the nearest future in the Nigerian market.

2.3.6.1 Universal Life Policies

Universal life policies are a development of regular premium unit-linked whole life policies.
In fact, these policies are basically standard unit-linked whole life policies but with a whole
range of bolt-on extras for total flexibility. The idea is that policyholders pay in what they like,
when they like, and choose from a whole range of benefits. All premiums paid are used to
purchase units in the selected fund(s) and each month the cost of whatever benefits currently
apply is paid for by cancelling the relevant number of units.

The range of benefits available usually includes the following:

 death benefit;
 annual indexation option to automatically adjust the death benefit
 guaranteed insurability options;
 waiver of contribution benefit during disability;
19
  regular income option;
 facility to suspend premium payments, for example, during unemployment;
 income protection benefits;
 sum assured payable on disability;
 hospital income benefits;
 accidental death benefits;
 option to add a further life assured, for example, on marriage;
 critical illness cover.

Benefits can often be added later as well as chosen at the outset. As a result of the range of
benefits offered, the policies cannot meet the qualifying rules and are thus non-qualifying.
However, this does give the policyholder great flexibility with respect to payment of
premiums. Most contracts provide for a regular premium, usually monthly, which can be
increased or reduced as required, and also allow single premiums to be paid in whenever
desired. Since the policies are non-qualifying, the payments are not tax free as they would be
on a qualifying policy. The income protection insurance (IPI) and hospital income benefits
are tax free as for IPI policies.The other benefits are free of basic rate income tax but are
subject to higher rate tax under the chargeable gains rules.

2.3.6.2 Contingent Policies

A contingent life assurance is a type of assurance where payment is only made on the death of
the life assured if a certain other condition (the contingency) is also fulfilled. The usual
condition is that the life assured must die during the lifetime of another specified person (the
counter-life). The policy would thus pay out on the death of A (the life assured) only if it
occurred during the lifetime of B (the counter-life). Premiums will depend on the age, sex and
health of the life assured and the counter-life. Policies can be issued to cover other
contingencies and in such instances, the premiums will depend on the contingency involved.

2.3.7 Bolt-On Options

Bolt-on-options are riders to the basic life policies. Many life offices have a number of bolt-on
options which can be added to their standard policies. Often they are available on whole life
or endowment policies only. All these options involve an increase in premium over the
standard premium and many will be available only for 'ordinary rated' lives. The most
common options are dealt with below.

2.3.7.1 Waiver of Premium Option

This is a provision which states that if the life assured is unable to follow their normal
occupation due to illness or injury the premiums on the policy will be waived. This, in effect,
means that the life office will pay the premiums for the life assured in order to maintain the
policy benefits. The option works like a mini income protection insurance, with a deferred
period, exclusions and so on.

2.3.7.2 Total and Permanent Disability (TPD) Benefit

This is a benefit whereby the sum assured is payable on permanent disability as well as on
death. The life office will need evidence that the life assured is permanently unable to follow

20
their normal occupation due to illness or injury. Again, this is similar to income protection
insurance, although the payment is a lump sum (the death sum assured) rather than an
income. Naturally, if payment of the sum assured is made due to permanent disablement
there will be no further payment on subsequent death.

2.3.7.3 Double Accident Benefit

This benefit provides that if the life assured dies as a result of an accident (as defined in the
policy) an additional payment will be made equal to the death sum assured. The policy will
thus pay out twice the ordinary sum assured if death is by accident. There will be various
exclusions in the double accident benefit. For example, payment may not be made if death is
caused by suicide, participating in certain dangerous sports or while committing a criminal
offence. The exclusions do not affect the payment of the main sum assured, which will
usually be payable whatever the cause of death.

2.3.7.4 Increasing Cover Option

This option enables the policyholder to increase the cover by certain amounts at certain
times. Typical items would be a right to increase every three or five years by a total amount
not greater than the original sum assured. No medical evidence is required on increase but
the premium will be increased according to the office's ordinary rates at the time of exercise
of the option. Sometimes the option provides for the increase in cover to be through a new
policy rather than an increase to the existing policy.Some options are triggered by events
such as marriage, birth of a child, moving house or receiving an inheritance. These are often
termed guaranteed insurability options, as what they give the policyholder is the facility to
be guaranteed the right to further cover in future if required. The policyholder will have to
meet the exact conditions of the option in order to exercise it. There may well be limits on the
amount of cover and a maximum age at which the option can be exercised. The option is
particularly valuable for someone whose health has worsened since the policy was effected
and who thus might no longer be able to obtain cover at ordinary rates (or at all). For that
reason, the option is usually only given if the life assured is accepted at ordinary rates on the
original policy.

2.3.7.5 Critical Illness Cover (CIC)

Many offices now have policies which pay the sum assured on the diagnosis of a critical
illness as well as on death. This has the advantage that a claim can be made before the
policyholder's death. However, the critical illness payment is an alternative, not an addition,
to the death sum assured. Thus, if there is a payout, there will not be a further payment on
subsequent death. The policy will define what is a 'critical illness' and definitions vary from
office to office. All offices cover cancer, strokes, coronary artery disease and heart attacks.
Other commonly covered problems are kidney failure, major organ transplants, paralysis,
permanent total disability, multiple sclerosis and blindness. HIV is now covered if it was as a
result of a needle stick injury for a claimant working in the medical profession.

Critical illness cover (CIC) is sold as an optional extra on whole life policies, particularly unit-
linked ones where the risk is paid for by cancellation of units. It can also be added to term
assurances and endowments (which might be useful for mortgages). A number of offices

21
now sell stand-alone critical illness policies. Stand-alone critical illness policies can be
guaranteed or unit-linked. A guaranteed policy provides a fixed benefit for a fixed premium.
The unit-linked policy will be like a unit-linked term assurance and premiums could increase
in the future due to poor investment performance or bad claims experience. A few offices
have policies which pay regular instalments of capital rather than a lump sum. There is a
trend towards reviewable CIC products as the cost of guaranteed premiums increases, due to
possible future medical advances in diagnostic techniques. Reviewable premiums are
generally 15% to 55% cheaper than guaranteed ones and the gap is widening. The policies
would be reviewed every 5 or 10 years on the current rates, based on general advances in
medical science, not on individual circumstances or individual lives assureds' health.

Improvements in medical science and treatments have led to some illnesses becoming much
less critical than previously, and so the market periodically reviews what illnesses should be
covered and how they should be defined. Insurers thus from time to time revise their policy
wordings, although any changes would not affect any policy already issued.

2.3.7.6 Terminal Illness Cover (TIC)

This is similar to critical illness cover and provides that the sum assured is payable if the life
assured is diagnosed as suffering from an advanced or rapidly progressing incurable
disabling terminal illness, where, in the opinion of the life office, the life expectancy will be
less than twelve months. However, if the cover is part of an endowment policy and the twelve
months would take the policyholder beyond the maturity date, the advance payment will not
usually be paid. The terminal illness payment is, in effect, an accelerated death benefit.
Terminal illness cover can often be added to term assurance but will not usually apply in the
last 18 months of the contract. However, if a terminal illness payment is made and the life
assured lives beyond the expiry date, the payment will not have to be refunded to the life
office. The idea underlying the cover is that if a terminal illness is diagnosed the life assured
will receive a large payment and be able to spend the last few months in relative luxury.
However, a counter argument might be that the life assured may be too unwell to take
advantage of the benefits the payment may bring.

2.3.8 Group Life Assurance

Group life assurance schemes were developed to enable employers to make provision for the
dependants of employees who died while in their service. They are usually arranged in
conjunction with an occupational pension scheme. In principle, a group life assurance
scheme is a collective term assurance, where a large group of lives is insured, often at a low
premium and with simplified underwriting. The insurer will have to pay out each time one
of the insured group dies. The insured group will change frequently as new employees join
and older employees leave or retire. Recently, life offices have offered employers more
flexible packages incorporating other benefits such as income protection insurance (IPI) and
critical illness cover. The aim is to enable a company to offer its employees a very good
remuneration and benefits package.

With the enactment of the Pension Reform Act of 2004 (as amended by the 2014 Act), Group
Life was made compulsory in Nigeria (Section 9 of the Pension Reform Act 2004 – also refer to

22
the joint release by the National Insurance Commission and the National Pension
Commission in the latter part of this chapter).

2.3.8.1 Level of Life Cover

The level of life cover can be calculated in various ways depending on whether or not there is
legislation regarding the provision of the group life cover. However, the most usual method
is to express the cover as a multiple of the employee's annual salary per each employee or
being fixed per level of employees in the organization concerned.

2.3.8.2 Duration of Cover

The normal terms are that cover continues as long as the employee continues to work for the
employer. Therefore, cover will cease if the employee leaves service or retires. The terms of
the group life scheme will reflect this and so there will be a condition stating that cover will
not be provided after, say, age 65 years. Usually the expiry date will match the normal
retirement date in the pension scheme. What often happens is that a company establishes a
scheme for its employees that, as part of the contract of employment, will last as long as the
employment. The company will then buy a group life policy from a life office to fund its
liability under the scheme. That policy will often be a short-term policy, normally for two
years. When that policy expires, the employer, with the assistance of an independent
financial adviser, will renegotiate cover for a further period of two years with whichever life
office in the market is offering the best terms.

2.3.8.3 Widows' and Orphans' Pension Schemes

As an alternative to the provision of a lump sum, some group life schemes provide what is
often called a widows' and orphans' pension. This pays a pension for life to a widow (or
widower) of an employee who dies before retirement. If there is no widow (or widower) a
pension may be paid to any orphans until they reach a specified age, usually 18, or finish full -
time education, if later. Some recognition is being given to unmarried partners by providing
a lump sum which can be used to purchase a pension for a partner who was financially
dependent on the deceased.

2.3.8.4 Group Life Schemes for Clubs and Associations

As an innovation on the compulsory group life assurance in Nigeria, clubs and association
now arrange group life assurance cover for their members on an annually renewal basis with
hope of providing financial compensation to the dependents of any of the members who may
pass on within the annul period of cover. This may sometimes be referred to as – Welfare
Group Life Assurance Cover.

2.3.8.5 The Premium

In group life assurance, members are covered for life assurance only as long as they are
members of the group. These groups are almost exclusively confined to bodies of employees
and, as such, a body may be taken as a sample of the population of the same age distribution.
Therefore, premiums may be based on population statistics, for example, the English life
tables, but modified by the life office's own experience, particularly with reference to
geographical and occupational factors. The employer almost invariably pays the whole cost,

23
even if the employee may contribute to part of the cost of an associated pension scheme.
Group life policies can be costed using individual ages of the members but they are usually
costed on a unit rate system, based on the average age of those covered and the total sum
assured for the year. The employer is only concerned with the total premium which, in a large
scheme, should remain fairly constant due to the withdrawal of older members (by
retirement or death) and the influx of younger members. In schemes where the sum assured
is proportionate to salary, the initial premium might be based on current salary with an
adjustment at the end of the policy year if salaries have increased during the year.

2.3.8.6 Underwriting
Since a group of people is being insured, it is possible for insurers to underwrite on a more
lenient basis than for individual policies. Some insurance companies in this market are
prepared to offer a substantial amount of group life assurance cover without evidence of
health, provided certain conditions are fulfilled; however, evidence of health may still be
required under some circumstances.

Group Life Assurance

Cover may be provided without Evidence of health is required when
evidence of health when… considering…
A stated minimum percentage of those Groups of advanced ages.
eligible join the scheme at its inception, the Individuals for whom an exceptionally
percentage varying according to the numbe rhigh sum assured, that is perhaps
of lives eligible (e.g. at least 75% of 100 disproportionate to the others, is required.
eligible employees).
Individual employees are actually at work Individuals who were ill when the scheme
on the day when they become eligible for started but who now want to join.
membership; or all lives are physically and All individuals where the group is small,
mentally capable of working, which would e.g. less than 20.
also cover those on annual leave.
The group of lives to be assured must exist Groups engaged in a hazardous
for some purpose other than assurance, occupation, e.g. workers in an explosives
e.g. clerical workers in a large office or factory where there is a disaster risk of a
employees in a factory. large number of simultaneous deaths.

2.3.8.7 Group Cover for Employees Abroad

In some cases, an employer will wish to provide cover for a group of employees travelling
abroad. For example, a construction firm building a dam or a bridge in Africa might wish to
arrange a group term assurance to cover all its employees working on the project. The
purpose of the scheme may be to cover the loss caused to the firm by the death of an
individual or to provide for dependants, or both. The sum assured will be determined by the
purpose but will generally be related to the salary or status of the employee. This cover might
be in addition to a normal group life scheme. Conditions for these contracts vary but the
policy will be issued to the employer who will usually advise the life office of all the
employees who have left the country of issuance on the project. As each employee leaves, an
appropriate year's premium is charged and will continue with a proportionate refund for the
24
year of return. Cover may be continued after return for, say, three months to meet cases where
the employee had an accident or contracted an illness abroad. The contract would continue
for the duration of the project. However, firms regularly in this position might have a
permanent scheme covering all employees going abroad.

2.3.8.8 Group Credit Insurance

The steadily increasing volume of hire purchase and credit sales of consumer goods has led
to the introduction of group policies designed to cover the outstanding debts on the hirer's or
debtor's death. Premiums are charged on the basis of decreasing term cover but, as the
procedure followed is simplified because individual policies are not issued, modified
premiums can be charged. The following description relates to one particular office but is
typical of the market generally. The cover is available to lenders whose total credit sales
exceed, say, N100,000.00 p.a. and the policy covers the outstanding debt on the death of any
borrower under 60 years of age. Arrears are not covered, the loan agreement must not exceed
three years and there is a limit of liability on any one life. The premiums payable quarterly or
monthly are based on the average outstanding debt in the quarter or month concerned. If the
total sum assured exceeds, say, N500,000.00, a scheme may be arranged on a profit-sharing
basis at a higher premium. If, in any year, the claims are less than, say, 80% of the premiums
paid then, say, 75% of the difference will be refunded.

Claims are paid to the firm on production of the credit agreement and the death certificate.
No evidence of health is required and there is no question of selection either by the office or
against it, as all the lender's credit agreements are included in the group life policy. A single
group policy is issued and each premium is calculated from a return supplied by the lender.
The lender is the policyholder and pays the premium. Borrowers are not party to the contract
and probably only know that their debt will be cancelled if they die. This is very much a
specialised niche market.

2.3.8.9 Partnership Group Life Assurance

Some life offices offer group cover to partnerships of more than, say, ten partners. Usually all
partners must join and cover cannot continue beyond age 65 years. The benefit is normally a
flat sum payable under trust to either the surviving partners, or the deceased's dependants.
These policies can be used in a partnership share protection scheme. They tend to be used by
professional partnerships such as solicitors or accountants.

2.3.9 Income Protection Insurance (IPI)

Most offices also offer Income Protection Insurance (IPI), formerly called Permanent Health
Insurance (PHI). This differs from life assurance by paying out not on death but when the
insured is unable to work due to illness or accident. It provides a regular income (weekly or
monthly) to replace that which the insured may no longer be able to earn. The office is thus
insuring a person's health rather than their life. As long as the insured keeps paying
premiums and complies with any relevant policy conditions, the insurer cannot cancel the
policy or increase the premiums, no matter how many claims are made.

25
2.3.9.1 Incapacity
IPI policies are written so that the benefit only becomes payable whilst the insured is
incapacitated as defined in the policy. A typical definition is as follows: Incapacity for the
purpose of this policy means that the insured is totally unable by reasons of sickness or accident to
follow the occupation stated in this policy and is not following any other occupation.
The policy will state the insured's occupation and the life office has to be notified if it changes.
Some offices do not specify the occupation on the policy and so their definitions state that the
insured must be unable to follow the occupation engaged in immediately prior to incapacity
or any other occupation. A number of companies state that if the insured has no occupation
the incapacity must confine the insured to their house. Many offices include that the insured
must be certified as being so incapacitated by a medical practitioner appointed or approved
by the office.

2.3.9.2 Deferred Period

Most offices provide that benefit will be payable only once the insured has been
incapacitated for a specified period, known as the deferred period. The longer the deferred
period, the cheaper will be the premium, since the duration and frequency of claims are
thereby reduced. The standard deferred periods are 4 weeks, 8 weeks, 13 weeks, 26 weeks
and 52 weeks. Most offices offer a choice of these periods. If an insured becomes
incapacitated, receives benefit, recovers and then becomes incapacitated again from the
same cause, many offices do not reapply the deferred period and benefit will recommence
immediately. Some offices offer stepped deferred periods for employees whose employers
give them full pay for, say, X weeks of incapacity, followed by half pay for a further X weeks.
The policy payment thus commences after the first X weeks, and then increases
appropriately after the second X weeks.

2.3.9.3 Proportionate Benefit

In most cases, benefit will cease once the insured recovers and returns to work. However, it
may be that the incapacity is so serious that the insured cannot return to the previous
occupation. The definition of incapacity will mean, on the face of it, that it would probably be
financially better for the insured to stay sick rather than seek a less onerous and less well-paid
job. For example, a manual worker might not be able to continue a job involving heavy
physical labour but might be able to do a lower-paid job involving lighter or clerical duties. In
order to encourage claimants to return to work, many offices include a proportionate benefit
clause in their policies. This will provide that if, having been incapacitated from the previous
occupation, the insured engages in another occupation then benefit will continue
proportionate to the reduction in earnings. A number of offices also have a similar provision
where the insured returns part-time to the previous occupation. These provisions, in effect,
make up the loss of earnings involved in the rehabilitation of the insured. They define the
level of previous earnings for this purpose, usually in terms of the average earnings for the
year or six months prior to incapacity.

2.3.9.4 Limitation of Benefit

In order to ensure that an insured will not be better off financially by claiming, especially as
the benefit paid is tax free, most offices put a limit on the amount payable. This will operate
26
regardless of the nominal benefit insured. The usual limitation is that the monthly benefit is
limited so that the total of all IPI benefits (thus including other IPI policies) shall not exceed a
specified limit between 50% and 75% of the insured's average monthly earnings in the year
prior to incapacity. Some companies also add State incapacity benefits and sick pay from an
employer to the definition of total IPI benefits. For very large policies the limit may be
reduced to a lower level, say, 25% to 35%. This can mean that, although the benefit insured
might be, say, N2,000 per month, if this is excessive in relation to the insured's earnings, then
the limitation clause can operate in order to reduce the claim payments to the specified level.

2.3.9.5 Exclusions
All companies have exclusions in their policies and no benefit will be paid for incapacity
arising from an excluded cause. The most common exclusions are as follows:
 war, invasion, act of foreign enemy, riot or military or usurped power;
 intentional self-inflicted injury;
 taking alcohol or drugs other than under the direction of a registered medical
practitioner;
 participation in any criminal act;
 pregnancy, childbirth or any complications arising from these;
 aviation other than as a fare-paying passenger on a normal flight;
 AIDS;
 failure to follow medical advice.

2.3.9.6 Foreign Residence and Travel

Benefit will be payable only while the insured is permanently resident within areas known as
free limits. The free limits vary from office to office, but cover will be at the least, within the
country of issuance of the policy. It is common for offices to continue to provide cover if the
insured travels or resides temporarily outside the free limits but benefit will not then be
payable for more than, say, three or six months. It is fairly usual to provide for cancellation of
the policy if the insured resides outside the free limits for more than a year.

2.3.9.7 Change of Occupation

Most offices cease cover if the insured engages in an occupation additional to or instead of
that shown in the policy, unless the office agrees to continue it, possibly with an appropriate
increase in premium. This is to allow for the possibility that the change in occupation carries a
greater risk. Some companies have no such condition and thus have to underwrite that risk at
outset. Most offices treat unemployment as a change of occupation.

2.3.9.8 Assignment
Almost all offices state that the policy is not assignable or that, if it is assigned, it becomes
void.

2.3.9.9 The Term of the Policy

The standard procedure is for the policy to expire at the age of 60 or 65 years. A recent
introduction is the renewable IPI which is written for a five-year term, with a right to renew
on expiry. This will be cheaper in its earlier years but more expensive later on in comparison
27
with the traditional policy after each five-year term. This is because the premium is
recalculated on the insured's age and the insurer's current rates. The right to renew exists,
regardless of the policyholder's state of health, up to normal retirement age. The level of
cover can be increased every five years by up to 50%.

2.3.9.10 Increasing Policies

Any policy effected for a fixed benefit will become less valuable as time goes on, due to the
effects of inflation. Thus, a number of offices offer policies with some form of provision to
allow an increase in benefit. There are three basic variations on this:

The option The consequences

Increase the benefit, without evidence of The maximum benefit levels of these
health, every three or five years by a options are normally limited by the insurer
specified percentage. and can be taken only if the insured is
below a certain age limit. The increased
premiums depend on the benefit and are
based on the insured's age and office's rates
at the time.
An automatic increase in benefit of a Premiums will normally increase by the
stated percentage every year/three same percentage.
years/five years.
Index-linking, whereby the benefit is This method has the advantage of
increased each year by the annual following inflation much more closely
increase in the Retail Prices Index (RPI), that the other types. Sometimes the index
and premiums are correspondingly is the National Average Earnings Index
increased. Once benefit starts to be paid, before a claim and the RPI during a
index-linking may continue. claim.

Some offices have a guaranteed insurability option enabling the insured to increase the
benefit without medical evidence if he receives a salary rise due to promotion or a job change.

2.3.9.11 Unit-Linked Policies

A number of offices have unit-linked IPI policies available. These are effectively non-
qualifying life policies. After an initial non-allocation period, premiums buy units in the
selected fund. Each month the appropriate number of units is cancelled to pay for that
month's cover. After, say, five years the policy is reviewed to see whether the unit’s growth
rate has met that assumed in the initial costing, in the same way as unit linked whole life
policies. If units have underperformed, the premiums will have to be increased. If units have
over-performed, then the policy will build up a cash value which can be surrendered for cash
or paid out on final termination. Some offices pay out the unit value on death before expiry. A
number of offices have a no claims bonus at expiry, consisting of payment of the unit value or,
for example, one or two years' premiums.

2.3.10 Group Income Protection Insurance and Critical Illness Cover

A number of life offices offer group IPI and critical illness contracts to companies for the
28
benefit of their employees.

2.3.10.1 Group Income Protection Insurance

These contracts are offered to employers but cannot be part of a registered occupational
pension scheme as IPI is not an allowable benefit. Under most policies, all employees aged
from, say, 21 to 65 years are eligible. Most of the terms will be similar to individual IPI,
although underwriting will be simplified on the same lines as for group life cover. The
company is the policyholder and pays premiums which are not benefits-in-kind for the
employees. Cover is usually based on a percentage of pay, and will cease on leaving service or
retirement. The deferred period is normally 26 weeks to match approximately the statutory
sick pay period of 28 weeks. If employees become unable, due to illness or accident, to follow
their own occupation, the benefit will be payable until recovery or normal retirement date.
However, due to increasing costs and poor claims experience, there is a trend towards having
a maximum claim period of, say, five years. This will reduce the premium. On a claim, the life
office would pay the employer, who then pays it on to the employee, for whom it is taxed in
the same way as normal pay. Exclusions tend to be less than on individual policies. However,
there can be specific exclusions for some occupations.

2.3.10.2 Group Critical Illness Cover

This is a new and growing market. Employers can purchase group critical illness cover for
their employees but it will not be part of a registered pension scheme. Employees will
normally have to be between 21 and 65 years to be eligible. There will be reduced
underwriting, although pre-existing conditions are often excluded. Cover can be fixed or a
multiple of salary. The illnesses covered will be the same as those on individual policies.
Cover will cease on leaving service or retirement. However, claims are usually only paid if
the employee survives for 30 days after diagnosis. Payment is usually made direct to the
employee and, thus, if the premium is paid by the employer, this is taxable as a benefit-in-
kind on the employee. The benefit itself is tax-free.

2.3.11 Business Assurance

Many life policies are effected to provide protection for some form of business arrangement.
This section explains the types of plan currently available.

2.3.11.1 Partnership Share Protection

Many small businesses operate as a partnership of two or more individuals. When one
partner dies their share of the partnership passes to their estate. This may not be convenient
for their beneficiaries or the surviving partners. The surviving partners are effectively in
partnership with the deceased partner's family and they may not understand, or even be able
to work in, the business. It is often in the interests of all concerned for the surviving partners
to be able to buy out the interest of the deceased partner and for the family to receive a cash
sum for this. Thus, it is frequently recommended that a partnership agreement contains a
clause enabling this to take place. Many life offices have partnership protection plans
combining a draft partnership agreement and life policies under trust for each partner. The
partnership agreement could be a buy and sell agreement. This means that the surviving
partners have a legal obligation to buy the deceased partner's share from the estate, which

29
has a corresponding obligation to sell. The disadvantage of this method is that it means the
loss of inheritance tax business property relief on the partnership share, as it is subject to a
binding contract for sale. This may not matter if the partnership share will pass to the
deceased's widow or civil partner and thus be exempt anyway. However, if business
property relief (up to 100%) is important, the cross option method can be used.

In the cross option method, the partnership agreement contains, not a binding agreement
that the survivors will buy the share, but an option for them to do so within a specified period
after the death (say six months). The estate has a matching option to sell. This means that the
share is not subject to a binding contract for sale and thus inheritance tax business property
relief is still available.

In either case, each partner effects a term assurance to retirement date on their own life on
trust for the other partners in whatever shares the other partners will hold the business after
their death. Two or more of the partners will be appointed trustees. The sum assured under
the policy should be the value of that partner's share of the business. When one partner dies,
the policy on their life pays out to the surviving partners as beneficiaries of the trust. They use
the money to buy the dead partner's share from the dead partner's estate. The result is that the
surviving partners end up in full control of their business, and the deceased's family receive
full value for their share shortly after the death. If each partner effects such a policy as part of
the partnership agreement this will make the premiums exempt from inheritance tax as a
bona fide commercial arrangement. However, if the ages of the partners vary then this
arrangement is costlier for the older partners than the younger ones. Thus, where premiums
differ to a material extent, there may be some adjustment between the partners to achieve an
equitable distribution of cost. These schemes can also be used for limited liability
partnerships (LLPs).

2.3.11.2 Directors' Share Protection

Small businesses run as companies have similar problems to partnerships. Many small
businesses are run as private companies, with a comparatively small number of people
owning the company as shareholders and running it as directors. This is particularly the case
for family companies. Although a company will not be dissolved on the death of a director,
the surviving directors run the risk of the dead director's shares passing to someone with no
interest in the company, or even to another company which may then be in a position to make
a take-over bid. When a director /shareholder dies, their shares will pass to their estate, which
will often be to their widow(er). The widow(er) may not want to retain the shares and may try
to sell them to someone else (although there may be restrictions on the transferability of
shares in the company's articles of association). The surviving directors will want to keep
control of the company and probably would not like the deceased's spouse to sell the shares
to a (perhaps unknown) third party with whom they might not be able to work amicably.
Thus, many life offices have directors' share protection plans similar to the partnership plans
discussed in the previous section. They will consist of an agreement between the directors,
either buy and sell or cross option, plus a life policy on the life of each director.

30
The policies would be term assurances (or possibly whole life assurances) under trust for the
other directors. When one director dies the policy on their life will pay out and give the other
directors the cash to buy their shares from the estate. Cross option agreements are often
preferable to preserve inheritance tax business property relief on the shares.

2.3.11.3 Key Person Insurance (KPI)

Key Person Insurance (KPI) is the name given to the insurance taken out by a company on an
employee who is vital to the continued profitability of the business. An example of a key
person would be a marketing executive with valuable foreign contacts or, for a
manufacturing company, an inventor or 'ideas person' who devises new products. The key
person may often be the person who has built up a company from scratch. The loss of such a
key person could seriously affect the company's continued profitability and key person
insurance has evolved to provide some sort of financial compensation for the company. The
sum assured should be that required to compensate for the loss of profits on the death of the
key person and, in particular, to cover the expenses of finding, securing and training a
successor. Some estimate should be made of how much the pre-tax profits would fall on the
death of the key person. In this light, a key person policy could be viewed as more akin to a
loss of profits insurance than to ordinary life assurance.

It is therefore common for companies to effect life assurance on the life of a key person. The
company will be the assured and will have to show that it has enough insurable interest in the
life assured to warrant the level of cover requested. The life office will require details of the
company's operations, and the duties and expertise of the key person for underwriting
purposes. The office should only accept the risk if it is satisfied that the company really does
have sufficient insurable interest in the key person to support the policy. This type of policy is
growing in popularity in the UK although it has not yet reached the same high levels of sales
as in the US and in Nigeria.

The ideal type of policy is a five-year renewable term assurance. The company may be able to
obtain corporation tax relief on the grounds that the premiums are allowable business
expenses. In the UK, HMRC will allow this only if the relationship of the life assured to the
company is that of employee and employer, the policy is to meet loss of profits resulting from
the death of the employee, and it is an annual or short-term temporary assurance. If the key
person has a substantial shareholding in the company, HMRC will not allow relief. The
proceeds of the policy will usually be taxable as a trading receipt, whether or not relief has
been obtained on the premiums.

The policy may be arranged so as to provide for the sum assured to be payable by
instalments. This may be appropriate as the losses resulting from the death of a key person
may only emerge over a period of time. In addition, the ability to spread the payments could
be beneficial for taxation reasons.

31
 NATIONAL INSURANCE COMMISSION NATIONAL PENSION COMMISSION
Shippers’ Plaza, Michael Okpara Street Plot 2774, Shehu Shagari Way, Maitama District
Wuse Zone 5, P.M.B 457, Garki Abuja P.M.B. 5170, Wuse, Abuja

GUIDELINES FOR LIFE INSURANCE POLICY FOR

EMPLOYEES
JOINTLY ISSUED BY NATIONAL INSURANCE COMMISSION AND
NATIONAL PENSION COMMISSION

1.0 INTRODUCTION
1.1 Section 9 (3) of the Pension Reform Act 2004 (The Act) requires every employer, to which
the Act applies, to maintain Life Insurance Policy in favour of the employee for a minimum
of three times the annual total emolument of the employee.

1.2 For the purpose of establishing uniform set of rules, guidelines and standards in relation
to the application of the provisions of Section 9 (3), the following

2.0 GENERAL REQUIREMENTS

2.1 The employer shall fully bear all costs in relation to procurement of this policy, and this
shall be in addition to, and separate from, the contributions to be made by the employer to
each employee's Retirement Savings Account, as required by the Act.

2.2 The Life Insurance Policy shall be effected through the purchase of a Life Policy issued by
a Nigerian Registered Insurance Company, licensed and authorized to conduct Life
Insurance Business by National Insurance Commission (NAICOM) under the Insurance Act
2003.
2.3 For ease of administration, a Consortium of eligible insurance Companies, as determined
in paragraphs 3.1 and 3.2 of this guideline, shall be constituted for the purpose of providing
life insurance cover for employees of the Federal Government.

2.4 Employers in the private sector shall be at liberty to engage the service of any insurance
company or group of insurance companies which satisfies the eligibility criteria in
paragraphs 3.1 and 3.2 of these guidelines.

2.4 Employers shall not be allowed to self insure.

2.5 As stipulated in Section 6 (1) of the Pension Reform Act, the National Pension Commission

32
(The Commission) shall set up a Board of Inquiry for treating any case of missing employees
referred to it by employers, for insurance claim purposes.

3.0 ELIGIBLE INSURANCE COMPANIES

3.1 In the first year of implementation, which is 2006, the National Pension Commission shall
provide a list of NAICOM licensed and registered insurance companies eligible to conduct
the business of provision of life insurance cover, under the provisions of the Pension Reform
Act 2004.

3.2 For subsequent years, such eligible insurance companies must have met minimum
acceptable standards to be fixed by the National Pension Commission.

3.3 The Commission shall collaborate with NAICOM to facilitate the Consortium referred to
in paragraph 2.3 of these guidelines from amongst the list of eligible insurance companies in
3.1 and 3.2 above.

4.0 POLICY COVERAGE

4.1 The policy shall provide cover to the insured against Death.

4.2 Insurance coverage shall be for twelve (12) months, from January through December, and
shall be renewable at the end of each coverage year.

4.3 The premium payable on the policy shall be pro-rated as applicable where an employee
joins the scheme in the course of the year.

4.4 Where an employee leaves the service of the employer before the expiration of twelve (12)
months, the premium paid relating to the unexpired period, shall be returned/set aside to the
credit of the employer.

4.5 Insurance cover is mandatory for all employees as long as they are in employment.
4.6 Insurers shall be expected to ensure that employers comply with the minimum insurance
cover of three times the annual total emolument of each employee.

4.7 Notwithstanding the provisions of 4.6 above, employers that have better existing life
insurance policies for their employees, in terms of benefits, shall maintain such policies.

5.0 DOCUMENTATION REQUIREMENTS

5.1 Each employer shall obtain an insurance certificate from the insurer.

5.2 Such certificate shall be accompanied by a schedule which shall indicate amongst other

33
things, the period of coverage, the number and details of staff at inception/ renewal date,
their total emoluments, the benefit payable and the annual premium/date of full payment.

5.3 The insurance certificate shall be issued to employers by the Insurer within a month from
the policy inception/renewal date.

5.4 Employers shall display a copy of the insurance certificate in a conspicuous place within
the premises, for the information of the employees, as evidence of having taken such policies.

5.5 Employers shall send a copy of the insurance certificate with the schedule of benefits to
the National Pension Commission, and the Pension Fund Administrators (PFAs) where the
employees maintain their Retirement Savings Accounts (RSAs), not later than 31st March
every year.

5.6 Employers shall be required to commence renewal negotiations in writing, within two (2)
months to the expiration of the current insurance coverage. Such negotiation must be
concluded before the last day of the current cover.

5.7 Full payment of the insurance premium shall be made, at the latest, on the first day of
insurance cover.

5.8 Where an employer fails to effect full payment of premium at the stipulated time, the
insurer shall report such failure to the National Pension Commission within fourteen (14)
days of non receipt of premium.

6.0 OPERATIONAL TERMS

6.1 Operational terms of the policy shall address, amongst other issues the terms listed in
paragraphs 6.2 to 6.6 below.

6.2 Free cover limit must be established between the insurer and employers. This is the limit
of sum assured above which the insurer will require the affected individuals to undergo
medical examinations.

6.3 Until satisfactory medical results are received, cover will be restricted to the free cover
limit.

6.4 All employees shall be made to fill a non-medical form with their passport photograph
attached, to ascertain identities and existence at commencement or point of entry into the
scheme.

6.5 Procedure for filing and settlement of claims on the policy shall be clearly defined.

34
6.6 Employers are expected to negotiate premium rates payable on such life policies with the
insurer, within the rate table stipulated by NAICOM.

7.0 DEATH OF AN EMPLOYEE

7.1 Where an employee dies, the employer shall immediately commence death benefit claim
on behalf of the deceased, as prescribed in the operational terms of the policy.

7.2 Employer shall notify employee's PFA and the National Pension Commission, of the
employee's death stating the claim amount receivable.

7.3 Employee's PFA shall validate claim amount and where discrepancies arise, this must be
resolved with the employer.

8.0 MISSING EMPLOYEE

8.1 Where an employee is missing, the employer shall report this immediately to the
employee's PFA, Insurer and the National Pension Commission.

8.2 The Board of Inquiry established by the National Pension Commission shall stipulate the
documentary evidence required from employers to process missing person claims. This shall
include the Police Report, Employee's passport photograph, newspaper publication of the
missing employee, a letter from employer declaring him/her missing and any other
document as may be required from time to time.

8.3 The documentary evidence required by the Board of Inquiry set up by the National
Pension Commission shall be provided within fourteen (14) working days after the period of
one year, from the day the employee was declared missing.

8.4 The Board of Inquiry shall, within thirty (30) working days of receipt of complete
evidence required for its deliberations, communicate its findings to the employer, insurer
and the National Pension Commission, for appropriate action to be taken.

9.0 SETTLEMENT OF CLAIMS

9.1 Claims must be settled by the Insurer within seven (7) working days of receipt of complete
documentation and acceptance of liability.

9.2 Information on any discrepancies on claims or its non-settlement within the time, as
specified in 9.1 above, shall be sent to the National Pension Commission by the employer and
employee's PFA immediately.

35
9.3 Total sums due to the employee shall not be encumbered or subject to any deductions by
the employer.

9.4 The total sum due to the deceased shall be paid directly to the credit of the deceased's
Retirement Savings Account by the insurer.

10.0 REVIEW

10.1 These guidelines are subject to regular reviews.

11.0 ENQUIRIES

All enquiries regarding these guidelines shall be directed to the National Pension
Commission

36
 Chapter 3
Introduction to Life
Underwriting Procedures
Learning Objectives
After studying this chapter, you should be able to:
 define underwriting in life business;
 understand and design a proposal form;
 understand the various medical factors in life underwriting;
 give details of various hazardous risks in life underwriting;
 understand the various ways of dealing with under-average lives
 understand the natural and level premium systems in life assurance
 know the medical examinations interpretation in life
 understand non-medical and free cover limits.

Introduction
This chapter explains the concept of underwriting in life assurance. Proposal form is
carefully defined.
Medical examination of the life assured in life assurance underwriting is very vital aspect of
the underwriting for sums assured in excess of either the non-medical or free cover limit.

3.1 Underwriting
Underwriting is the name given to the procedure of assessing a proposal and deciding
whether to accept the risk and, if so, at what rate of premium and terms of acceptance. Each
office has its own schedule of rates for particular types of policy. The rate is usually expressed
per N1,000.00 sum assured and varies with the age of the client and terms of the policy. These
ordinary rates are based on the average mortality experience. If a life proposed shows
features which suggest that there is an above average risk of death then these must be
investigated to decide whether the risk can be accepted at ordinary rates, or whether some
special terms might be required.

An underwriter must bear in mind that a life assurance contract is based on utmost good
faith. The proposer is in possession of all material facts relating to the risk and has a duty to
disclose them. However, material facts may be omitted or only partially disclosed. The job of
the underwriter is to recognise impairments, even if they are not specifically disclosed.
Vague answers on a proposal such as 'check-up' or 'stomach-pain' may describe some trivial
condition. On the other hand they may reveal something much more serious which may
require special underwriting treatment. The underwriter must use skill to assess whether
theproposal can be accepted at ordinary rates or, if not, at what special terms.

We shall now consider the procedure and forms used, factors influencing the assessment of
the risk and methods of dealing with under-average lives.
37
3.2 Underwriting Procedure and Forms
The basic form used to process an application for life assurance is the proposal form. This
document, which is signed by the proposer, requests the life office to issue the desired policy
to the assured and gives the basic information required to assess the application.

3.2.1 Proposal Form

The form usually falls into three sections:
 the first identifies the life to be assured;
 the second specifies the details of the contract required;
 the third section gives the details of the life risk.

The declaration must be signed to declare the answers to be true and also to give the insurer
permission to approach the doctor of the life to be assured for any further information. There
is a note on omission and misstatement of facts on proposal forms and this has been included
as a result of the Statement of Long-Term Insurance Practice. An Ownership of Benefits
section must be completed if the policy is to be written on a 'life of another' basis.

The life office has, of course, to be satisfied about the existence of insurable interest, and this is
the reason for the question on the relationship of the proposer to the life to be assured. The
counter-signature of the life to be assured is required to make sure they understand that the
policy will be owned by the other, to whom all benefits will be paid.

Whilst some proposal forms are still in paper form, the vast majority are now completed
online. The questions can now be made more specific to a particular contract or age group.
Electronic signatures are now becoming acceptable to avoid delays in sending back paper
proposal forms to be signed.

3.2.2 Proposal Procedure

When a proposal form is received by the head office of a life company it must be processed.
The first task is to check the office's index of proposers to see whether any earlier proposals
have been made for that life. If so, the documentation for those proposals is obtained to aid
the underwriting of the current proposal. The proposal must be checked to make sure that all
questions have been answered and the relevant declaration signed. The papers can then be
passed to the underwriter who will scrutinise the information on the form and decide if the
proposal can be accepted at ordinary rates without further investigation. If this is the case the
proposal can be passed to the policy issuing department. Alternatively, if the underwriter
feels that the proposal cannot be accepted immediately, they can:
 obtain further information on which to make a decision;
 impose some form of special terms;
 decline the proposal.

Most offices have what are described as non-medical limits under which proposals will be
considered without a medical report necessarily being required. The office will, however,
reserve the right to call for a medical report if the information on the proposal warrants this.
Limits vary from office to office but a typical age limit would be under 40 years of age, and for

38
a sum assured under N500,000.00.These limits relate to the total sum assured for that life, and
not just the present proposal. Therefore, in the above example, if the proposer already had
aN20,000.00 policy, the limit for a new proposal would be N480,000.00. This procedure saves
the life office from the expense of automatic medical reports for all proposals. Long
experience has shown that comparatively few cases reveal significant medical defects.
However, lives over the limit for age or sum assured for each particular life office will
automatically require a report, and maybe an examination. Many offices now require blood
tests for certain proposals because of AIDS. Typically, blood tests are compulsory for all sums
assured over a pre-determined limit by the life office. Some offices operate free cover or
guaranteed acceptance schemes. These vary from office to office but the general principle is
that for certain classes of business up to a certain limit, a proposal form is used with either no
medical questions or just one or two simple questions such as: Are you expecting to attend any
hospital or have you done so in the last six months for any condition, or are you receiving any treatment
for a heart condition? Acceptance would be guaranteed provided the answer was 'no'. The
schemes were common practice for endowment house purchase cases where, for example,
the sum assured is within predetermined acceptable limit by the life office. This enables the
office to process large volumes of cases easily and swiftly. However, schemes of this nature
are rare these days.

Life insurers place limits on the maximum losses they are prepared to risk. Over this limit,
referred to as the retention limit, the office must then spread the risk by finding other insurers
to accept part of it and so reduce the possibility of catastrophe ruining them. This process is
known as reassurance (also referred to as reinsurance) and is covered in more detail in later
chapters.

The office may need to reassure a policy if it is over the office's retention limit. The retention
limit is the level of sum assured on any life beyond which the office will need to obtain some
reassurance. The need to reassure will affect the underwriting of the policy as the
underwriter has to agree terms with the reassuring office's underwriter.

Most offices now have two tables of rates, one for smokers and another for non-smokers. If
this is the case, then the proposal form will contain a question about smoking and also give
the office's definition of a non-smoker. These definitions may vary but a typical one might be
someone who has not smoked tobacco products (except for 20 cigars per year) for the last
year. Non-smoker rates are cheaper than smoker rates because smoking increases the
likelihood of a number of diseases and shortens the expectation of life.

3.2.3 Access to Medical Reports Act 1988

The Access to Medical Reports Act 1988 gives the proposer certain rights and there will be a
statement of these rights on the proposal form.

3.3 Medical Factors

If the proposal form reveals any medical factor about which the underwriter would like
further information there are, in general, two methods of obtaining this. These are a general
practitioner's report or a medical examination. The underwriter can use either, or both. The

39
decision which to use will depend on the circumstances of each case.

3.3.1 General Practitioner's Report

The general practitioner's report would be sent to the doctor named on the proposal form and
stresses that the proposer has authorised the enquiry. The particular medical factor which led
to the underwriter sending out the report would be specified so as to be sure of getting
further information on the factor. The fees for these reports are agreed from time to time
between the life offices and the Nigeria Medical Association in Nigeria and the ABI and the
British Medical Association (BMA) in the UK, and the life office will pay the doctor.

3.3.2 Medical Examination

The underwriter may decide that a medical examination of the life proposed is necessary in
order to be able to assess the case. Most life offices have lists of doctors who are willing to
carry out these examinations, and they will request one of the doctors in the proposer's area
to conduct the examination. The proposer will be asked by the office to contact the doctor and
make an appointment. The doctor will then conduct an examination and arrange completion
of the medical examiner's report. The first part of this is completed from information given by
the proposer, and the second from the results of the examination. The life office will pay the
doctor's fee for the examination. Fees for GP's reports and medical examinations are exempt
from VAT.

3.3.3 Further Processing

As a result of the information gained from the general practitioner's report or medical
examination the underwriter should be in a position to assess the risk. If a further opinion is
required, especially where the sum assured is very high, the case can be discussed with the
office's Chief Medical Officer. The Chief Medical Officer is usually a consultant physician of
high professional standing retained by the office. They can give expert medical advice to the
underwriter and may even conduct medical examinations for very important cases. Some
offices now use tele-medical interviewing. This is an underwriting technique using
insurance trained nurses to obtain information via telephone direct from the client. This can
speed up the underwriting and reduce costs.

3.3.4 Medical Factors

The underwriter will look for medical factors affecting longevity. Little importance will be
attached to colds, influenza, or any of the usual childhood illnesses. Accidental injuries
which have fully healed (for example, a broken leg from a football injury) will not usually be
investigated and what will receive attention is any condition which could reduce the
expectation of life. Obviously it is beyond the scope of this subject to go into the details of the
various relevant medical conditions, but the following disclosures will normally be
investigated:

 heart diseases;
 circulatory diseases;
 overweight;
 digestive system diseases;

40
  cancer;
 liver diseases;
 eye diseases;
 tropical diseases;
 respiratory diseases;
 kidney diseases;
 glandular disorders;
 diseases of the nervous system;
 mental disorders;
 diabetes;
 HIV/AIDS.

If the underwriter wants to see copies of the proposer's medical records, this is permitted by
the Access to Health Records Act 1990, as long as the life office has the proposer's written
authority. There is usually an Industry Best Practice on HIV and insurance. Underwriters
have to take decisions on a case-by-case basis and assess premiums fairly. They should not
ask for excessive, speculative or irrelevant information and must take account of all relevant
factors. Underwriters must also stay up to date with developments and statistics and the
company must have an agreed policy on dealing with HIV, updated at least every three years.

3.4 Occupational Factors

Occupations with above average risk of Occupations with above average risk of
death by accident a particular disease
Scaffolders
Publicans – alcohol-related diseases.
Steeplejacks
Steel erectors
Divers – the ‘bends’.
Trawlermen
Underground miners
Miners – Pneumoconiosis.
Oil rig workers
Bomb disposal workers Chemical workers – various types of
Divers poisoning.
Professional boxers
Asbestos workers – asbestosis.
Handlers of radioactive materials

The occupation of the proposer may also be material for underwriting purposes. The
underwriter should look at the occupation to see whether it presents a greater than average
risk of death. Some occupations may result in a higher than average risk of death by accident.
Others may predispose a person to a higher risk of disease.
As a result of improvements in working conditions and better safety measures many
occupations have become far safer than in the early years of the twentieth century. However,
new processes may often involve the handling of dangerous substances – often found, for
example, in the chemical industry. Practices generally vary from office to office. However, a
number of occupations such as those listed above may lead to some form of special
treatment. The risks of disease are usually minimised by safety regulations and the

41
underwriting treatment will vary from office to office.

3.4.1 Service Risks

Members of the armed forces bear a higher than average risk of accidental death. Treatment
has varied but generally, at present, no service extra is charged, unless the proposer is under
orders to proceed to a disturbed area or is engaged in particularly hazardous duties such as
flying or bomb disposal. If the proposer does a significant amount of service flying then some
extra premium will be charged, often for a limited term of seven years. The scale of the extra
premium will vary with the amount of flying time done, age and rank. Most offices will
follow the agree market agreement and the Nigerian Insurers Association/National
Insurance Commission guidelines which have been issued to guide offices as to the
appropriate ratings for particular ranks and ages.
In times of war the treatment of service personnel would, naturally, change. During World
War II, for example, war and aviation risks were excluded from policies issued.

3.4.2 Civil Aviation Risks

No extras will be required for proposers who fly as fare-paying passengers on normal
commercial flights. However, special treatment might be given to those doing a significant
amount of private flying, particularly pilots. If the proposal revealed that the life to be
assured took part in private flying, or was a pilot, the aviation questionnaire would be sent in
order to obtain the relevant details. Commercial air crew who work for the major airlines do
not usually pay any extra, but private pilots normally have to pay extra if they fly more than
about fifty hours a year.

3.4.3 Hazardous Sports and Pastimes

The underwriter will also be on the lookout for any unusually hazardous sports or pastimes.
Some of these exhibit a high risk of accidental death and have to be treated accordingly.

Potentially hazardous activity Relevant factors for underwriting

Boxing Amateur or professional?
Diving Type of equipment used and depths.
Motor and motorcycle racing Type of vehicle and competitions entered.
Mountaineering Grade and whether ropes are used.
Parachuting Frequency.
Hang-gliding Frequency and if powered.

3.4.5 Residential Factors

Residential factors, including climatic risks, used to be very important in life assurance
underwriting, but are now much less significant. The advances in transport, medicine and
public health over the last few decades have minimised these risks and there have been wide-
scale reductions in residential extras. However, the rise in cases of HIV and Hepatitis B & C
contracted whilst overseas has meant the underwriter is still concerned about residence and
travel to various territories e.g. Sub Saharan Africa.

42
Many offices' policies are valid no matter in what country the life assured resides. However, if
a proposer lives abroad at the time of the proposal, the underwriter must consider whether
the area of residence presents any extra risks. The risks may arise from political instability or
warfare. This has been evident in recent years in parts of Africa, the Middle East and
Southeast Asia. Often the purpose for which the proposer lives abroad is relevant. For
example, a police inspector may merit a higher premium than an engineer.
Tropical countries may produce extra health risks because of the prevalence of tropical
diseases, poor sanitation and less sophisticated medical facilities. Occupation may be a
factor, for example, for a mineral prospector working in an isolated area. This might warrant
a higher premium than a business manager in a large city.

If there is no intention or prospect of foreign travel at the time of the proposal a world-wide
policy is usually issued at ordinary rates. The policy would then be unaffected by the life
assured's subsequent move to any country in the world. However, if the proposer is living in,
or going to, a country of extra risk, then a worldwide policy could be issued at an extra
premium. This is often removable on permanent return to the UK.

3.4.6 Financial Factors

Underwriters should take note of financial factors in their underwriting. Most proposals do
not present any problems here, but cases where the sum assured looks very high for the
circumstances of the life assured should be looked at carefully. If a policy is sold (particularly
by a company representative) for a sum assured and/or premium which is inconsistent with
the life assured's circumstances, is this a bona fide sale? Could it be a case of overselling,
which would be a possible breach of the best advice rules required by the Financial Services
and Markets Act 2000? The fact-find should be checked for a justification of the sale, although
the life office will not be able to do this if the policy was sold by an intermediary as it would
not then have the fact-find.

If a high value policy has been sold on a life of another basis, then the insurable interest
situation should be checked carefully. It must be shown that the proposer does have an
insurable interest in the life assured of at least the amount of the sum assured. The higher the
sum assured, the more justification the life office will be looking for. In the case of key person
proposals and other business cases, the underwriter will want full details of the company
involved, its turnover, profit levels and the significance of the key person in the business. The
underwriter must also pay heed to the possibility of a fraudulent claim.

There have been cases where individuals have insured themselves for large amounts with a
number of different life offices and then faked a death to enable an associate to defraud the
life office. For this reason, life offices are co-operating under the aegis of their respective
insurers association to try to combat such fraudsters.

3.4.7 Methods of Dealing with Substandard Risks

Those proposers accepted at ordinary rates are termed average lives. However, those
assessed by the underwriter as having a materially greater risk of death than average are
called under-average lives, or substandard risks. Under-average lives should pay higher
than the normal premium because otherwise, the office's costing assumptions, which are
43
based on average mortality, will be upset. Each proposer should pay a premium appropriate
to the risk run by the life office.About 76% of proposers are accepted at ordinary rates. About
20% will have to pay some form of extra premium, or equivalent, and about 4% are declined.
There are various different types of extra risk which can demand different treatment.

Extra Risks

Increasing extra risks: the risk increases Being overweight; the effect of which
with the passing of time. tends to be greater with age.
Chronicbronchitis, which tends
to be progressive and can lead to
emphysema.

Tuberculosis, as the risk of recurrence is

low following full treatment.
Carcinoma, where risk of recurrence
decreases over time following successful
treatment.
Constant extra risks: the risk is constant Aviation risks.
for as long as the life is exposed to it. Motorracing.

Let us look at a variety of methods of dealing with under-average lives.

3.4.7.1 Ordinary Rates for Limited Types of Policy

A number of impairments are acceptable at ordinary rates if the policy expires before a
certain age. If the extra risk is an increasing one, becoming more critical in later life, then a
proposal might be accepted only for a policy expiring or maturing not later than a specified
age, for example, the age of 65 years. A whole life proposal might be declined, but a term
policy expiring at 65 years could be offered.

3.4.7.2 Exclusions
Under the method known as exclusion, the proposal is accepted at ordinary rates, but death
from the extra risk is excluded. For example, a proposal from an otherwise average life who
took part in amateur motorcycle racing might be accepted at ordinary rates subject to an
exclusion for death caused by motorcycle racing. The drawback of this method is that cover is
not complete and is, in fact, not available when it might be needed most. It will usually be
used for an occupational or sporting extra risk rather than a medical one.

3.4.7.3 Monetary Extra

The monetary extra is an extra premium expressed in terms of a specific amount per N1,000
sum assured. An example would be a steeplejack's extra of N2.50 per mille. The extra may be
payable throughout the policy, or only for a limited period, such as a seven-year service
flying extra of N2.00 per mille. The limited term extra is used where the extra risk is heavy
and immediate, as with aviation (where the bulk of flying is done in early years), or where the
risk will decrease with time, such as recently cured tuberculosis.

44
3.4.7.4 Rating-Up
Rating-up is a further type of extra premium, but is calculated differently from that already
described. It is assumed that the life is x years older than the real age, and the premium for the
rated-up age is then charged. Thus, a 45-year-old man with chronic bronchitis might be rated
'plus 5' and be charged the normal premium for a 50-year-old man.

3.4.7.5 Postponement
The postponement method can be used where the initial risk is such as to render the life
virtually uninsurable, but, where once the danger period is survived, prospects will improve
substantially, so that acceptance at ordinary rates might be possible. A postponement may
thus be in the best interest of both parties.
This method is used, for example, if the proposer is having an operation in the near future.
The proposal might be postponed for a period, to allow for full recovery, when the
application can be resubmitted, and possibly accepted.

3.4.7.6 Declinature
Where the extra risk is very heavy and there is little prospect of improvement later, the
proposal may be declined outright. As a general rule, offices are loath to decline and will try
to offer some special terms if they can. The proportion of cases declined is very low, probably
around 4% of total applications. As a result of an agreement made between the ABI and the
BMA in the UK, when an insurance applicant is declined or postponed as a result of a medical
disclosure they have made on the application form, the life office will give the reason for this
to the applicant. If a new, or poorly controlled, medical condition is revealed on the General
Practitioner's Report or following a medical examination, which was not disclosed on the
application, the life office will inform the General Practitioner.

3.4.7.7 Equality Legislation

Under s.19 of the Disability Discrimination Act (DDA) 1995 it is unlawful for a provider of
services to discriminate against a disabled person by refusing to provide services which it
provides to the general public or by providing such services on different terms. Insurance is
mentioned as one of the services to which the section applies. On the face of it, this would
mean that declining or rating-up a disabled person for life assurance would be unlawful.
However, under s.20 of the DDA 1995, such treatment is lawful if it reflects the greater cost to
the insurer in providing insurance to the disabled person and the treatment is reasonable in
that light. Thus, any form of special terms (e.g. an extra premium) is allowable, provided it
can be justified by actuarial or other statistical or medical evidence. It is not necessary for the
terms to be the same as those offered by other insurers, provided the treatment is reasonable.
The DDA 1995 was updated by a new Disability Discrimination Act in 2005 but both have
since been replaced by the Equality Act 2010. Neither the 1995 or 2005 Acts have had an
impact on the life assurance industry, nor is the Equality Act expected to.

3.4.7.8 Calculation of Premiums

Like all types of insurance, in life assurance the policyholders pay premiums into a common
fund from which claims are paid out. In order for the insurer to be sure it will have enough
funds to pay out all the claims, there has to be a relationship between the premium charged
and the benefit given under a policy. With general insurance (e.g. motor, marine etc.) it is very
45
hard to predict how many claims will occur and how much they will cost. For example, how
many ships will sink next year and what will be their value? However, in life assurance it is
much easier to predict how many claims there will be. This is because mortality tables can be
used. Mortality tables are the results of the study of mortality (i.e. deaths) over the last couple
of hundred years. These can be used to predict with a considerable degree of accuracy how
many claims an insurer can expect each year from lives of a given age. A mortality table
shows for each age the number of persons living at that age and the number of persons dying
at that age. By dividing the number of deaths by the number living, the mortality rate can be
calculated. The mortality rate is the chance of dying at a specified age.

All insurers have mathematicians – called actuaries – whose job is to calculate what
premiums to charge from the mortality tables. A specimen mortality table is shown in
Appendix 3.5. According to this table, out of 100,000 male babies born, 99,402 are still living at
age one. In the next year, 44 die aged one last birthday and 99,358 survive to age two. The
numbers dying and surviving at each later age are shown until, at age 110, not a single
survivor out of the original 100,000 remains alive. The third column in the table (qx) is the
probability that a person aged x will die before reaching x + 1, and is thus the mortality rate
for that age. The fourth column (ex) is the expectation of life for a person aged x. Thus a
woman aged 40 can expect to live on average a further 41.657 years.
It should be noted that in March 2011 the European Court of Justice banned the use of
gender in determining the premiums for all types of insurance with effect from December
2012, even where there is statistical evidence to justify a difference in premiums. This
would mean that life assurance premiums and annuity rates should be the same for both
males and females of the same age.

3.4.7.8.1 Natural Premiums

By using mortality tables, the actuary can find out the mortality rate for any given age
and, by multiplying this by the sum assured, can work out the pure (or net) premium for
that year, i.e. the premium required just to meet claims in respect of those who die during
the year. Thus, using the mortality table set out in Appendix 3.5, the mortality rate for a 30-
year-old male is 0.000955 and thus the pure premium for a one year term assurance (which
only pays out on death) for N1,000.00 would be 1,000.00X 0.000955 = N0.96 (rounded up
one decimal place). The premium for a 35-year-old would be 1,000 × 0.00119 = N1.19 and so
on.It is obviously not known which lives will die, but if all the lives pay the premium for
that age for that year's cover, there should be enough money to pay all those who die, but
leaving nothing over. Thus, next year's cover will cost a little more as all lives will be a year
older. Each subsequent year's cover will cost more and more and so the natural premium will
rise each year.

In the early years of life assurance natural premiums were charged. However, this was not
very successful as premiums increased steeply in later years, leading people to be unable to
afford cover when it was most needed. In addition, the tendency was for the best and fittest
lives not to renew their policies. This leaves a greater percentage of inferior or unfit lives
which led to an increase in the mortality rate over and above that predicted from the
mortality tables, which are based on average lives. Premiums would then become
inadequate to meet claims, leading to further increases which would only exacerbate the
46
trend. The natural premium system was thus replaced by the level premium system, where
the premium for a given sum assured is level throughout the term of the policy.

3.4.7.8.2 The Level Premium System

It can be seen from the mortality tables that the risk of death increases with age. If a level
premium is charged throughout the duration of a policy, the premium in the early years is
higher than is needed to meet the current claims costs. Thus there will be money in hand to
meet the cost of the greater risk in later years, when the premium will be less than is required
to cover such risk.

The excess in the early years forms a reserve which can be drawn on to meet the heavier
claims in the later years. Thus, in any group of insured lives there will be just a few deaths in
the first year, causing a moderate proportion of the total premiums to be paid out in claims.
The balance will go into the reserve to be held against future claims. In the second year, a
slightly higher proportion of the premiums will be needed to pay claims and slightly lower
proportion will go into the reserve, but still increasing the total reserve. Each year the claims
cost will be slightly higher and the amount going into the reserve slightly lower. The reserve
continues to grow until the cost of one year's claims matches the premiums and nothing goes
into the reserve.

The next year's claims will slightly exceed the premiums and the difference will come from
the reserve. From then on, the reserve will steadily decrease each year as claims exceed
premiums more and more. Finally, only one life is left in our group and he pays his last
premium and dies. The last premium plus what is left of the reserve should be enough to pay
the claim. Naturally, this will only be so where the mortality assumptions drawn from the
mortality tables are matched by the actual experience. Because mortality tables are compiled
from past statistics and mortality has generally been improving historically, actual mortality
experience has tended to be better than that predicted.

It is not possible to calculate the reserve under a single policy by accumulating premiums
and subtracting claims. The insurance principle requires that policies under which claims
occur at an early date are subsidised by policies where claims occur at a later date. A single
policy cannot exist in isolation. The unit of calculation is therefore a group of policies. The
reserve under a single policy is obtained by calculating the reserve for a large group of similar
policies effected at the same time, at the same age and for the same sum assured, and then
dividing the total reserve for the group by the number of policies in force. The reserve for the
group at first increases, reaches a peak and then steadily falls to nil. The number of policies
steadily decreases as the lives assured die off. The reserve for a single policy increases
throughout its duration and almost reaches the sum assured if the life assured survives to an
advanced age.

3.4.7.8.3 Interest on Premiums

We have so far looked at what we might call 'pure premiums', i.e. the premium required just
to pay claims for that year or for each year under the level premium system. However, in fact
the premium is invested as soon as it is paid and thus, even under the natural premium
47
system, premiums would be invested for part of the year until they were required to pay
claims. There would thus be a small amount of interest due from that investment. Under the
level premium system, the reserve will be invested. Because this continues for the life of the
contract, a substantial amount of interest can be expected. Thus, the pure premium can be
reduced somewhat to take account of this fact. The actuary will have to allow for this in his
calculation of the premium. He will have to be conservative in his assumptions because the
premium may be payable for many years (e.g. 30 years) at a fixed amount. Even if interest
rates are high now they might not be in five years' time, let alone 30 years. The effect of the
expected interest on the premium is also dependent on the duration of the contract. It would
have little effect on a one year policy, but it would have a much greater effect on a whole life
premium for a 20-year-old where we are looking at an average premium-paying term of 54
years.

3.4.7.8.4 Premium Loadings

The premium calculated from mortality and interest factors is a net premium and
adjustments or loadings will have to be made to arrive at the actual premium chargeable.

The major loading is to cover the expenses of the life office. These would include:
 salaries of employees;
 commission paid to the sellers of policies;
 costs of office buildings used;
 computer, administration and regulatory costs;
 medical fees during underwriting.

There will also be a safety margin to guard against higher than expected mortality and, of
course, a profit margin. The actuary will have to include all of these factors in his loadings to
produce the final premium charged. Whilst premiums are level throughout the contract,
expenses are not. Most of the expenses occur at the start of the policy; the initial commission
and underwriting expenses, for example. Once a policy is on the books the expenses are
much lighter. Renewal costs are minimal and claims handling costs are much lower than
initial costs. It is therefore not possible to add a percentage loading to the premium to cover
all expenses as and when they occur. The heavy initial expenses must be spread out over the
whole premium-paying period. It is normal, however, to add a policy charge to the loaded
premium to arrive at the final premium payable. This policy charge is in effect a handling fee.

3.4.7.8.5 Frequency Loadings

Premiums are often calculated on a yearly basis, although in practice most premiums are
paid monthly. The monthly premium cannot just be one twelfth of the yearly premium as
this will upset the calculations, which assume that the whole premium will be available
for investment at the start of the year. Thus, if premiums are to be paid more frequently,
the life office will impose a frequency loading, i.e. charge slightly more in total for not
having all the premium in one go. A common example would be a 4% loading, so that if
the annual premium was N300 the monthly premium would be N26.00, i.e.:
N300 X 1.04 = N26.00

48
Some offices approach it a different way and quote monthly premiums but give a discount
for paying annually in advance and a much a higher discount for paying a single premium as
a lump sum in advance for policies with at least two years as duration.

Classification of Underwriting in Life Assurance

Underwriting in Life Assurance is classified into three as below:

 Non-Medical Underwriting: Underwriting done without medically assessing the life

assured.
 Medical Underwriting: Underwriting done through reviewing medical conditions of
the life assured.
 Financial Underwriting: Underwriting conducted to determine the ability of the
assured to pay the applicable premium for the policy.

Medical Underwriting Requirements for Individual Business

Sum Assured (N) Up to Age49 Age 50 and Above

Up to – 21,000,000 A B

21,000,001 – 22,000,000 B B+C

22,000,001 – 23,000,000 B+C B+C+D

23,000,001 – 24,000,000 B+C+D+E B+C+D+E+F

25,000,001 – Upwards B+C+D+E+F+G B+C+D+E+F+G

Note: Maximum age limit at entry is 65 years and Minimum policy term is 5 years.

A: Without Medical Examination

B: Medical Examination (plus Private Medical Attendant's Report)
C: Chemical and Microscopic Urinalysis
D: Blood Chemistry Studies (Fasting Blood Sugar and Cholesterol, SGPT Creatinine or Serum
Urea)
E: ECG (Resting and Exercise)
F: Chest X-Ray
G: HIV Antibody test

Non-Medical and Free Cover Limit

Both non-medical and free cover limit mean the same, except that while the non-medical limit
is used for individual life, free cover limit is used for group life to establish the level of sum
assured which does not require medical examination.

49
 Chapter 4
Introduction to Policy
Documentation and Administration

Learning Objectives
After studying this chapter, you should be able to:
 know how a policy document is constructed;
 explain the rules relating to notices of assignment;
 distinguish different types of assignment;
 know how mortgages work.

Introduction
This chapter explains the life assurance policy document and its constituent parts.
Endorsements which are used effect any changes in the policy are also considered in detail.

4.1 Policy Documents

Once a proposal has been accepted by the life office and the first premium paid, the office can
prepare the policy. The first step is to allocate a policy number, if this has not already been
done. There are a number of different methods used by life offices to produce policies and
therefore an almost infinite variety of internal documents is used by different offices. Policy
documents usually consist of pre-printed terms and conditions which are consistently
applied to all contracts of that particular type, together with a personalised policy schedule,
which is often computer generated. Policy documents usually consist of pre-printed terms
and conditions which are consistently applied to all contracts of that particular type, together
with a personalised policy schedule, which is often computer-generated.

The following will be covered:

 Heading: identifies the type of policy, name of assurer and policy number.
 Preamble: states the purpose of the document which will need to be kept in a safe place
for use in the event of a claim, the parts of the policy i.e. schedule, conditions and
definitions, which constitute the entire contract and how many policies are expressed in
the document.
 Operative Clause: states that the benefit will be payable by the life office, subject to
payment of premiums, proof of claim and proof of ownership, where the benefit is
payable in the stated currency e.g. if Lagos, in Naira.
 Schedule: shows the individual details of the contract, policy number, life assured;
date of birth; assured/insured, policy date, type of policy, maturity or expiry date,
premium amount, premium frequency, sum assured and when payable, fund
selected (for unit linked policies), allocation percentage (for unit linked policies).
 Conditions: states the detailed terms relating to that type of policy, using
standard terms, unit allocation procedure, unit valuation procedure, consequences

50
 of non- payment of premiums, explanation of bonus system, surrender provisions,
funds switching rights, claim procedure, charging structure, procedure for notices
of assignment.
 Standard Exclusions: states what are not covered such as suicide (for life
policies), intentional self-inflicted injury (for IPI), HIV and AIDS(for IPI),
war(forIPI), participation in a criminal act (for IPI), pregnancy and childbirth (for PPI).
 Definitions: defines the key terms such as life assured, sum assured; assured, bid
price, offer price, valuation date.
 Signature: the policy will also usually bear a copy of the signature of one of the
directors of the life office.

4.1.1 Special Conditions

A policy might also have specific conditions or exclusions included because of the
circumstances of that particular life assured. Examples might be an exclusion for death
resulting from motorcycle racing for someone who took part in that sport, or an exclusion for
death resulting from bomb disposal work for a policyholder who was a member of the
Armed Forces.

4.1.2 Benefits
A particularly important condition is that relating to the payment of benefit. This will have to
describe exactly what benefit is payable when. As large sums of money could be involved
there should be no ambiguity. This is relatively simple for a straight term assurance where the
sum assured is only payable on death. However, it is more complicated for IPI policies, where
there has to be a definition of disability, and critical illness policies, where there has to be a list
of the diseases, the diagnosis of which produces benefit.

4.1.3 Additional Benefits

If any additional benefits are being added to a basic policy type the appropriate wording will
have to be added. This might be by endorsement or as an extra page or pages. This might
apply to additional benefits such as:
 waiver of premium;
 disability benefit;
 double accident benefit;
 increasing cover option;
 critical illness cover;
 terminal illness cover;
 health care benefits.

4.1.4 Endorsements
An endorsement is an addition to a standard policy document. It might be added at outset to
set out the terms of an additional benefit – see the previous section. Endorsements are also
used to set out the terms of alterations to existing policies.

4.1.5 Policy Ownership

The policy document will show who the owner of it is. This will often be the life assured – i.e.

51
an own life policy. It might however be another individual (a life of another policy) or a
company, as on a key person policy. Once a policy has been issued, its ownership can be
changed in a number of ways, such as:

 absolute assignment;
 mortgage;
 trust;
 bankruptcy.

These topics are dealt with later in this course.

4.1.6 Policy Record

The office also has to create its own internal record of the policy for administrative purposes.
This was once done by having policy register books or a policy register card system. Now
almost all offices have computerised systems and therefore, when the policy is produced, the
relevant details will be put into the computer's policy data file to create the record. Manual
records in paper form may also be kept in addition to the computer record. Irrespective of the
record system that is used, the following details need to be recorded:

Policy details to be recorded Types of future changes to be recorded

Policy number Premium payments
Life assured Unit allocation
Address for correspondence Units encashed
Types of policy Unit fund switches
Term Alterations to benefits/premiums
Sum assured Loans
Premium amount Notices of assignment
Premium frequency
Any special conditions
Branch of life office involved
Intermediary
Unit allocation and fund

4.2 Premium Collection

Unless a policy is a single premium contract, a system will have to be set up to handle
payment of renewal premiums. The new business department usually sets up the policy
records, making arrangements to collect future premiums, which is most commonly done by
direct debit. The renewals department is then left to take any further action necessary.
Renewal premiums under ordinary branch policies will be payable annually, half-yearly,
quarterly, or monthly. Premiums can also be payable weekly under industrial policies.

At law, the obligation is on the policyholder to pay premiums. The life office has no legal
obligation to send any reminder if premiums have not been paid, although in practice it will
do so. The policy will show both the amount and the due dates of the premium and
enables the policyholder to pay the premium on the due date. Normally the policy will
provide days of grace after the due date, during which the premium can still be paid. The
52
position on death of the life assured during the days of grace, but before payment of the
premium, will be specified in the policy and varies from office to office. However, the
general position is that the claim would be paid, subject to deduction of any outstanding
premiums. The usual period of grace is 30 days or one month, although if premiums are
payable monthly only fourteen days may be allowed. There is obviously a large number of
ways in which renewal premiums can be paid. The most important are renewal notices,
bankers' orders and account collections; we shall now look at each in turn.

4.2.1 Renewal Notices

The simplest method of premium collection is by sending a renewal notice to the
policyholder. The renewal notice shows the premium due (net of tax relief, if applicable) and
the due date. It will normally be sent to the policyholder some two or three weeks before the
due date. The policyholder will return part of the renewal notice with his remittance for the
premium and the life office will apply it to the policy. Virtually all life offices use a
computerised system to prepare and despatch the notice. Most offices will not allow monthly
premiums to be paid by renewal notice.

4.2.2 Bankers' Orders

The most usual method of paying premiums is by some form of standing order on a bank,
whereby the policyholder signs a form instructing their bank to pay the premium on each
due date to the life office. This avoids the need for renewal notices and is particularly useful
for monthly premiums. The bank will make the regular payments direct to the life office until
instructed by the policyholder to stop. The most common form of bankers' order is the direct
debit system in which the policyholder signs a direct debit mandate authorising the life office
to debit their bank account with the premiums. The life office then raises a debit for each
premium due, and this debit is transmitted to the policyholder's bank account through the
bank's computer system. The premium is collected and applied automatically by the life
office. This is the most common method now used for monthly premiums. One useful aspect
of this system is that it is possible to have a variable, or unspecified, direct debit. This can be
utilised for policies where premiums vary from year to year, such as index-linked contracts.

4.2.3 Account Collections

A number of offices have schemes whereby premiums are collected by a third party, often an
employer, on an account basis. A typical example would be where an employer arranges a life
assurance scheme for its employees. Individual policies are issued by the life office to the
policyholders, and the premiums are deducted each month by the employer from the
employee's salary. The employer then makes a bulk remittance to the life office consisting
of the total premiums for all members of the scheme for that month.

4.2.4 Arrears Procedure

All offices have procedures designed to investigate policies which fall into arrears. When a
policy falls into arrears the life office will send a letter to the policyholder quoting the amount
of the arrears and pointing out the consequences of non-payment. If the policyholder pays
the arrears within a certain time the policy will continue, although many offices impose some
form of late payment charge to compensate for interest lost by not having the premium to
invest on the due date. If the arrears are not paid and the policy has no surrender value it will
53
lapse and the office will be off-risk. If the policy has a surrender value then its non-forfeiture
provisions will come into effect. These vary from office to office, but the following are typical
conditions:

 The policy remains in force for as long as the surrender value exceeds the total of
outstanding premiums and late payment charges.
 The policy remains in force for one year and then the surrender value becomes
payable and death cover ceases.
 The policy is converted on the expiry of the days of grace (or after one year) to a paid-
up policy for the appropriate reduced sum assured.
 The policy remains in force, with units being cancelled to pay for life cover until
thereis none left.

Most offices have automated arrears procedures so that a reminder is automatically sent out
once the policy has been in arrears for a certain time. If a policy is mortgaged, the office will
usually inform the mortgagee if premiums fall into arrears, so as to enable the mortgagee to
protect its interest.

4.2.5 Reinstatement
Once a policy has lapsed due to non-payment of premiums the office is off-risk. The office
may later receive a request from the policyholder to reinstate or revive the policy. This may be
possible but is entirely at the discretion of the office involved. The office may agree to
reinstate the policy subject to payment of all the arrears, a late payment charge and a
satisfactory declaration of health. The life assured will have to declare that he is in good
health and, as the duty of disclosure is also revived, give details of any deterioration in the
risk since the date of the proposal.If a long period has elapsed since the policy expired, the
office may not be willing to reinstate the old policy at the old premium. It may only be
willing to consider a new proposal based on the rate for the life assured's current age,
which may well be higher than the old premium. Reinstatement can have an effect on the
qualifying status of the policy.

4.3 Alterations
The office will have an alterations department whose job it is to alter policies if requested by
the policyholder. Unless the policy wording gives the policyholder a right to make the
alteration, the office does not have to agree to it and can decline if it wishes. The reasons for an
alteration request are almost infinite and the most common reasons are as follows:

Reason Implications
Increase in the sum assured May involve fresh underwriting unless
given as a policy option. It is often
required on mortgage policies when the
loan is increased and will involve an
increased premium.

54
 Decrease in the sum assured Easy to arrange as no fresh underwriting
is requiredand the premium will decrease
(which may be the reason for the
alteration).
Conversion of policy For example a convertible term being
converted into whole life or endowment
(where more permanentcover is needed).
Exercising a guaranteed insura bility No medical evidence required.
option
Extension of term, increasing the period Often required for a mortgage policy if
covered by the policy the term of the loan is extended.
Reduction of a term on an endowment Will result in an increased premium if the
sum assured is maintained.
Addition of life assured, converting a Will involve fresh underwriting and an
single policy to a joint life one (e.g. on increase in premium.
marriage)
Removal of life assured Sometimes requiredon a joint life policy
after a divorce,for example.
Fund switch To improve investment prospects on a
unit-linkedpolicy.
Change of premium frequency For example, from monthly to annually.

The office will require the policyholder's written authority to make any alteration, as well as
that of any other person interested in the policy, such as a mortgagee. The policy will then be
endorsed to show the alteration made and the office's records altered appropriately.

4.3.1 Paid-Up Policies

If a policyholder can no longer afford to pay premiums they may request that the policy be
made paid-up. This means that no further premiums are payable and cover continues at an
appropriately reduced level. Only substantive policies (endowments and whole life
assurances) can be made paid-up; a term assurance will just lapse if premiums cease.

The reduced paid-up sum assured will normally bear some relation to the number of
premiums actually paid as opposed to the total originally payable. Thus, if a 20-year
endowment was made paid-up after premiums had been paid for ten years, the reduced
paid-up sum assured would probably be half the original sum assured. Any future bonus
would be based on the reduced sum assured. The office will require completion of the
appropriate letter of authority to make this alteration. The policy will be endorsed to show
the reduced sum assured.

4.3.2 Gender Recognition Act 2004

Under the Gender Recognition Act 2004, a change of gender has no affect on any existing
policy as the Act provides that the change does not affect anything done previously – e.g. the
terms of a pre-existing contract.

55
4.4 Assignments
An assignment is a transfer of ownership from one person to another. This frequently
happens with life policies, so knowledge of the legal principles involved is necessary when
dealing with claims or surrenders. An assignment may be temporary or permanent, and can
confer an absolute interest or a limited interest.The various types of assignment are as
follows:
 Absolute assignments. Absolute assignments include assignments by way of sale and
by gift.
 Assignments by way of mortgage.
 Assignments by operation of law on bankruptcy
 Assignments to trustees.

4.4.1 Joint Ownership

Assignments can be made to a single assignee or to joint assignees. If an assignment is made
to two or more people, attention must be given as to how the joint assignees hold the
property. There are two basic types of joint ownership in English law. These are joint tenancy
and tenancy in common.

4.4.2 Joint Tenancy

Under a joint tenancy, if one joint tenant dies their interest passes automatically to the
survivor(s). On the death of the last survivor the property passes to the legal personal
representatives. Thus, property held under a joint tenancy can be disposed of by will only by
the last surviving joint tenant. Many joint life first death policies are held under a joint
tenancy by the two lives assured. This means that when one dies the sum assured is payable
to the other as the surviving joint tenant.

4.4.3 Tenancy in Common

A tenancy in common differs from a joint tenancy in that on the death of a tenant in common
their interest passes to their estate and can thus be disposed of by will. It would be rare for a
joint life first death policy to be held under a tenancy in common by the two lives assured.
However, it would mean that the sum assured would be payable 50% to the survivor, and
50% to the estate of the deceased. A joint tenancy is automatically converted to a tenancy in
common by the bankruptcy of one of the joint tenants.

4.5 Policies of Assurance Act 1867

The Policies of Assurance Act 1867 is the Act which regulates the assignment of life policies.
The Act provides that any person becoming entitled by assignment to a life policy has the
legal power to sue in their own name to recover the monies payable. Therefore, an assignee
can sue the life office in their own name without involving the assignor. An assignee can thus
claim from the life office, subject to production of the policy document and deed of
assignment.

4.5.1 Notice
Section 3 of the Act details the principle of notice. The section specifies that no assignment
shall confer on the assignee or their representative any right to sue until a written notice of the
date and purport of such assignment has been given to the assurance company. The section
56
goes on to state that the date on which such notice is received by the assurer shall regulate the
priority of all claims under any assignment, and that a payment bona fide made for any
policy by an assurer before the date when such notice was received is valid against the
assignee. The Act refers to 'assignment' and not to 'absolute assignment' or 'assignment for
value', and thus covers all forms of assignment except assignment by operation of law: for
example, in bankruptcy proceedings. Therefore, an assignee who gives notice to the assurers
can claim precedence over all other interests where notice has not been given, even if the date
of the assignment is later than that of the other interests. The effect of the section can be
summarised as 'priority of notice regulates priority of claim'. There are, however, several
exceptions to this rule.

4.5.2 Exceptions to the Priority Rule

There are five exceptions, as follows:

S/No Priority Rule Exceptions to the Priority Rule

1 A trustee in bankruptcy takes They cannot therefore take prior ity over an
the debtor’s property subject to earlier interest of which notice has not been
all existing equities. given: Re Wallis, ex parte Jenks (1902).
2 The rule does not apply to Where there is a conflictbetween an assignee for
voluntary assignments: that is, value who has not given notice and a voluntary
gifts or trusts. Notice does not assignee who has given notice, the giving of
give priority between notice will not affect title. Priority will, in these
consecutive voluntary cases, be determined by thedates of the
assignees. assignments. The reason for this is that where
no valuable consideration has been given, the
same need for protection does not arise.

3 The rule does not apply between The equitable principle is that they are equally
assignee and assignor. affected by knowledge of the facts.
4 The rule does not apply where
If a person intending to give a loan on the
there is evidence of wilfull security of a policy has reason to suspect the
blindness on the part of an existence of a prior interest of which no notice
assignee for value. has been given, and deliberately refrains from
making enquiries, relying on notice to gain
priority over the earlier assignee, they will fail
in their attempt. The equitable principle is that a
person should not profit by their own
negligence.

5 The rule does not apply to The further advances made under the original
mortgages for unlimited deed would rank in priority to subsequent
amounts. For example, where mortgages, whether or not there had been
there is an obligation to advance notice of these. The principle is that a second
unlimited amount as the mortgagee should make proper enquiries
mortgage loan. before taking a charge on a policy.

57
4.5.3 Importance of Notice
As a result of the priority rule, it is vital for an assignee to give notice of his assignment to the
assurer as soon as possible. For this reason, s.4 of the Act requires every assurance company
to state on every policy the address of its principal place of business at which notice of
assignment can be given. Furthermore, by s.6, the assurance company must, on request,
acknowledge receipt in writing of any notice of assignment. Such acknowledgement is then
conclusive evidence of receipt of the notice referred to. An insurer must therefore have a
system of recording notices of assignment in policy records in order to comply with the Act
and to be able to make any payments to the correct person. The means used to record notices
vary. Some offices use a record card system but most use a computerised system. Whatever
system is used must be capable of recording the date that notice was received and the date of
the deed, together with the parties to the deed.

The assurer must make formal acknowledgement of every notice given, no matter what type
of interest it may concern. Sometimes the deed itself may be produced, and this is notice to
the office of its contents. Also, in the course of correspondence about one policy, a deed may
be produced which refers to another of the company's policies. Note should be made of this
on the record of the other policy, as this is implied notice to the company. Acknowledging a
notice of assignment is not the same as receiving proof of title. The notice itself does not
transfer title, only the deed of assignment does this, and there could always be an error on the
notice. For this reason, many life offices state on the acknowledgement that no opinion is
expressed as to the validity of the title. Proof of title is not generally called for until payment is
required under the policy. If an assignee requests confirmation of their title the office could
suggest that they consult their solicitor.

4.5.4 Constructive Notice

Notice is usually express, although it can be implied as explained in the previous section.
Notice can also be implied from correspondence on an office's files, even if no formal notice
has been served. Another form of notice is constructive notice. This applies whenever an
assurer might have reason to suspect that an assignment has taken place even though no
express or implied notice has been received. An example of constructive notice would be if an
assurer knows that A is paying the premiums on B's policy. This does not necessarily mean
that the policy has been assigned to A, but the insurer might be wise to check with A before
making any payment to B. Otherwise, A could allege that the insurer had constructive notice
of his interest and try to force a second payment to him. The attempt might not succeed but
would involve the office in an unwelcome dispute.

A similar situation exists with lost policies. Non-production of a policy at the time of
payment may suggest that the policy has been assigned and is in the hands of an assignee
who has omitted to give notice. The assurer should therefore make some investigations in
order to rebut any allegation of constructive notice. A statutory declaration coupled with an
indemnity may be required before payment can be made.

4.5..5 Form of Notice

Notice need not be given in any particular form. This was decided in the case of Newman v.
Newman (1885), where the first assignee served notice informally and the second assignee
58
gave formal notice under the Act. It was held that the second assignee did not gain priority
merely because his notice followed the statutory form. As a result of the possibility of implied
and constructive notice, a life office must take care in keeping its records and note all interests
it becomes aware of. For example, if an office receives a request for a surrender value
quotation from a person other than the assured, who says they are holding the policy, this
should be recorded as it is implied notice and express notice may not be given subsequently.

4.5.6 Effect of Notice

The object of the Policies of Assurance Act 1867 was to simplify actions against a life office
and to make it easier for the office to settle claims. The Act does not enable a person who has
lent money on a second charge, and who has notice of the first charge, to take priority over
that first charge by giving notice to the life office. If, when he takes an assignment, an assignee
has knowledge of some existing interest he cannot gain priority over it just by giving notice.

The reason for this is that the Act concerns only the priority of the right to sue, and claim
against, the life office. It does not affect the equitable title to the policy moneys. Therefore,
although an assignee in the circumstances set out in the previous paragraph may gain
priority of claim against the life office by virtue of priority of notice, he cannot gain priority
over the first assignee in the ultimate distribution of the policy moneys. This principle was
confirmed by the case of Newman v. Newman, quoted earlier. It should also be noted that
anyone who advances money on the security of a life policy which is not produced to him,
and which is held by an earlier mortgagee, has constructive notice of that earlier mortgage.
This is similar to the principle that non-production of a policy to a life office at the time of a
claim can be constructive notice of a third party's interest.

To sum up, the effect of giving notice is:

 to give the assignee the right to sue in his own name;
 to bind the insurers so that if they pay another claimant they will be held responsible;
 to gain priority of claim over earlier assignees who have failed to give notice;
 to preserve priority of claim over subsequent assignees.

4.5.7 Other Provisions of the Act

Section 5 provides that an assignment can be made either by endorsement on the policy or by
a separate instrument, subject to due stamping. A specimen wording is set out in the schedule
to the Act. The Act refers to assignments of 'a policy of life assurance' but in view of its
definition in s.7, the Act extends to any contract securing payment on any contingency
depending upon the duration of human life. Thus it applies to pure endowments and
annuities as well as life policies as ordinarily understood.

4.6 Absolute Assignments

An absolute assignment is the complete transfer of the policy, either by way of sale or as a gift.
The assignor assigns the policy absolutely to the assignee. All interests in the policy are
thereafter vested in the assignee and the assignor has no further interest in the policy. The
assignee should serve notice on the assurer and thereafter will be able to give the assurer a
good discharge for the policy moneys, subject to proving his title by producing the policy
and the deed of assignment. Before taking an assignment, an assignee for value should
59
enquire of the life office whether any notices affecting title to the policy have been received
and whether the premiums are paid to date. He should also ensure that the policy document
and any other relevant documents of title are delivered to him.

4.6.1 Requirements of an Assignment

A life policy must be assigned in writing and not by mere delivery. This was decided in
Howes v. Prudential Assurance Co. (1883), where it was stated that an assignment by
handing over a policy without anything further being done was void, even though the
would-be assignee subsequently paid all the premiums.

An assignment is normally achieved by a deed of assignment. However, it appears that it can

be done by interchange of letters offering and accepting the sale, together with proof of
payment: Morgan v. Holford (1853).

An assignment must be dated during the currency of the policy and during the lifetime of
the life assured. In Scott v. Coulson (1903), Coulson purchased a policy on the life of a third
party who at the date of assignment, and unknown to Scott or Coulson, was already dead.
It washeld the assignment was void.

An assignment must assign the whole of a policy and not merely a portion: Re McKerrell
(1912). This does not, however, mean that a policy cannot be assigned to joint assignees, or
that equitable interests cannot be held in portions of a policy under trust. It is only the legal
interest in the policy which cannot be assigned in part.

The assignor should execute a deed of assignment and the actual words used must be
adequate to transfer the legal interest in the policy. If not, the deed will act as a mere equitable
assignment. An illustration of this principle is the case of Spencer v. Clarke (1878). There it
was held that a deed that merely recited an agreement to assign did not operate to convey the
legal interest.

Notice of the assignment should be served on the life office immediately.

4.6.2 Effect of an Assignment

As previously stated, the assignee under a legal assignment can give a good discharge to the
life office. This means that he can surrender, alter, or continue the policy and raise a loan on its
security. An assignee should keep in touch with the life assured, so that if the latter dies he
will be able to claim promptly from the life office.

4.6.3 Deeds
When a deed of assignment is produced to a life office as part of a claimant's proof of title, the
deed must be examined to see if it legitimately passes title to the claimant. The assignor
should be the person legally entitled to the policy prior to the assignment and the assignee
should be the person now claiming. The signature should be that of the assignor and may be
verified against previous signatures on the office's files. The date of the deed should be
checked to see that it is during the currency of the policy. The operative wording should be
checked to see that it does convey the legal interest and it should be ensured that the policy
60
concerned has been specified in the deed. Under the Law of Property (Miscellaneous
Provisions) Act 1989, a deed no longer has to be sealed if it is signed as a deed in the presence
of a witness who attests the signature. In the case of those unable to write, making one's mark
is the equivalent of a signature.

4.6.4 Equitable Assignments

Some assignments operate only as equitable assignments, because the legal title has not been
conveyed. Equity will assist the equitable assignee to enforce his claim by joining the holder
of the legal title as a defendant. It is not necessary to use any special form of words to pass the
equitable right to a policy as long as the intention of the parties to pass those rights is clear.
Each transaction must be dealt with individually, on its own facts, to see whether it amounts
to an equitable assignment.

An agreement to assign is binding between the parties, even without notice to the life office.
Delivery of a policy for valuable consideration can be an equitable assignment, even without
written evidence or notice to the life office.

To perfect the equitable assignee's title against the life office, a legal assignment and notice
are required. However, if the assignment is for valuable consideration, equity will assist the
assignee to complete his title even if he does not have possession of the policy. Equity will
only help a voluntary assignee (one who has not given consideration) if the assignment is
complete as between assignor and assignee, or the assignor has constituted himself a trustee
for the assignee.

The following cases illustrate the principles involved:

Thomas v. Harris (1947)

A father handed a policy to his son, requesting him to erect a tombstone out of the policy
money on death. The son paid premiums and on his father's death he erected and paid for a
tombstone. Both the son and the executrix of the father claimed the policy. It was held that
there was a binding contract between the father and the son involving a valid equitable
assignment to the extent of the charge for the cost of the tombstone.

Re: King, Sewell v. King (1879)

King wrote to his trustee that he wanted to settle a policy, that he undertook to execute an
assignment, and that he would be bound by this agreement in the same manner as if a
settlement was actually executed. He then sent the letter enclosed in another with the policy,
saying, 'The enclosed is the formal letter of assignment previous to a deed, and as binding'. It
was held that an equitable assignment can be made by the use of words showing a present
intention to transfer and thus the assignment was valid.

Re: Williams, Williams v. Ball (1917)

The assured gave his housekeeper a policy with the following signed endorsement: 'I
authorise X to draw this insurance in the event of my pre-deceasing her'. It was held that the
endorsement was inoperative as it contained no present words of gift and was without
consideration and conditional. It could not even take effect as a testamentary disposition
61
because it was not executed as such. It is possible to have an equitable mortgage by deposit of
the policy (see section G5).

4.6.5 Stamp Duty

There used to be stamp duty on some deeds of assignment of life policies but this was
abolished by the Finance Act 2003 in the UK but is still effective in Nigeria.

4.7 Mortgages
A mortgage is a type of assignment used in connection with a loan. If an asset is being used as
security for a loan, that asset will be mortgaged by the borrower to the lender for the duration
of the loan. It is not an absolute assignment, as once the loan (and any interest due) is repaid,
the lender must reassign the asset to the borrower. During the currency of the loan, the
borrower retains an interest in the mortgaged property in the form of their right to have the
asset reassigned to them on repayment of the loan. This right is known as the equity of
redemption. It is the equity of redemption which in essence distinguishes a mortgage from
an absolute assignment.

A legal mortgage is where the legal interest is assigned, subject to redemption, by the
borrower (mortgagor) to the lender (mortgagee) by a deed of mortgage. It is possible to have
an equitable mortgage in certain circumstances. During the term of the mortgage, the
mortgagee has certain rights which enable them to enforce their security.

4.7.1 Types of Mortgage

The most usual mortgage is one made for a specific sum lent, although it is possible to have a
mortgage for a specified sum and further advances. The deed will be suitably worded and a
receipt should be given by the borrower for each further advance. This can be endorsed on
the mortgage deed or as a separate document. When property is mortgaged to a bank, the
deed will often not specify any fixed sum but will secure sums 'owing from time to time'. This
enables the mortgage to be used to cover an overdraft arrangement, where the amount
outstanding may vary from time to time.

There are various other types of mortgage, dealt with under the following four headings:

4.7.1.1 Second Mortgages

When a mortgagor mortgages property as security for a loan, they retain their equity of
redemption. If the mortgaged property is now worth, say,N100,000.00, and is mortgaged to
secure a loan of N50,000.00, the mortgagor is said to have an equity of N50,000.00 in the
property. If they require a further loan and obtain this from a different lender, they can
mortgage the property to the second lender. This is known as a second mortgage. The second
mortgage is subject to the first mortgage and the first mortgagee has priority of claim.
Because a second mortgage is not quite as secure as a first mortgage, second mortgagees
often charge higher interest rates than first mortgagees. If the original mortgagee is willing to
make the new advance, this is termed a further advance rather than a second mortgage.

4.7.1.2 Transfers of Mortgage

A transfer of mortgage is where the mortgagee transfers the mortgage to another person,
62
who can then exercise all the powers of the original mortgagee. This can be achieved by a
deed called a transfer of mortgage. The new mortgagee (called a transferee) takes over the
mortgage completely and 'stands in the shoes' of the original mortgagee, so that all future
repayments will be made by the borrower to the transferee. A transfer of mortgage can occur
when one lender takes over a loan granted by another lender. A transfer of mortgage can also
occur when someone other than the borrower (or their successors) in title repays the loan.
This repayment takes effect as a transfer of mortgage from the original mortgagee to the
person making the repayment.

4.7.1.3 Sub-Mortgages
These occur when a mortgagee wishes to raise money and uses the mortgage as security for
the loan. This is different from a transfer of mortgage in that the mortgagee does not
completely part with their interest but retains an equity of redemption. The sub-mortgagee's
title rests on that of the mortgagee and, in order to protect their interest, the sub-mortgagee
should serve notice on the original mortgagor so that the latter does not repay the debt to the
mortgagee without advising the sub-mortgagee. The sub-mortgagee's proof of title is the
policy, the mortgage deed, and the sub-mortgage deed.

4.7.1.4 Collateral Mortgages

A mortgage debt may be primarily secured by a mortgage of certain property, with further
property included by way of collateral or additional security. The most common example of
this is in a house purchase arrangement. The primary security is the mortgage of the house
itself, while a life policy may be mortgaged as collateral security to protect the lender against
the consequences of the borrower's death.
The mortgagee can exercise their security by means of the primary or the collateral security,
or both. Collateral security can also be provided by a third party as a form of surety, and if the
mortgagee enforces this security then the third party is in effect in the same position as the
mortgagee and has the right to obtain a charge on the primary security.

4.7.2 Rights of a Mortgagee

The purpose of a mortgage is to give security to the lender. At any time after the date for
repayment stated in the mortgage, the lender can give the borrower notice requiring
repayment of the money lent. If the borrower fails to repay, the lender has the following
remedies:
 repayment;
 power of sale;
 receiver;
 foreclosure.

4.7.2.1 Repayment
The deed will contain a covenant by the borrower to repay the loan, and if they fail to do so
within the three months' notice given, the lender can sue them for breach of this covenant to
repay. The loan cannot be called in before the date specified in the deed. In practice this
remedy is very seldom used, because the borrower is unlikely to have the money.

63
4.7.2.2 Power of Sale
If the mortgage is by deed then the mortgagee has the right, without application to the court,
to sell the mortgaged property and recover the loan from the sale price, with any balance
being paid over to the mortgagor. The mortgage deed may contain an express power of sale.
Even if it does not, a statutory power of sale is conferred automatically by s.101 of the Law of
Property Act 1925.Section 104 provides that when exercising the power of sale, a mortgagee
can convey the mortgaged property free from any interests over which the mortgage had
priority, but subject to any interest which had priority over the mortgage. Section 107
provides that the receipt of the mortgagee is sufficient discharge and that the person paying
the sale price to the mortgagee does not have to concern themselves with whether the power
was properly exercised.

It is considered that a mortgagee of a life policy can surrender it to the insurer under either a
specific or statutory power of sale, on the basis that a surrender is equivalent to a sale. In
order to sell a house that is mortgaged, a lender will, in practice, often have to apply for an
order for possession. The court can suspend such an order (under s.36 of the Administration
of Justice Act 1970) if it appears that the borrower is likely to be able within a reasonable
period to pay any sums due under the mortgage. If the borrower shows they have a good
chance of repaying outstanding interest over the term of the loan, the court may well suspend
the possession order.

4.7.2.3 Receiver
The mortgagee can appoint a receiver to take possession of the property and collect any
income from it, and to apply it in reduction of the mortgage debt. This remedy may be
convenient in the case of mortgages of land where there may be rental income, or shares
where there may be dividend income, but is virtually never used in connection with life
policies.

4.7.2.4 Foreclosure
The mortgagee can apply to the court for an Order of Foreclosure, whereby the court orders
that the mortgage debt must be repaid by a specific date, which will normally be in six
months' time. If the court grants the application, it will make an order nisi. If repayment is not
made by the date set, the order becomes absolute and the mortgagee becomes the full owner
of the property. The Order of Foreclosure Absolute thus has the effect of vesting the
mortgaged property in the mortgagee absolutely, and the mortgagor's equity of redemption
is extinguished. The mortgagee can then do what they wish with the foreclosed property. If
they sell it, they do not have to account to the mortgagor for any balance over the amount of
the debt. A mortgagee's proof of title is the Order of Foreclosure Absolute, which requires
stamping as a conveyance on sale.

If the court so decides, it may order a judicial sale instead of a foreclosure. In this case, the
court arranges for the sale of the property and pays the amount owing to the mortgagee and
the balance, if any, to the mortgagor. Foreclosure is fairly unusual these days.

64
4.7.3 Rights of a Mortgagor
The mortgagor retains the equity of redemption and has the following rights:
 The right at law to have the property reassigned to them on repayment of the loan plus
interest and costs.
 On repayment, they can require the mortgagee to transfer the mortgage to a third
party. This is useful if the mortgagee calls in the loan and the borrower has to arrange
another loan to repay it. The mortgage can then be transferred to the new lender.
 They can, at their own expense, inspect and make copies or abstracts of the documents
of title to the mortgaged property.

4.7.4 Mortgages of Life Policies

Life policies are commonly mortgaged to banks, building societies, and life offices
themselves. When an office gives a loan on the security of one of its own policies this will
normally be by means of a mortgage deed. A mortgage deed assigning a life policy will have
all the normal features of a mortgage deed, but will also have conditions that specifically
relate to the life policy. Conditions commonly found in mortgages of life policies are as
follows:
 A covenant by the mortgagor to pay the premiums as they fall due, and to restore the
policy if it lapses.
 A covenant by the mortgagor that the policy is valid and that if it becomes void he will
effect an equivalent new policy and mortgage that to the lender.
 A power for the lender to pay any premium in arrears and add it to the principal of the
loan.
 A power for the lender to exercise the power of sale by surrendering the policy to the life
office.

Most life offices are willing to grant loans on the security of their own policies. This will
apply only to certain classes of policy, where there is a surrender value. The policyholder
will execute a mortgage deed in favour of the life office and this will contain the normal
conditions outlined above. The deed may also have a clause giving the office power to
surrender the policy to itself to repay the loan if the borrower defaults on payments of
interest or premiums. An office will generally only lend if it can get a first charge on the
policy; it will not normally wish to be a second mortgagee or a sub-mortgagee.

If a policyholder whose policy is already mortgaged applies for a policy loan, the office may
suggest that it provides the funds to repay the original mortgagee and then obtains a first
charge from the policyholder for the amount paid to the original mortgagee plus the balance
lent to the policyholder. The maximum loan will usually be 90% of the surrender value, and
interest will be charged at the office's current ruling rate, which can be altered from time to
time subject to, say, one month's notice in writing. An office may often be prepared to allow
the loan to remain outstanding until the policy becomes a claim, as long as premiums and
interest are paid promptly.

4.7.5 Equitable Mortgages

An equitable mortgage is where the mortgage transfers only the equitable, and not the
legal, interest. This may be because the mortgagor possesses only an equitable interest or
65
because the documentation is only informal and is not sufficient to convey the legal
interest. A common example of this is a deposit of title deeds, together with a memorandum
of deposit. It is even possible for there to be an equitable mortgage created merely by
deposit of the relevant documents of title coupled with an intention to create a charge,
although there is no written document. This is called an equitable mortgage by deposit.An
equitable mortgagee has no power of sale because they have not obtained the legal title. If
they wish to enforce their security, they will have to apply to the court for an order
enabling them to sell. Where there is a written equitable mortgage or memorandum of
deposit, the mortgagee can give a good discharge for life policy moneys on a claim by death
or maturity, but cannot surrender the policy without the concurrence of the mortgagor. It
would seem that, under an equitable mortgage by deposit only, the concurrence of the
mortgagor is required for claims and surrenders. Where an equitable mortgage is repaid, a
receipt signed by the lender is all that is required. Because there has been no legal
assignment of the policy there need be no reassignment.

4.7.6 Reassignment
On repayment of a mortgage the borrower is entitled, at their own expense, to have the
mortgaged property reassigned to them. This can be done by a separate deed of
reassignment or by a reassignment typed or printed on the original mortgage deed. Many of
the standard-form deeds of mortgage of life policies used by banks and building societies
have pre-printed reassignments on the reverse of the deed. These just need dating and
signing on behalf of the mortgagee to be effective. The Law of Property Act 1925, s.115
provides that, after 31 December 1925, on repayment of the mortgage moneys a receipt
endorsed on the mortgage deed is sufficient to re-convey the property to the person repaying
the money who is named in the receipt or, if no such person is named, then to the person
entitled to the equity of redemption. The receipt must be signed on behalf of the mortgagee. If
a statutory receipt is given, then no formal deed of reassignment is necessary. A formal
reassignment must, however, be executed if requested by the mortgagor. When repayment
has been made, the mortgagee will deliver up the mortgage deed, the statutory receipt or
reassignment, and any other documents of title held; for example, the policy document in a
mortgage of a life policy.

4.7.7 Claims Under Mortgaged Policies

When a claim is made under a mortgaged policy, the office will pay the claim to the
mortgagee subject to proof of their title: production of the policy and the mortgage deed. If
the office has received notice of more than one mortgage, it will be necessary to consider the
priority of the mortgages. Payment will normally be made to the mortgagee gaining priority
of claim under the doctrine of notice. It would be wise, however, to inform the other
mortgagee of the payment. Subsequent mortgagees can then apply to the prior mortgagee
for any balance after the amount owing to the latter has been satisfied. The office will pay the
whole claim value to the mortgagee, even if this exceeds the amount owing under the
mortgage. This is because the mortgagee holds legal title to the whole policy. The mortgagee
repays their loan plus any interest out of the policy moneys and will then pass any balance to
the mortgagor (as long as there are no subsequent mortgagees). The office is not concerned
with the equitable interests in a legal mortgage: s.113, Law of Property Act 1925. The
66
mortgagee is a trustee for the mortgagor for any balance after their charge has been repaid,
and has the legal power, under s.107 of the Act, to give a good discharge to the life office. The
life office is not concerned with the state of accounts between the mortgagee and mortgagor.

Where a request is made to surrender the policy under the power of sale, the life office can
accept the sole discharge of the mortgagee and does not have to satisfy itself that the power is
being properly exercised. However, the office must not allow a surrender on the sole
discharge of the mortgagee where it knows that the power of sale has been improperly
exercised: Selwyn v. Garfit (1888). In this case, a purchaser bought property from a
mortgagee under a deed which stated that the power of sale could be exercised only after
certain notice to the borrower. The purchaser bought so soon after the date of the mortgage
that it was not possible for such notice to have been given. It was held that the purchase must
be set aside as the purchaser must have known that the power of sale had not been correctly
exercised. If both mortgagor and mortgagee join in the discharge for surrender, the office is
not concerned with whether the power of sale has arisen or not.

4.8 Second-Hand Policies

There is now a flourishing market in second-hand policies. This is where an investor buys a
policy (usually an endowment) on someone else's life from the original policyholder, who
originally bought it from the life office but no longer wants it. The attraction for the original
policyholder is that the selling price on the second-hand market may be higher than the
surrender value offered by the life office. From the buyer's point of view it can be a good
investment. They will have to pay future premiums but will get the maturity value and there
is always the chance of an early profit if the life assured dies. The most popular policies on the
second-hand market are with-profits endowments with a few years to run to maturity, issued
by sound, well-established life offices.

There are a number of firms who specialise in this market, putting buyers and sellers
together. The seller has to execute a deed in favour of the buyer and hand the policy
document over to them. The buyer should serve notice of assignment on the life office. The
life office will make arrangements for the buyer to pay future premiums and any claim
would be payable to the buyer, who would have to produce the policy document and deed of
assignment in proof of title.
Please note that second-hand life policies are yet to be operational by life offices in the
Nigerian market.

4.9 Bankruptcy
Bankruptcy is the name given to the situation where a person cannot (or in some cases will
not) pay their debts. The Insolvency Act 1986 provides for a trustee in bankruptcy or the
Official Receiver to be appointed to take the bankrupt's property (with the exception of
clothes, furniture, bedding and tools of trade), sell it and distribute the proceeds to the
creditors. The bankrupt is then discharged, freed from all previous debts. When a
policyholder becomes bankrupt they can no longer deal with their policy, and no payments
should be made by the office without the permission of the trustee in bankruptcy. The trustee
will usually notify the office of their interest in the policy and the office will then note this in
its records, like a notice of assignment.
67
The trustee can surrender the policy in order to provide cash for the creditors. If so, they will
have to produce the policy, the Bankruptcy Order and either the Order for Summary
Administration or the Certificate of Appointment as Trustee in proof of their title.
Alternatively, the trustee can keep the policy in force for the benefit of the creditors in case the
bankrupt dies. Under the Enterprise Act 2002 for bankruptcies declared on or after 1 April
2004 there will normally be an automatic discharge after one year (previously the period was
three years). For bankruptcies before 1 April 2004 discharge was automatic on 1 April 2005,
unless already given. There are provisions to extend the bankruptcy period for serial
bankrupts and those who act irresponsibly or recklessly. When a policyholder receives their
discharge from bankruptcy, ownership of any life policies does not revert automatically to
the bankrupt unless and until the trustee in bankruptcy assigns them back.

4.9.1 Individual Voluntary Arrangements (IVAs)

Individual voluntary arrangements (IVAs) are a popular alternative to bankruptcy. This is a
formal repayment agreement by the debtor with their creditors to repay an agreed
proportion of the debts within a specified timescale. This is binding if 75% of the creditors
by value agreed to it. The agreement will appoint an insolvency practitioner to oversee
the arrangements. This avoids the publicity and stigma of bankruptcy. However, if the
debtor defaults on the agreed payments, the creditors can then commence bankruptcy
proceedings.

68
 Chapter 5
Life Assurance Claims
Administration
Learning Objectives

After studying this chapter, you should be able to:

 outline the procedure for handling maturity claims;
 understand the procedures used in settling death claims;
 know how a claimant can prove title on a death claim.

Introduction
This chapter explains the job of the claims department, which is to pay claims as efficiently
and speedily as possible. However, the office must make sure that every claim is valid, and
that it is paying the right amount to the right person.

In general, claims are subject to:

 payment of all due premiums;
 production of the policy;
 proof of title – the onus of which is on the claimant;
 proof of death on a death claim;
 proof of age on a death claim.
There are two different types of claim covered in this chapter – maturity claims and death
claims. The considerations concerning lost policies, which are the same for both types of
claim (as well as surrenders and loans), are also dealt with. It must be remembered that it is
the claimant's duty to prove title and he must produce all the documents required to prove
his ownership – these are called the documents of title.

5.1 Maturity Claims

When an endowment policy matures, it becomes the subject of a maturity claim. This is
usually initiated by the life office writing to the policyholder a month or two before the
maturity date. The letter will:
 remind the policyholder of the maturity date;
 state the amount payable;
 list the requirements for payment;
 enclose the relevant form of discharge.

Many offices have programmed their computers to produce automatic letters for policies
maturing in “x-weeks' time”, and use these as the basis of their maturity procedures. The aim
is to receive all the requirements in advance of the maturity date, to enable the office to
release its settlement cheque to reach the policyholder by the maturity date.
On every maturity claim the office's form of discharge must be signed by the person with
69
legal title to the policy. Only the person with the legal title can give the office a good
discharge.

Forms of discharge also provide for the signature of a witness (or witnesses), although it is
very doubtful whether the office can insist on these. In any event, the office can check the
signature against the others it will have in its files, for example on the proposal form.

Production of the policy will be required and this will be the sole proof of title if the claimant
is the assured and the policy has never been assigned. If the policy has been assigned, the
relevant deed(s) of assignment will have to be produced. For a trust policy, any deeds of
appointment or retirement of trustees will have to be produced and all the trustees will have
to sign the discharge. If any trustees have died, their death certificates will be required. The
office must deal with the person who has legal power to sue, even if that person will not
ultimately keep all of the payment.

For example, if the policy is mortgaged, the office must pay the mortgagee, even though the
amount of the debt owed to it is less than the sum assured. If there is any balance left after the
mortgage debt has been repaid, it is the duty of the mortgagee to pass this to the mortgagor.
The office is not concerned to see whether this is done. Similarly, if a policy is under trust, the
office must get the discharge of the trustees, as legal owners, even though they may pass the
money to the beneficiaries. The office will have a review system to keep a check on unpaid
maturity claims.

5.2 Death Claims

When a death claim occurs the correspondence will normally be initiated by the claimant, or
solicitors for the estate, who will write to the office informing them of the death and
requesting the amount payable. The first step is for the office to search its index of lives
assured to ascertain all the policies on that life. Then the date of death must be obtained, as
the amount payable may depend on the exact date of death – for example, the profits on a
with-profits policy or the sum assured on a decreasing term policy will vary according to the
precise date of death. Unit value on a unit-linked policy will usually depend on the date the
office is told of the death or receives proof of death. The office's initial reply will quote the
amount payable, subject to the admission of the claim.

The next step is to obtain proof of death. When this has been done the validity of the claim can
be assessed. This may depend on the cause of death. Once the office is satisfied that the claim
is valid, the claimant must be requested to prove their title. Proof of age must be obtained if
age has not already been admitted. The office will also require a form of discharge to be
signed by the claimant before making payment. The format of this will virtually be the same
as that used for maturity claims.

5.2.1 Proof of Death

Proof of death is vital for admission of a death claim. Deaths are proven by an official Death
Certificate and/or with the Medical Certificate of Cause of Death. The Death Certificate is an
official copy, made by the Registrar of an entry in the Register of Deaths maintained pursuant
to the Births and Deaths Registration Act 1953. It is possible to get as many original death
70
certificates as required from the Registrar on payment of the appropriate fee. Only original
death certificates should be accepted as proof of death. There have been cases of life offices
being defrauded by paying death claims based on forged photocopy death certificates. It is
infinitely more difficult to forge original certificates and therefore Life Offices have opted to
only accept original copies of death certificates and/or medical certificates of cause of death;
while it is up to individual life offices to decide whether to accept this in lieu of a death
certificate. Other documents will not normally be allowed as proof of death. A grant of
representation is not acceptable as proof of death (High Court, Chancery Division Practice
Direction 13 February 1970).
The full name of the deceased together with the date and place of birth, occupation and
address should be checked against the details on the office files to make sure that it is the life
assured that has died.

5.2.1.1 Presumption of Death

It sometimes happens that a life assured disappears and there is no direct evidence of death.
Disappearing is not the same as dying and attempts have been made to defraud life offices in
this manner. Caution should therefore be exercised in dealing with claims where it is alleged
that the life has died, but nobody is found and therefore no death certificate issued. Death
may be able to be proved in such cases by circumstantial evidence. For example, if it is alleged
that the life assured died when an airliner in which he was a passenger crashed into the sea,
then proof could be adduced by the airline's written confirmation that the life was a
passenger on the flight, and that the plane did crash into the sea with the loss of all those on
board. It is also possible for the claimant to apply to the court for an order presuming death, if
the life assured has disappeared and been absent for seven years. The court will have to be
satisfied that all possible enquiries have been made, particularly among those who would be
likely to hear from the life if he or she were alive. The application will have to contain details
of all policies on the life of the person who disappeared. If it is required to establish death at
any particular time within the seven years (for example, if a term assurance expired during
this period) then this must be proven by suitable evidence. In cases of disappearance it is not
always necessary to wait seven years. It is possible that the circumstances may be such that
the court may reasonably find that the life assured is dead and give leave to swear the death
within the seven years. An example of such a case would be where the life was a passenger of
a ship that went missing. The personal representatives of a life who has disappeared cannot
get their grant of representation until the court has given them leave to swear to the death.

There have been many cases where life offices have paid death claims on policies on the lives
of those who have been presumed dead in the manner outlined above.

5.2.1.2 Cause of Death

The office should take note of the cause of death shown on the death certificate. There is a
possibility that the life assured died as a result of some activity that was excluded from the
cover provided by the policy, for example private flying, or mountaineering.

Also, if death has occurred within a comparatively short period since the issue of the policy,
the office should pay heed to the possibility of non-disclosure. If the office suspects that there

71
may have been non-disclosure of a material fact it will have to make further enquiries. If the
office needs to see the deceased's medical records, this is permitted under the Access to
Health Records Act 1990, as long as the office has the written authority of the deceased's
personal representatives. If the life assured died of a chronic heart disease a few months after
effecting the policy for example, in this case the office would investigate the medical history
of the deceased. If it was discovered that he had suffered heart trouble for the last five years
and had been receiving regular treatment for it, but had not disclosed this on the proposal
form, this would be a clear case of non-disclosure. The office would therefore have the right
to repudiate the claim, as it is necessary to disclose all material facts when effecting a policy.
An office will usually only repudiate a claim for non-disclosure if the non-disclosure is
related to the cause of death. If the non-disclosure was fraudulent, the claimants have no
legal right to recover premiums. If the non-disclosure was not fraudulent, then premiums
can be recovered but interest on them would not be due. Foreign death certificates do not
always show the cause of death. Therefore, medical evidence of the cause might have to be
sought if it would be relevant to the validity of the claim. Suicide can often have a bearing on
the validity of claims and is dealt with later. The place of death should also be checked, as
some policies contain restrictions as to travel or residence abroad.

5.2.1.3 The Financial Ombudsman Service View

Whilst the law provides that any non-disclosure of a material fact renders the contract void
and thus entitles the insurer to repudiate the claim, as mentioned above, most offices will
only repudiate a claim if the nondisclosure was related to the cause of death. However, life
offices also have to bear in mind the views of the FOS to which a complaint may be referred if
a claim is refused. The FOS's view is that where non-disclosure of a material fact is fraudulent
or deliberate the office can decline the claim, void the policy from outset and refuse to return
premiums. It should also be mentioned that fraudulent non-disclosure is a criminal offence,
although the perpetrator may well be dead by the time the life office finds out about this. If
the non-disclosure is innocent, the FOS view is that the life office should meet the claim in full
even if, had it known of the non-disclosure, it would have increased the premium or refused
to offer cover. The FOS says it is likely to conclude that non-disclosure was innocent if the
questions on the proposal were not clear or it is reasonable for the proposer to have
overlooked the non-disclosed facts – e.g. minor childhood illnesses. In any event, proposers
have no duty to disclose facts they are not aware of.The FOS further distinguishes between
inadvertent or negligent non-disclosure and clearly reckless or deliberate non- disclosure.
The FOS is likely to conclude that non-disclosure was inadvertent or negligent if it seems to
have resulted from an understandable oversight or moment of carelessness ratherthan any
deliberate act. In such cases, the FOS may adopt a proportionate approach and work out the
premium that would have been paid if the fact had been disclosed, then calculate what
proportion of that the actual premium was and base its settlement on that proportion. It is
difficult to reconcile this approach with the FSA's duty to treat customers fairly (i.e. the
ones who fill out proposal forms fully and truthfully).

72
The FOS is likely to conclude that non-disclosure is clearly reckless or deliberate if a proposer
appears not to have any regard for accuracy when completing the proposal. Typically, the
non-disclosed facts will be significant and well known by the proposer but the FOS will be
unable to establish that the non-disclosure was deliberate. In these cases, the FOS states
that the office can decline the claim and cancel the policy but should normally refund
premiums. Clearly, however, the FOS will look at each case on an individual basis.

5.2.2 Proof of Title

Proof of title will be required before a claim is paid.
 If the policy is a life of another contract, payment will be made to the assured on
production of the policy.
 If it is a trust policy, payment will be made to the trustees, again on production of the
policy.
 If the claim is being made by an assignee, both the policy and the deed of assignment
will be required.
 If the policy is an own life policy that has not been assigned, then payment will be
made to the estate. The estate is represented by the legal personal representatives, and
they can prove their title by producing the appropriate grant of representation, which
is issued by the court, appointing them.

The executors, or administrators, must produce a grant to prove their title. It is not
uncommon for an office to be requested to pay the claim before the grant is obtained. Such
requests should be declined as it is not until the grant is produced that the office will know
who the legal personal representatives are. If payment was made before the grant was
obtained, the office could not be sure that it was paying the right person(s). Therefore,
even though it may be some time before a grant can be obtained, the office should not pay
the legal personal representatives until it is produced. An original grant or a court sealed
'office copy' will be required and ordinary photocopies are not usually accepted. A legal
personal representative can obtain as many office copies as desired from the Registry on
payment ofthe appropriate fee.

There are two types of grant:

 a grant of probate when a valid will naming executors was left;
 a grant of letters of administration where no valid will was left.

Sometimes a claimant may say that, as the value of the estate is small, no grant will be applied
for, and request the office to dispense with its production. Any payment to an estate without
production of a grant will involve the office in some risk, however slight, of paying the wrong
person. Caution should therefore be exercised in dealing with such requests.

The practice of offices varies, but most will pay claims under a certain limit (for example, sum
assured up to N500,000.00 or where the value of the estate is less than N1,000,000.00) without
a grant. Often this will be done only provided payment is made to a surviving spouse. The
office would obtain an indemnity from the claimant to repay it if it has to make payment
again to a subsequent claimant who produces a grant.

73
Under a joint life/first death policy with joint assureds, the payment would be made to the
surviving assured on the basis that the assureds were joint tenants. If a claim is made under
an own life joint life second death policy, payment would be made to the estate of the second
of the assureds to die. If both lives assured under a joint life policy are killed in the same
incident it will be necessary to know, for title purposes, which of the two died first. This may
be clear from evidence but, if not, for example if both lives assured were killed in an air crash,
then s.184 of the Law of Property Act 1925 provides that:

In all cases where, after the commencement of this Act, two or more persons have died in
circumstances rendering it uncertain which of them survived the other or others, such deaths
shall (subject to any order of the Court), for all purposes affecting the title to property, be
presumed to have occurred in order of seniority, and accordingly the younger shall be
deemed to have survived the elder. Thus, if the two lives assured died in the same disaster
and there is no evidence to show who died first, s.184 would apply and the younger would be
deemed to have survived the elder. This view has been confirmed by the House of Lords in
the case of Hickman v. Peacey (1945) where two brothers were killed in a basement when a
bomb struck the house. Payment would thus be made to the estate of the younger.

5.2.3 Proof of Age

Proof of age will be required on a death claim. Where proof of age is required it is advisable to
add to any quotation of the sum payable on death that it is subject to age having been stated
correctly. Proof of age is important in that premiums are based on the age of the life assured,
and if the age differs from that stated on the proposal then an incorrect premium has been
charged. If this happens often, the whole of the office's rating basis will be upset. Therefore,
most offices prefer age to be proven at inception of the policy. This sometimes does not
happen, so proof of age may be required on a subsequent death claim. Proof of age is not so
important in maturity claims or surrenders, and is not usually required in these cases. Age is
normally proven by production of an official birth certificate. Like death certificates it is
recommended that photocopy certificates should not be accepted. Often it is stated that a
birth certificate is not available, but for a person born in the UK it is possible to obtain a
birth certificate without much trouble, as long as the rough date and place of birth are
known.

However, for a person born outside the country of residence, for example, if the policy is
issued in UK and the person was born outside of the UK, proof of age can be more difficult in
that a birth certificate cannot be obtained or may not even exist. This is particularly true of
those born in countries where registration of birth is not customary, for example, many Asian
countries. In such instances the office will require the best possible evidence of age available
in the individual circumstances of the case, such as baptismal certificate, adoption
certification, passport or naturalisation certificate.

For a married woman, the marriage certificate will also have to be produced to link the name
on the birth certificate with the present name of the life assured. If it is found that the life
assured was older than stated, then, although practice may vary between offices, the most
usual course of action is to reduce the sum assured payable to that which would have been
purchased by the premium actually paid, using the rate for the true age. This may also
74
necessitate recalculating any profits on a with-profits policy, or units allocated on a unit-
linked policy. If the age was younger than that stated, again practice will vary. The most
popular treatment is probably to calculate the premium which should have been paid and
refund the excess over the premium actually paid for each premium payment.

5.2.4 Suicide
Special consideration should be given to claims where it appears that the cause of death is
suicide. Before the Suicide Act 1961, suicide committed voluntarily by a person of sound
mind was a crime; and in Nigeria, suicide committed voluntarily by a person of sound mind
is still a crime. This is because it is contrary to public policy for a person to benefit from their
own criminal act, and therefore no legal claim could be made by the estate of a life assured
who committed suicide whilst of sound mind.

Although in the UK, the Suicide Act 1961 abolished the rule that suicide was a crime, the Act
did not mention life assurance. The position of a post-1961 claim, where death is by suicide
whilst of sound mind, is not entirely free from doubt if there is no suicide clause in the policy.
One view is that, as suicide is no longer a crime, payment should be made. However, it is
widely held that it is a fundamental principle of insurance law that an insured cannot recover
if, by their own deliberate act, they cause the event insured against. This is supported by the
judgment of Lord Atkin and Lord Macmillan in the leading case of Beresford v. Royal
Insurance Co. Ltd (1938). Although this was decided before 1961, these judges considered
that the rule preventing payment was not that of public policy, but a fundamental implied
term of the contract that a man cannot by his own deliberate act cause the event on which the
insurance money is payable. It is submitted that this is the correct statement of law.

The above principle does not apply if the life assured commits suicide whilst insane, as it can
be said that he or she does not have the mental capacity to appreciate what they are doing.
Their estate would be able to recover the policy moneys in such an instance.
If the policy contains a suicide clause then the position depends on the wording of the clause.
Many offices include a clause such as “If the Life Assured shall commit suicide within one year from
the date of the policy all benefits which would otherwise have become payable shall be forfeited and
belong to the insurer”.Suicide would therefore not be covered if it occurred during the
specified period. If suicide occurs after that period, then the office would be liable for the
claim, even if the life assured was of sound mind at the time. This is because, by having a
suicide clause expressly excluding cover for a limited period, the office is implicitly insuring
that risk after that time.

Most suicide clauses protect the interests of a third party, preserving the value of the policy
for mortgagees. A typical proviso would be “this suicide condition shall not prejudice the interest
in such moneys of any third party who shall have bona fide acquired that interest for valuable
consideration”.If this is the case, the life office itself is not a third party, as was shown in Royal
London Mutual Insurance Society v. Barrett (1928). There, a life policy was mortgaged to the
life office along with leasehold property. The life assured committed suicide and the court
held that the life office was not a third party, therefore the policy was void and they could
recover their debt against the leasehold property. Where a life office can repudiate a claim on
the grounds of suicide, then, not only can the legal personal representatives not claim, but all
75
those claiming a share in the estate as beneficiaries or creditors are equally barred. This
would also extend to the trustees of a policy under trust. The burden of proving that suicide
was the cause of death is on the life office. One problem is that the coroner's findings are not
conclusive proof. The case of Walsh v. Legal and General Assurance Society Ltd (1935)
illustrates the difficulties which can arise. The life assured died when he fell from a train
during the first year of a policy which excluded suicide within the first year. There were no
other passengers in the compartment and examination of the carriage door showed no defect
that might have allowed it to open of its own accord. In view of these circumstances, the
coroner's verdict was 'suicide while of unsound mind'. Legal action was brought to claim the
sum assured. It was held that the coroner's verdict was not conclusive proof of suicide and
that, as the life office could not positively prove it was suicide, they were liable.

5.2.5 Other Unlawful Acts

The general rule of public policy which does not allow a person to benefit from their own
criminal act also operates to prevent a claim from a person who has murdered another
person on whose life he holds a policy (Prince of Wales Assurance Association Co. v. Palmer
(1858)). This does not apply where the murderer was insane (Re Batten's Will Trusts (1961)).

The case of Re K Deceased (SJ Col 129, p.132) emphasises that this rule also applies to
manslaughter where death was an unintended consequence of a deliberate act. In this case a
wife threatened her husband with a shotgun which then went off and killed him.
However, in a recent case a court applied the Forfeiture Act 1982 so as to enable the survivor
of a suicide pact to claim under a policy on the life of her partner, whom she had assisted to
commit suicide.

An interesting case on this subject is Hewitson v. The Prudential Assurance Co. Ltd (1985). In
this case Mrs. Hewitson was the assured of a policy on the life of Mr. Hewitson. Together they
took part in an armed robbery, although the guns were actually imitations. The robbery
failed and Mr. Hewitson was shot and killed in the course of trying to escape. Mrs. Hewitson
claimed under the policy.

The court decided that Mr. Hewitson's death was caused by his own criminal act, i.e. the
attempted armed robbery. It also held that as Mrs. Hewitson was an active participant in that
crime, it would be contrary to public policy to allow her to benefit as a result of that crime,
and thus the insurers were not liable.

5.3 Lost Policies

It frequently happens on a claim that the claimant says that the policy is lost. The loss of the
policy is inconvenient, but not crucial, as the policy is not the contract itself, merely evidence
of it. However, non-production of a policy may amount to constructive notice to the office
that a third party has an interest in it. The life office will therefore need to be in a position to
rebut any allegation of constructive notice of a third party interest. For this reason, the
company will require a proper search to be made, and enquiries undertaken of those who
might hold the policy or know of its whereabouts, for example, the assured's bank, solicitors,
or accountants. The office's files should be checked for any indications as to the policy's
whereabouts. Often the policy is found by this process.
76
If the policy is not found, and the office is satisfied that it is genuinely lost, it may ask the
claimant to execute a Statutory Declaration, setting out the circumstances of the loss and
stating that the policy has not been assigned or charged. Not all offices will insist on a
Statutory Declaration. The claim can then be paid on completion of an indemnity form by the
claimant against any losses to the life office as a result of making payment without
production of the policy. Sometimes executors or trustees may not be willing to give an
indemnity and in such cases the office may be prepared to accept the indemnity of one or
more of the principal beneficiaries. If the claim is very large an indemnity bond from another
insurance company might be required.

It is probable that an office has no legal right to an indemnity, unless provided for in the
policy conditions. Therefore, an office will usually modify its requirements if it meets any
resistance to an indemnity. It is important to note that an indemnity cannot prevent a further
claim by an assignee; it can only repay the office any loss incurred thereby.

Statutory Declarations are made before a magistrate or solicitor under the Statutory
Declarations Act 1835. There are penalties if the declaration is made knowing it to be false.
Lost policy procedure will also apply to surrenders and loans, as well as to claims. Similar
procedures will apply to other lost documents of title, for example, deeds of assignment.
Sometimes a policyholder will report the loss of a policy even though no claim is being made,
and request a duplicate policy document. Life offices are very reluctant to issue duplicate
policies, because of the confusion which could arise if the original came to light and there
were two identical policies in existence. One solution to the problem is to issue the
policyholder with a policy clearly marked 'copy policy' or similar. This can then be used for
reference purposes. Sometimes a document reciting the particulars of the contract will satisfy
the policyholder's requirements.

Alternatively, the lost policy may be replaced by a new one on identical terms but with a new
number. The office will do this only if it can get a discharge from its liability under the lost
policy from all interested parties in consideration of issuing an identical policy with a new
number. The office may wish to make a charge for its expenses in doing this.

5.3.1 Other Lost Documents

Sometimes it is found that other documents of title are lost on a claim. The procedure
depends on exactly what has been lost. If the lost document is a birth, death or marriage
certificate then a replacement can be obtained from the Registrar of Births, Deaths and
Marriages. If it is a lost deed, then that is more serious because an assignee cannot prove their
title if they cannot produce the deed of assignment. Serving notice of assignment is not the
same as proving the assignment. If the deed cannot be found the office would probably want
confirmation from the assignor that there really was an assignment, or a joint discharge from
the assignor and assignee. This could be problematical, especially on a death claim. If these
alternatives are not possible then a life office might be prepared to pay a claim based on an
indemnity from the assignee. However, if the policy was lost as well as the deed this would
reduce the chances of the life office being willing to pay as the assignee would have no proof
of title whatsoever.

77
5.4 Surrenders
A request for payment of a surrender value is not strictly speaking a claim. However, it must
be treated in the same way as regards proof of title. The surrender value will be quoted,
subject to payment of all due premiums and proof of title. The office will require the normal
proof of title and a discharge from the policyholder. The form of discharge will be similar to
that used for maturity claims, except that it will specify that the policy is being surrendered.
The form will have to be signed by the policyholder. If the policy is being surrendered by a
mortgagee, the countersignature of the mortgagor will be required, unless the mortgagee
confirms it is surrendering under its power of sale. Trustees surrendering a policy will have
to use the surrender proceeds for the benefit of the beneficiaries. A surrender may involve a
chargeable event. Regulation requires life offices to make sure that endowment policy
holders who seek information on surrender values are made aware of the other options
available, including the fact that they may be able to sell the policy on the traded market as an
alternative to surrendering.

5.4.1 Bonus Surrenders

Some offices will allow a policyholder to surrender the whole or part of the reversionary
bonus attaching to a policy. Normal proof of title will be required and, in addition, the office
will require production of the policy, so that it can be endorsed to show the amount of bonus
surrendered and the equivalent cash value. A bonus surrender is a part surrender and can be
a chargeable event.

5.5 Loans
It is common for life offices to allow loans on the security of policies issued by them. The
usual maximum loan is 90% of the surrender value and, therefore, loans can only be taken
where there is a surrender value. Rates of interest charged will vary according to market
conditions. The borrower will have to prove their title to the policy in the normal way and
complete a mortgage deed. Under the deed, they mortgage the policy to the life office as
security for the loan, with a promise to repay the loan and to pay interest thereon while it is
outstanding. In practice, as long as premiums and interest are paid, most offices will allow a
policy loan to remain outstanding until the policy becomes a claim or is surrendered. In this
event, the loan, together with any outstanding interest, would be deducted from the
payment made.

The mortgage deed would contain a provision whereby the borrower promised to pay
premiums under the policy and to restore it if it lapsed. The office would retain possession of
the policy, any title deeds and the mortgage deed during the currency of the loan. When the
loan is repaid, the office would return the policy and any deeds to the borrower and also
reassign the policy by means of a specific reassignment, or by a receipt on the mortgage deed.
An office will normally only lend on the security of one of its policies if it can obtain a first
charge thereon, that is, if title is clear. Loans will not usually be given to policyholders under
eighteen, as they do not have full contractual capacity.

Life offices which give policy loans must have a licence under the Consumer Credit Act 1974
and comply with its regulations in their procedures.

78
 Chapter 6
Introduction to Life
Reassurance
Learning Objectives

After studying this chapter, you should be able to:

 understand what reassurance is;
 the need for reassurance;
 know what types of reassurance are available;
 understand how the different methods of reassurance work;
 understand what the retention limit is;
 understand reassurance administration;
 understand the Nigerian life reassurance market;

Introduction
This chapter introduces the candidates to Life Reassurance. Reassurance is the method
whereby one life office (called the direct or principal office) assures a life assured but passes
on a part, or all, of the risk to another office (called the re-assurer or guaranteeing office).
Many offices accept reassurance business from the life offices. Some reassurance companies
are composite, while there are few reassurance companies that are life reassurance specialist
companies. Retention limit is also considered as well as Reassurance types are equally
considered.

6.1 The Reassurance Market Place

The market place for reassurance, no matter where it is bought or sold, is much the same. In
the figure below, we have outlined the main players in the market place.

Buyers Intermediaries Sellers

Direct insurers Reinsurance brokers Reinsurers
Captive insurers Management companies Direct insurers
Co insurers Co insurers
Reinsurers Pools

Notice that the insured does not appear in our description of the reinsurance market place.
This is an important point to have in mind. The contract to purchase reinsurance is one
between the direct insurer and the reinsurer; the insured plays no part in it. The consequence
of this, for example, is that, even if the reinsurer should fail to meet its obligations to the direct
insurer for one reason or another, the direct insurer would still be liable to the insured. It
would be no excuse to say that the reinsurer had failed as the reinsurance contract is not part
of the contract between the insured and the insurer. In fact, the vast majority of ordinary
79
insureds will have absolutely no knowledge that reinsurance exists! The selling and
marketing rules made under the Financial Services and Markets Act 2000 do not apply to
reassurance, although the prudential regulation rules do.

6.2 Need for Reassurance

The basic principle of spreading the risk is common to all branches of insurance. It is a means
of stabilising an office's claims experience by avoiding unduly favourable results in some
years, and very unfavourable results in others. The need for life reassurance arises basically
from the mortality risk. By using mortality tables compiled from the experience of a very
large number of assured lives, a life office is able to estimate the number of deaths that may be
expected each year in a group of assured lives of the same age. This estimate is, however, only
of the number of deaths and if the expected number of deaths does occur in any one year this
does not necessarily mean that a profit has been made from mortality. The profit will depend
on the sums assured under, and the reserves held against, the individual policies which
become claims in that year. As has been said earlier, under the level premium system a
reserve is accumulated which is used in later years when the premium is less than that
required to cover the risk of death. On death, the real cost of a claim is the sum assured less
the reserve. The difference between these two is called the death strain on the life fund.

6.2.1 Retention
All life offices have a maximum limit on the sum assured they will themselves hold on any
one life. This limit is called the office's retention. The office may accept a sum assured higher
than its retention, but only if it can reassure the excess. The reason for a retention is that,
although an office can forecast fairly accurately how many claims it can expect for any given
age group, it cannot forecast which individual policies will become claims. If a policy with a
very high sum assured became an early claim, this would affect the results adversely, and
would also impair the basic principle of spreading the risk. Hence each company will set its
retention limit, which will be revised from time to time, to reflect both the growth of the life
fund and the effects of inflation.

Retentions vary from company to company and are largely dependent on the size of the life
fund, the level of free reserves and the average sum assured. Retentions may be lower for
older lives and sub-standard risks. The class of assurance may also affect the retention. An
office may wish to reassure a sub-standard life even if the sum assured is lower than its
normal retention. Reassurers have built up a special degree of expertise in underwriting sub-
standard lives. This is because few individual life offices see enough sub-standard cases to
build up meaningful statistics on them, whereas reassurers tend to see a lot more. Thus,
reassurers are often able to assist in the underwriting of these cases. The retention of a large
well-established office nowadays can be as much as £500,000 while new offices may only
retain the first £10,000.

6.3 New Business Strain

Reassurance is a necessity for an office which has just started to transact life assurance. A new
office will wish to keep its new business strain within tolerable limits. New business strain
can occur as a result of unexpected early claims before the life fund has had a chance to build
up the large reserves possessed by the long-established offices. It is also influenced by the
80
level of reserves and heavy initial expenses such as commission and underwriting. A new
office will therefore have a reassurance agreement under which it will reassure an
appreciable proportion of its business. It may even reassure all its death strain in the early
years of business. As the office gets more established the need for reassurance will reduce
and its retention will increase. Reassurance will also enable a life office to reduce its statutory
solvency margin.

6.4 Types of Reassurance

If an office needs to reassure a risk, there are two ways in which this can be done: either it is
reassured facultatively or reassured using the treaty agreement.

6.4.1 Facultative Reassurance

Under this system each risk is dealt with individually. The principal office makes a proposal
to the guaranteeing office, which it is free to accept or reject. The guaranteeing office will
prepare a guarantee which will be held by the principal office as evidence of the contract.
This method has been used for a long time, but does have some disadvantages. The offering
of individual risks is time-consuming and expensive. This is especially so where a life is to be
reassured with a number of guaranteeing offices. Copies of the medical evidence and other
relevant details will need to be shown to each reassurer. In addition, the principal office
cannot confirm acceptance to the proposer until it has received acceptances from all its
reassurers. These complications led to the development of, first, the informal arrangements
and then, the formal reassurance treaties.

6.4.2 Treaty Reassurance

Under a reassurance treaty the element of discretion is removed. With a fully automatic
treaty all amounts over the retention limit of the principal office up to a specified maximum
figure must be offered to, and be accepted by, the reassurer. Any excess over the treaty's
maximum limit would have to be reassured facultatively. A variation of this is the
facultative/obligatory treaty. Under this arrangement the principal office may reassure with
the guaranteeing office at its option, but the reassurer is then obliged to accept the risk within
the limits set by the treaty. Treaties are often arranged to cover all of a life office's business.
Alternatively, a treaty can be restricted to a certain class of business: for example, pension
business only. Under a treaty reassurance a formal guarantee is not issued for each case as
cover is automatic under the treaty provisions. However, the principal office will supply the
reassurer with regular statistics of business covered by the treaty so the reassurer is aware of
its level of risk. The treaty will normally provide for premiums and claims to be paid on a
quarterly accounting basis. This saves a considerable amount of time and work as only one
remittance is required per quarter. The reassurer is entitled to copies of any medical
evidence, but this is for information only, as cover is automatic. Many offices have
reassurance treaties which are specifically designed for new offices to provide automatic
cover against new business strain. Treaties usually stay in force until renegotiated.

6.5 Methods of Reassurance

Reassurance can be provided by two different methods: original terms or risk premium.

81
6.5.1 Original Terms Reassurance
The reassurance of a proportion of the original sum assured can be accepted on whatever
terms are agreed by the offices concerned. However, it is usual for the reassurance to be
effected at the same rate of premium and subject to the same policy conditions as those of the
principal office, hence the expression 'original terms' reassurance. Most original terms
reassurance is term assurance. The reassurer is liable for a proportion of the original policy
throughout its duration and pays its due share of any claim or surrender value. Under a with-
profits contract, the reassurer follows the rate of bonus declared by the principal office,
although with-profits business is not usually now reassured on an original terms basis.

6.5.2 Risk Premium Reassurance

As already explained, under the level premium system, a reserve builds up under a policy
year by year. The death strain, which is the difference between the sum assured and the
reserve, thus reduces each year. Under a risk premium reassurance, it is the death strain
which is reassured and not a fixed proportion of the original sum assured. The cover
provided by a risk premium reassurance thus decreases each year as the death strain reduces
by the building up of the reserve. When a death claim arises under the original policy, the
reassurer's liability is restricted to the difference between the reserve and the nominal sum
reassured. The reassurer has no liability for surrenders or maturity claims, as these are paid
out of the principal office's reserve under the policy. Risk premium reassurance is the most
common basis currently in use.

Under the risk premium reassurance, the premium is based on a mortality table, with a
small loading to cover the expenses of the reassurer and fluctuations in mortality
experience. The premium rate thus increases each year with age, although the amount
covered decreases, and so the actual reassurance premium paid can fluctuate appreciably.
This can be seen from the following example of a risk premium reassurance for a male
aged 45 next birthday with a non-profit endowment for twenty years, where N1,000 is the
nominal sum reassured.

82
 Policy year Age next Actuarial Amount at Rate of risk Reassurance
birthday reserve risk Premium premium
N N per mille N
1 45 – 1,000 5.55 5.55
2 46 42 958 5.99 5.74
3 47 84 916 6.50 5.95
4 48 128 872 7.07 6.17
5 49 172 828 7.70 6.38
6 50 218 782 8.38 6.55
7 51 264 736 9.14 6.73
8 52 312 688 9.97 6.86
9 53 360 640 10.89 6.97
10 54 410 590 11.88 7.01
11 55 461 539 12.97 6.99
12 56 514 486 14.16 6.88
13 57 567 433 15.47 6.70
14 58 623 377 16.90 6.37
15 59 680 320 18.47 5.91
16 60 739 261 20.18 5.27
17 61 800 200 22.07 4.41
18 62 864 136 24.14 3.28
19 63 930 70 26.42 1.85
20 64 1,000 – – –

As will be seen, it has been assumed that the whole of the first premium has been absorbed by
commission and expenses so that the amount at risk in the first year is the whole nominal
sum reassured. The risk premium basis is especially attractive to a new office, as premiums
are relatively small and, therefore, the premium income and the life fund develop much
more rapidly than they would if the business were reassured on original terms. Additionally,
if the life office can secure an advantageous rate of interest on its investments, it will benefit to
the extent of interest profit on the actuarial reserves.

The decision between original terms and risk premium reassurance is really an actuarial one
which will depend on the circumstances of the life office. If reassurance is arranged on
original terms, and commission is paid, this has the attraction of reducing the burden of its
expenses, and the reassurer shares the investment problems with the principal office. Even
after an office has been in business for many years, the decision must still depend on the
individual circumstances at the time.

6.5.3 Morbidity Reassurance

It is not just the life risk that can be reassured: morbidity risks can also be reassured. The
most common example of this is income protection insurance (IPI). IPI can be reassured
on an original terms basis or a risk premium basis. This is common for new entrants into
this market who have yet to build up enough underwriting experience. Critical illness
cover (CIC) can also be reassured, either as stand-alone business or as a rider benefit on a life
83
policy.

6.6 Quota Share Reassurance

Quota share reassurance is a type of treaty reassurance whereby the principal office
reassures a fixed percentage of every policy in a particular class of business. For every policy
covered by this agreement the reassurer will get a fixed percentage of the premium and be
responsible for that percentage of the sum assured. The split is negotiated between the
principal office and the reassurer but could be as much as 90% reassurer, 10% principal office.
This arrangement is typically used for high volume protection contracts, for example term
assurance and critical illness cover.

6.7 Reassurance Administration

When a reassurer is negotiating with a life office it will enquire as to the office's experience
and rates. It will also want to be satisfied as to the qualifications and experience of the medical
officers and underwriting staff of the principal office. The medical and policy forms used by
the office will also be examined. A reassurer will only agree to a reassurance treaty when it is
satisfied on all these aspects. Reassurance is sometimes more difficult to arrange if it is on a
with-profits basis on original terms. This is because the reassurer is accepting an
indeterminate future liability over which it has no control. It will have to be sure, therefore,
that it can follow the principal office's bonus rates. Occasionally, with-profits policies are
reassured on a non-profit basis so that the principal office is fully responsible for the bonus. A
young life office with little experience in underwriting may sometimes require assistance in
underwriting substandard lives. In such circumstances, a treaty may be arranged under
which proposal papers are sent to the reassurer, who decides on what terms the proposal can
be accepted. The reassurance of these cases may be arranged on the risk premium basis or on
original terms. It is usual for the reassurer to accept a quota share of each case – for example,
the principal office may retain 20% of each risk, while the reassurer accepts the remaining
80%.

The existence of any reassurance must be borne in mind by the administrative staff of the life
office throughout the term of a policy. If the original policy is being altered to any material
extent, the principal office will need to obtain the consent of the reassurer. When any claim is
being paid, or the policy is being surrendered, the principal office should claim the
appropriate amount from the reassurer. Copies of any necessary proofs (for example, a death
certificate) should be produced to the reassurer, along with its reassurance policy, guarantee,
or certificate for cancellation. It is important to remember that on a claim the principal office
is directly and wholly liable to the policyholder. It must pay the claimant (subject to the
normal proofs) the whole sum assured, whether it has yet received the reassurer's proportion
or not. There is now a trend towards reassurance being administered by electronic data
transfer between companies.

6.8 The Nigerian Life Reassurance Market

Life business is domesticated in Nigeria. Therefore, this means that no foreign reassurance
company is allowed to do life reassurance business directly with any of the life offices in
Nigeria, except through what is called retrocession with any of the locally recognized life
reassurance company.
84
The following companies are recognized as local reassurance companies in Nigeria (in
alphabetical order):

S/N Name of Reinsurance Company

1 African Reinsurance Corporation
2 Continental Reinsurance Plc
3 Nigeria Reinsurance Plc
4 WAICA Reinsurance Corporation Plc

85
 Chapter 7
Introduction to Annuity
Learning Objectives

After studying this chapter, you should be able to:

 know the history of annuities;
 know the definition of an annuity;
 know the various uses of annuities;
 know the ways annuity payments could be made
 know the various uses of annuities;

Introduction
This chapter introduces the candidates to annuity and its various uses. The various types of
annuity products are considered in the next chapter of the course book.

7.1 History of Annuities

The history of annuities dates back to at least 1699 when the Life Assurance and Annuity
Association was founded. Early annuities were not scientifically based in that the age of the
purchaser was not taken into account. However, even if it was realised at that time that
younger lives should pay more for an annuity than older lives, the absence of mortality data
would have made it impossible to do the calculations. In some ways it could be said that
annuities are even older than this in that, in medieval times, churches and monastic bodies
offered life annuities to raise money. The English Government also raised money by the sale
of annuities in the late seventeenth century. Later, as mortality tables and life assurance
developed, it was realised that age was relevant. By the nineteenth century, it became
possible to predict expectation of life for a given age and thus the single premium for an
annuity of a given amount for a life of a given age could be calculated scientifically.

Since then a number of different types of annuity have developed which will be discussed in
the next chapter. Annuities are also used in pension arrangements but this is beyond the
scope of this book.

7.2 Definition of an Annuity

An annuity is a contract to pay a set amount (the annuity) every year while the annuitant (the
person on whose life the contract depends) is still alive.

Annuities are usually expressed in terms of the annual amount payable although in practice
they can be payable monthly, quarterly, half-yearly or yearly. An annuity can be payable in
advance or in arrears. For example, where an annuity is effected on 1st January 2009, the first

86
 st st
annual payment is due on 1 January 2009, if it is in advance, or on 1 January 2010, if it is in
arrears. Where an annuity is payable in arrears, it can either be with proportion or without
proportion. This is because each payment is made at the end of the period to which it relates.

Thus, when the annuitant dies there will be a period since the last instalment date for which
no payment has been made. Under a with proportion annuity, a proportionate payment will
be made to cover this period. This is not the case for a without proportion annuity, where no
payment is made.

Most annuities are paid for by a single premium which is often called the consideration for
the annuity. However, deferred annuities are often purchased by regular premiums. Annuity
rates have reduced substantially over the last few years due to declining gilt yields and
improving life expectancy.

Annuities are commonly used by retired people to provide an income that is guaranteed to
last for life. Annuities are also provided by pension arrangements and these are covered in a
separate course. This section describes the types of life annuity currently available.

Generally, annuities are regarded as the opposite of life assurance in the sense that, unlike in
life assurance when the benefit is payable upon the death of the life assured, annuity benefits
usually cease when the annuitant dies. Therefore, annuities are more of a survival benefit
rather than death benefit.

7.3 Uses of Annuities

Some of the uses of annuity products are:
1. An annuity product may be used to make provision for pensions provision.
2. An annuity product may be used to make provision for children's education.
3. An annuity product may be used by the breadwinner for life protection. This an
annuity which does not depend upon human duration of life.
4. An annuity product may also be used for investment purposes.
5. Also, an annuity product may be used to augment pension.

87
 Chapter 8
Types of Annuities
Learning Objectives

After studying this chapter, you should be able to:

Understand and differentiate between the various types of annuity products .

Introduction
This chapter introduces the candidates to the various types of annuity products after
displaying a good understanding of what an annuity is the immediate previous chapter of
the course book.

8.1 Types of Annuity Products

In this Chapter, we shall be considering some basic types of annuity products. A more in-
depth study shall be made on this at the Associateship Stage of the Examination under the
Life Assurance Course Module.

8.1.1 Immediate Annuity

An immediate annuity contract provides, in return for a single premium, an annual payment
starting immediately and continuing for the rest of the annuitant's life.
These contracts are often purchased by retired people who want an income that is
guaranteed to last for the rest of their life, no matter how long (or short) that may be.

8.1.2 Deferred Annuity

A deferred annuity is a contract which provides for an annuity to be payable commencing at
some future date. The period between the date of the contract and the date the annuity is to
commence – often called the vesting date or the maturity date – is the deferred period. Often,
regular premiums are payable throughout the deferred period. If the annuitant dies during
the deferred period, the office will usually return the premiums paid, with or without
interest. Once the vesting date is reached, the annuity becomes payable and will continue for
the rest of the annuitant's life. Often, a cash option is available on the vesting date in lieu of the
annuity. Many deferred annuities are effected in connection with pension schemes or
personal pension contracts. Full cash options will not be available in those cases.

8.1.3 Temporary Annuity

A temporary annuity is an annuity which is payable for a fixed period or for the annuitant's
lifetime, whichever is the shorter. It thus differs from an immediate annuity, which is
guaranteed to continue throughout life. If the annuitant survives the fixed period, the
annuity ceases. The annuity will also cease if the annuitant dies during that period.
88
8.1.4 Annuity Certain
An annuity certain is a contract to pay an annuity for a specified period regardless of
whether the annuitant survives. It does not depend on the age of the annuitant as
payment is guaranteed for the set period whatever happens.

8.1.5 Guaranteed Annuity

A guaranteed annuity is an immediate annuity which is guaranteed to be payable for a
minimum period regardless of when the annuitant dies. Thus, an annuity guaranteed for ten
years will be payable for life or ten years, whichever is the longer. If the annuitant dies during
the guaranteed period, then the balance of the guaranteed instalments will be payable to the
estate. However, a commuted cash sum may be payable instead.

8.1.6 Joint Life and Last Survivor Annuity

Where an annuity is being used to provide retirement income for a married couple, it would
not be advisable to have a single life annuity because, if the annuitant died first, payments
would cease and the surviving spouse would be left with nothing. This has led to joint life
and last survivor annuities. These contracts pay an annuity for the joint lifetimes of the two
annuitants. Payments usually continue in full after the first death but sometimes reduce by,
say, one-third. These annuities can be in advance or arrears, with or without proportion to the
date of the second death, and with or without guarantee, just like single life annuities.

8.1.7 Increasing Annuity

All the annuities discussed so far are level annuities. However, some offices offer increasing
annuities, where the annuity payments increase by a fixed percentage at each period (say
monthly or quarterly or yearly). This can help to offset the effects of inflation, although in
some circumstances the rate of inflation may well be higher than the fixed rate of increase and
this is where constant monitoring and review are very important. A few life offices have
annuities which are linked to the Retail Prices Index. Unit-linked annuities are also available
and some life offices have annuities linked to a with-profits fund. All these types of annuity
give a lower initial payment than a fixed annuity but better protection against future
inflation.

8.1.8 Capital Protected Annuity

This is an annuity where the total payment is guaranteed to be at least as much as the
premium. The effect is that when the annuitant dies, the office adds up all the annuity
payments made and compares this with the premium. If total payments are less than the
premium, the office will pay the balance as a capital sum to the deceased annuitant's estate.
These annuities are more expensive than ordinary immediate annuities but guarantee that
the annuitant will never receive back less than the premiums paid.

8.1.9 Impaired Life Annuities

A number of offices offer impaired life annuities. These provide higher than normal
annuities for clients with a life expectancy which is below average. The client has to give full
details of their health and the proposal will be underwritten. As a result of the underwriting,
the office may offer an increased annuity. The increase will depend on the degree of

89
impairment and will be individually calculated.

8.1.10 Reversionary Annuities

Reversionary annuities are annuities which make provision for the payments of annuity only
if the annuitant is living at the death of another life. This means that there must be a minimum
of two lives involved for a revisionary annuity to operate – the annuitant and another life,
which is known as the reversionary life.

This type of annuity contract is common between a husband and wife, whereby the
breadwinner of the family would effect it and make himself or herself the reversionary life.
The annuity payment would commence upon his or her death and be made available to the
annuitant.

8.1.11 Equity-Linked Annuities

Equity-linked annuities are annuities in respect of which parts of the premium are being
invested in specialized investments or shares of quoted companies in the stock exchange
market. The annuity payment in terms of value at each periodical installment to be received
by the annuitant would depend partly on the performances of these shares invested in.

These types of annuities are designed to counteract the effect of inflation on the annuity
payment and as such they have been put to preventing the future value of the annuity
payment advantage.

90
 Chapter 9
Historical Development of
Pension and Pension Provision
Learning Objectives

After studying this chapter, you should be able to:

 know the definition of pension;
 know the various reasons for providing for pensions;
 know the category of persons who could provide for pension;
 understand the various factors that determine the level of pension benefit;
 understand what a gratuity is and how it is typically being computed;
 understand what a provident fund is.

Introduction
This chapter introduces the candidates to the historical development of pension and
definition of pension. The factors that determine the level of pension's benefit are well
considered. Gratuity is also explained.

9.1 Definition of Pension

Pension may be defined as a series of payments made to a retiree at regular interval of time
from his previous employment, commencing at any time after his retirement until death. In
some cases, pensions' payment may continue even after the death of the retiree, especially
where the pension's benefit is guaranteed for fixed period of time or where dependants'
benefits are provided along with the basic pension's benefit.

Pension's benefit may be expressed as a fixed amount or subject to increases throughout the
period in which it is payable. It may be payable on a quarterly or half-yearly basis, but it is
usually payable on a monthly basis. The main purpose of pension provision is to enable a
retiree enjoys some of level of standard of living he or she was enjoying while in active
service.

9.2 Various Reasons for Pensions Provisions

The following are some of the various reasons employers do make provisions for pension's
benefits for their employees:
1. to enable a retiree enjoy certain level of standard of living he or she was enjoying while
in active service
2. to comply with the provision of the law in countries where pension's provisions has
been made compulsory.
3. to attract new, qualified and competent employees
4. to retain qualified and competent employees

91
5. some employers see pensions provision as a means of carrying out their social
responsibilities.
6. pensions may be provided in order for the employer to enjoy government incentives
in the form of tax relief and exempts.

9.3 Categories of Who Can Provide for Pensions

Essentially, pensions may be provided by two categories of persons and these are:

 The Employer: This may be the government (for public/civil servants) or private
employers (for those in the private sector)

 The Employee: Where the pensions' provision is contributory, the employee will have
to partly provide for their pension. Also, where it is a non-contributory pension
scheme, the employee may arrange for a personal pension plan.

9.4 Factors that Determine the Level of Pension Benefits

The following are some of the factors that may determine the level of pension's benefits to be
provided for the employees by their employers:
1. Financial status and capability of the employer
2. Strong competition for labour in the country
3. Investment conditions prevailing in the economy
4. Provision of the legislation regarding minimum pensions' benefit
5. Inflation and (deflation) levels
6. Government incentives in the form tax exempt and tax-relief
7. Awareness level by both the employer and employees
8. Nature of the pension's scheme (in terms of whether it is a contributory or a non-
contributory scheme).

9.5 Gratuity
Gratuity may be defined as a lump sum of money payable to an employee by his employer
after putting in a minimum qualifying period of years with a particular employer following
his or her resignation or retirement. The minimum qualifying years for gratuity is usually 5
years, though in some cases, it may be longer than this. The main purpose of a gratuity is to
keep the employees for a longer period in the services of the employer.

Please find below a specimen table for gratuity benefit which has a minimum qualifying
period of five (5) years:

92
 Years of Service Completed Gratuity Benefit as a % of Employee’s
Total Emoluments
5 100%
6 108%
7 116%
8 124%
9 132%
10 140%
11 148%
12 156%
13 164%
14 172%
15 180%
16 188%
17 196%
18 204%
19 212%
20 220%
21 228%
22 236%
23 244%
24 252%
25 260%
26 268%
27 276%
28 284%
29 292%
30 300%

Thus, for an employee, who has spent 5 years of continuous service and resigned his
appointment with an organization that provides a gratuity scheme in line with the above
table, shall be entitled to 100% of his total emolument in the year he resigns as defined in the
organization's handbook for staff. Please note that the total emolument here refers to his
emoluments in the year he is leaving the organization and NOT his total emoluments in the
year he joined the organization. Furthermore, for the purpose of calculating the qualifying
years, probation period is usually included, except if exclusively excluded by the
organization concerned. Lastly on gratuity, some employers may peg the benefit at 300% of
each employee's total emolument in the year he is leaving the organization, whereas, some
others may allow it to continue graduating or once the 300% level is reached, an additional
fixed benefit is added.

93
9.6 Gratuity vs. Pensions

Gratuity Pensions
It consists of a lump sum of money It is usually in the form of a series of money
Payable on resignation or retirement or Only payable on retirement
retrenchment
Non-contributory (i.e. it is fully borne by It may be contributory or non-contributory
the employer)
The minimum qualifying service years is The minimum qualifying service years is usually
usually put at 5 years put at 10 years
Not made compulsory the legislation It may be made compulsory by the legislation
Benefits are usually expressed in terms May not necessarily be expressed in terms of
of employees’ salary employees’ salary
Retirement age not applicable Retirement age is applicable

9.7 Provident Fund

A provident fund is a retirement benefit or fund under which the employee's retirement
benefit is payable as a lump sum on his retirement. It is usually being provided (where
applicable) as an alternative to pension's scheme benefit.

The main advantages of a provident fund over the typical pension's scheme benefit are (a) the
benefit is payable as a lump sum on retirement as against the pension's benefit which is a
series of payments and
(b) the lump sum benefit for the provident fund is usually tax-free, whereas, pension's benefit
is subject to tax.

94
 Chapter 10
Types of
Pension Schemes
Learning Objectives

After studying this chapter, you should be able to:

 understand the various types of pension;
 know what retirement age is;
 know the three types of retirement ages.

Introduction
This chapter introduces the candidates to the various types of pension generally found in
practice. Retirement age is also explained with its different types.

10.1 Types of Pension Schemes

10.1.1 Money Purchase Scheme

In a money purchase scheme, employer's and the employee's' contributions (if it a
contributory pension scheme) are used to purchase annuities for the employees upon
retirement. These contributions are first accumulated for investments on a periodical basis
before being applied to purchase the annuities for each of the employees following their
retirement.

A major advantage of a money purchase scheme is that each employee can monitor his or her
pension's contributions fund as it grows over time and at any particular time he or she can
know the accumulated value of the fund. Furthermore, each employee does not lose
anything whenever he changes job as the accumulated value of his fund is transferrable to the
new employer.

The major shortcoming of a money purchase scheme is that each employee is not able to
predetermine with precision his pension's benefit until when he eventually retires since the
actual annuity benefit will equally be dependent upon the investment conditions prevailing
in the economy as at the time of his retirement.

Lastly, a money purchase scheme is kind of defined contribution pension scheme, but only
that the total contributions accumulated as at the time of retirement for each employee is
used to purchase annuities as against other options which might be available for a pure
defined contribution scheme.
95
10.1.2 Final Salary Scheme
In a final salary scheme, the pension's benefit for the employees is expressed as function or
percentage of each employee's final salary in the actual year of retirement. A final salary
scheme has been put a major advantage of allowing the employees to enjoy pensions in
relation to their terminal salary. Also, it may be put inflation control advantage after
retirement as salary increases over the years for the employees are expected to have taking
into consideration the negative effect of inflation.

The main disadvantage of a final salary scheme is that it does not favour early leavers before
salary increases and those employees who might have been demoted either in the year of
actual retirement or prior to their years of retirement.

Unlike the money purchase scheme which operates like a defined contribution scheme, the
final salary scheme operates like a defined benefit scheme, only that the pension's benefit
under it is defined in terms of each employee's terminal salary.

10.1.3 Hybrid Pension Scheme

Hybrid pension schemes are pension schemes that combine certain features of both the
money purchase (which is like a defined contribution scheme) and final salary (which is like
a defined benefit scheme) schemes to provide the pension's benefits to employees.

In other words, hybrid pension schemes have basically been designed to overcome problems
or challenges which are often associated with both the money purchase and final salary
pension schemes. In a money purchase scheme for instance, employees do not know with
precision the value of their pensions' benefit until when they actually retire, while in the case
of the final salary scheme, employees who leave the employer early and those who are
demoted prior to retirement are at a great disadvantage.

Therefore, with a hybrid pension scheme, the contributions are first accumulated and used
to provide pension benefits as expressed in terms of the employees' final salary in the year of
retirement.

10.1.4 Average Salary Scheme

Under average salary scheme, pension's benefit is expressed as an average of say three to five
years' salaries of each employee prior to retirement. An average salary scheme operates like
that of the final salary scheme, except that the pension benefit is taken as the average of few
years' salaries prior to retirement.

It may equally be referred to as a 'Graded Pension Scheme'. This type of pension scheme like
the final salary scheme does not favour early leavers or those employees demoted prior to
their retirement.

10.1.5 State Pension Scheme

State pension schemes are pension schemes established for those employees who are
working in public service and such schemes shall be run in strict compliance with the
96
provisions of the legislation establishing the state pension scheme.

The state pension scheme may sometimes be referred to as 'The Government Scheme. It is
generally considered applicable to all working in the public service irrespective of the tier of
the government the person is attached to.

10.1.6 Insured Pension Scheme

Insured pension schemes are pension schemes that have been transacted through an
insurance company. Or when put in another way, they are pension schemes which have been
insured with an insurance company. They are sometimes referred to as 'Life Offices
Schemes'. The main advantage of having a pension scheme insured with an insurance
company lies in the range of expertise and experience largely possessed by the life offices in
pension's administration.

10.1.7 Self -Administered Pension Scheme

Self-administered pension schemes are pension schemes that have been privately
administered by the employer through a set of well constituted trustees. The trustees shall
be solely responsible for the investment of the pension's contributions and make sure that all
the benefits are paid to each retiree as and when due. However, please note that, though it is a
privately administered pension scheme, it may partly be insured and partly uninsured or
may even be totally insured with an insurance company. Also, it may be operated in such a
way that the contributions are first accumulated for investment and applied to buy annuities
for the employees following their retirement.

10.1.8 Contributory Pension Scheme

A contributory pension scheme is a pension scheme in which both the employer and
employees contribute towards the pension benefits provision for the employees in a
predetermined percentage. These contributions may be in the same proportion or in
different proportions (usually in case of the latter, the employer's contribution is higher in
proportion).

The main advantages of a contributory pension scheme are as follows:

(i) It generally enhances each employee's pension benefit at retirement (i.e. it augments
the employees' pension benefit)
(ii) Unlike in the non-contributory pension scheme, all the employees under the
contributory pension scheme are guaranteed their accumulated contributions to be
transferred to the new employer whenever they change job.

10.1.9 Non-Contributory Pension Scheme

A non-contributory pension scheme is a pension scheme in respect of which the cost of
funding the pension scheme benefit is totally borne by the employer. In other words, in a non-
contributory pension scheme, it is only the employer that makes contributions towards the
employees' pension benefits.

97
10.1.10 Defined Contribution Pension Scheme
In a defined contribution pension scheme, the employer's contributions (and that of the
employee- where applicable) towards the pension's benefit are predetermined. That is, the
contributions are fixed at the onset. Furthermore, these contributions are accumulated for
investment and shall be used to provide for the employees' pension benefit on retirement.

A major challenge of a defined contribution pension scheme is that the pension benefit is not
known prior to each employee's retirement.

10.1.11 Deposit Administration Pension Scheme

A deposit administration pension scheme is a pension scheme under which each employee
makes a regular deposit of money (contributions) with an insurance company which now
invests these monies on his behalf and on annual basis, the insurance company shall prepare
an account, which shall be credited with the interest earned on invested contributions less all
expenses incurred by the insurance company.

Upon retirement, the accumulated amount may be used to purchase an annuity for the
employee. A deposit administration pension scheme is regarded as outdated in most
countries of the world, especially West African Anglo-phone countries.

10.1.12 Managed Fund Pension Scheme

In a managed fund pension scheme, the pension fund manager (which may either be an
insurance company or other specialized pension fund managers) are given the opportunity
to invest the pension scheme contributions on an explicit basis in specialize investments like
unit trusts. Generally, unit trusts operate by pooling resources (contributions or monies)
from a group of people and with these resources being used to purchase specialized
investments.

10.1.13 Centralized Pension Scheme

This is a pension scheme which has been established by a parent company, but incorporates
pension benefits provisions for all the employees of both the parent company and its
subsidiaries.

10.2 Types of Retirements

There are three types of retirements which are usually associated with pensions' provision
and these are:

10.2.1 Normal Retirement

This is when an employee retires from active service on the actual retirement age as
stipulated either by the provisions of the legislation in the country of operation or the
company's policy (whichever that is applicable). The normal retirement age may vary by
gender and even for the same gender; it may vary from one country to the other. It may
equally vary from one employer (i.e. organization) to the other.

Generally, the normal retirement age for female and male may be put at 55 and 60 years (or 60
98
and 65 years) respectively. However, in few circumstances, the normal retirement age for
both genders may be made the same and as such everybody in the organization has the same
retirement age.

10.2.2 Early Retirement

This is when an employee retires before the normal retirement age as stipulated either by the
provisions of the legislation in the country or the company's policy. Please find below some
of the circumstances under which an employee may be allowed to have early retirement:

 On the ground on ill-health such as mental disorderliness, body incapacitation and

other related ailments.
 After putting in a minimum qualifying service years for pension.

10.2.3 Late Retirement

This is when an employee retires beyond the normal retirement age as stipulated either by
the provisions of the legislation in the country or the company's policy. The main condition
that is usually attributed to late retirements is that the employee concerned is regarded as a
'key staff'.

99
 Chapter 11
Pension Installation
Learning Objectives

After studying this chapter, you should be able to:

 know what pension installation is;
 know the stages involved in pension installation;
 know the various documents which may be need when establishing a pension
scheme.

Introduction
This chapter introduces the candidates to the process of installing a pension scheme by an
employer for his employees. The various types of retirement age applicable in practice are
also considered.

11.1 Definition
Pension Installation is a process of establishing a pension's scheme for a group or set of
employees in an organization. Generally, there are four stages involved, though the stages
may slightly vary from one country to the other. These stages are as follows:

 Creation of the legal basis for the pension's scheme

 Obtaining approval from the relevant tax authority for the purpose of tax relief and
tax-exempt.
 Determining whether the pension scheme is to be contracted out or not of the state
pension scheme.
 Informing the employees (communicating with the employees).

We shall now begin to explain each of these stages in details.

11.1.1 Creation of the Legal Basis for The Pension's Scheme

This is the first stage in pensions installation. It is the creation or establishment of a document
which shall serve as the legal basis for the pension scheme between the parties involved. It
should be noted that the main purpose of creating the legal basis is to make the pension
scheme as a contract be legally enforceable at law in case of any future dispute that may
arise between the employer and employees. The document used to create the legal basis
may takethe form of “an exchange of letter” or “a trust deed”.

An exchange of letter is only used as the document for the legal basis where one or two
employees are involved. However, where there are three or more employees the document
used is the “trust deed” (though, an interim trust deed may be in place pending the
perfection of the trust deed, as it may take longer time before it could be concluded).
100
11.1.2 Obtaining Approval from the Relevant Tax Authority for the Purpose of Tax
Relief and Tax-Exempt
The next stage after the creation of the legal basis for the pension scheme is seeking or
obtaining approval from the necessary tax authority for the purpose of tax relief on the
pensions' contributions and tax-exempt on the investment income accrued or earned for
investing the pension's contributions. However, please note that if the approval is not sought
for, nor sought for but not granted, it does not invalidate the pension scheme as a contract.
The only effect it would have on the scheme is that there will not be anytax relief neither will
the scheme be tax-exempt.

The following are the documents required in order to obtain the approval:
1. Receipt of the payment of the prescribed application fee.
2. Submission of a copy of exchange letter or trust deed (or an interim trust deed).
3. A copy of the Actuarial reports on the scheme.
4. Information regarding the method of funding the pension scheme.
5. Submission of the name of tax district where the employer is located
6. Information regarding the initial members of the scheme.
7. Information regarding any existing scheme
8. Information regarding the directors of the company
9. A copy of the pension scheme policy where it is insured with an insurance company.
10. A schedule showing the names of members, annual salary and contributions of both
the employer and employees.

11.1.3 Determining whether the pension scheme is to be contracted out or not of the
state pension scheme
The employer needs to decide on whether the pension scheme shall be contracted out or not
of the state (government) pension scheme. If the pension scheme is going to be contracted out
of the state pension scheme, then the employer must provide benefits higher than that of the
state and a certificate must be obtained to that effect. Furthermore, before the certificate is
released, the employer must have informed his employees of his intention to provide higher
benefits and their consent obtained.

11.1.4 Informing the Employees

This regarded as the last stage in pensions installation and may also be referred to as
communicating with the employees. After the first three stages have been completed, the
employer shall communicate all the rules, conditions and other terms governing the pension
scheme to all the qualifying employees.

Examples of such information expected to be communicated are as follows:

1. when does an employee becomes eligible to join the scheme
2. the applicable retirement age
3. minimum qualifying service years
4. the categories of employees covered
5. whether the pension scheme is contributory or non-contributory
6. what kinds of benefits are available e.t.c.

101
 Chapter 12
Trusteeship and Privately
Administered Schemes
Learning Objectives

After studying this chapter, you should be able to:

 define a trust;
 identify different types of trust;
 identify the ingredients of a valid trust;
 give details of how life assurance policies may be placed under trust;
 explain what matters a life office must consider when dealing with a policy under trust.

Introduction
This chapter introduces the institution of a trust. The legal definition of a trust is given as well
as other ways in which a trust may be defined. The various types of trusts are considered.

12.1 Definition of a Trust

The legal definition of a trust is an equitable obligation binding the trustee to deal with
property over which he has control (called the trust property) for the benefit of certain
persons (called beneficiaries) of whom he may himself be one, and any one of whom may
enforce the obligation. A trust is a means of arranging property to be for the benefit of
other persons, without giving them full control over it. This is often done for persons who
could not otherwise appreciate or deal with the property correctly: for example, minor
children. A family head may use a trust as a means of giving property to his or her family
while retaining some control over it by being one of the trustees. Many trusts are set up for
tax reasons.

The nub of the arrangement is that the trustees possess the legal ownership of the trust
property, but cannot treat it as their own personal property. The trustees have to use the
property for the benefit of the beneficiaries according to the terms of the trust. In every trust
there is therefore a division of ownership. The trustees possess the legal interest; the
beneficiaries possess the beneficial or equitable interest. The beneficiaries can enforce their
rights against the trustees by legal action if necessary.

A trust can be distinguished from a contract in that there need be no agreement between the
person creating the trust and the beneficiaries, and there does not have to be any
consideration. The law of trusts originated in equity rather than in common law, and for a
long time trusts were not recognised at common law. Trust law has developed over the
102
centuries on equitable principles, although much of our trust law is now contained in the
Trustee Act 1925 and the Trustee Act 2000.

12.2 Types of Trust

There are a number of different types of trust and these are dealt with below. In addition to
trusts created voluntarily, which are considered in this chapter, there are trusts created, at
least in the main, involuntarily during bankruptcy proceedings. As explained in the
preceding chapter, the trustee in bankruptcy is trustee of the bankrupt's property for the
benefit of the creditors in general.

12.2.1 Express Trusts

An express trust is a trust intentionally and expressly created, usually by some written
method such as a deed or a will. It is called 'express' because the trust is expressly set out. A
trust of personal property can be made by an express oral declaration. A trust of a life policy is
normally made by a declaration in writing, or a deed.

12.2.2 Implied Trusts

An implied trust is one which is not created expressly but is implied from the actions or
circumstances of the parties. An example of an implied trust would be where a partnership
purchases property and arranges for the conveyance to be to one of the partners only, who
will then hold the property on trust for all the partners even if there is no formal written
document setting this out.

12.2.3 Resulting Trusts

A resulting trust arises where there is a failure of the trust on which the property is held. As
the purpose of the trust can no longer be fulfilled, there is said to be a resulting trust for the
creator of the trust, and ownership of the property reverts to that person. A good example of a
resulting trust involving life assurance is Cleaver v. Mutual Reserve Fund Life Association (1892)
where a man effected a policy on his own life on trust for his wife, if living at his death, but
otherwise for his estate. He was then murdered by his wife and the office faced a claim from
the wife's assignee. It was held that it was against public policy to allow a person to benefit
from their own criminal act, and this defeated the claim of the wife and anyone deriving title
from her. The trust had thus failed and there was a resulting trust of the policy moneys for the
husband's estate.

12.2.4 Bare Trusts

A bare trust is where the trustee's sole duty is to transfer the trust property to the appropriate
beneficiary. An example of this would be a claim under a Married Women's Property Act
policy for a single adult beneficiary, 'on trust for X absolutely'. The trustees receive the
policy moneys from the office and their sole duty is to transfer it to the beneficiary, often the
wife.

12.2.5 Successive Trusts

A successive trust is where property is held in trust for a succession of interests taking effect
one after the other. For example, a marriage settlement might provide for property to be on
trust for a husband for his life, thereafter for his wife for her life, and on her death for the
103
children of the marriage in equal shares. In this way the trust property is subject to a
succession of interests. The final interest in a successive trust is called the ultimate trust. In the
above example, the ultimate trust would be for the benefit of the children.

12.2.6 Settlements
Many trusts are called settlements, and the term is often used as an alternative to the word
trust. Strictly speaking however settlement is a trust where there are successive interests –
such as 'to my wife for life and thereafter our children in equal shares'. The wife is the life
tenant and is entitled to the income from the trust property, but cannot touch the capital. The
children do not get their share of the capital until their mother dies.
As well as being the name given to the person creating a settlement, the term settlor is also
used in simpler trusts to describe the person creating the trust.

12.2.7 Fixed Trusts

In the trusts described above, the beneficiaries are fixed at outset and cannot subsequently be
changed by the settlor or the trustees. This can be inconvenient if there are changes in family
circumstances or taxation and this has led to the development of flexible power of
appointment trusts.

12.2.8 Power of Appointment Trusts

A 'power of appointment trust' is one where a power exists to vary or appoint beneficiaries. A
typical power of appointment trust wording would be as follows:“on trust for all or such one or
more of my wife AB and the children of our marriage in such share or shares as the trustees shall from
time to time by deed or deeds revocable or irrevocable appoint and subject to and in default of any such
appointment and insofar as any such appointment shall not extend or shall fail for any reason on trust
for my wife AB absolutely”.

The power of appointment is given to the trustees for the time being to use at their
discretion. The wording provides for a 'gift over' in case an appointment is never made.
The 'gift over' beneficiary is sometimes called the 'default' beneficiary, and has the interest in
possession forinheritance tax purposes. The interest in possession is the right to any income
of the trust, as and when it arises. This type of trust is very flexible, as it gives the trustees
power to vary the beneficiaries according to family circumstances. It can cope with deaths
and births in a way which a fixed-interest trust could not. The power can be exercised only
among the prescribed class of beneficiaries. Most life offices use a power of appointment trust
as their standard trust form for the majority of circumstances. Power of appointment trusts
without a default beneficiary have no interest in possession and are often called
discretionary trusts.

12.2.9 Statutory trusts

Statutory trusts are trusts specifically created by statute. A common example is that a policy
effected by a man on his own life for the benefit of his wife or children will create a trust under
the Married Women's Property Act 1882. Trusts created under this Act and its Scottish and
Northern Irish equivalents are sometimes known as the statutory trusts.
Another type of statutory trust is that which arises in certain cases of intestacy under the
Intestates' Estates Act 1952.
104
12.3 Trust Creation
Trusts may be created by deed, by will or by statute. As we have seen earlier, a trust may be
created over personal property verbally, or even be implied from the conduct of the parties.
Possibly the most usual method of creating a trust is by the property owner (or settlor) A
executing a deed assigning the property, for example, to trustees A, B and C for the benefit of
beneficiaries X, Y and Z. The deed will specify the trust property and name the trustees and
beneficiaries. It will also set out the powers of the trustees and the rights of the beneficiaries.
The deed will have to fulfil the normal requirements of a deed of assignment. It will have to be
signed by the settlor and ideally also by the trustees to show their acceptance of that duty.
Trusts of life policies are usually created by a declaration of trust form supplied by the life
office.

12.3.1 The Three Certainties

Whatever method is used to create a trust, the following 'three certainties' must be present if
the trust is to be valid (Knight v. Knight (1840)):

 The words used must be on the whole imperative: that is, they must
unmistakably show that a trust is intended. However, as equity looks at the intent rather than
the form, no special form of words is necessary. Using the words 'on trust for' would make it
certain.
 The subject matter must be certain: that is, the property to be subject to the trust
must be specified.
 The objects of the trust, the beneficiaries, must be certain: This can be achieved
simply by naming the beneficiaries: for example 'on trust for X, Y and Z absolutely'. It can also
be achieved by describing the beneficiaries as a class: for example, 'on trust for the employees
for the time being of the XYZ Co. Ltd'. Whatever words are used to specify the beneficiaries; it
must be possible to ascertain with certainty at any time exactly who are the beneficiaries.
Thus, although a class of beneficiaries may fluctuate from time to time (for example, the
employees of the XYZ Co. Ltd) it is always possible to state at any time exactly who are
members of that class. This certainty is not required if a trust is exclusively for charitable
purposes.

12.4 Trustee
As has been explained previously, a trustee is the owner at law of the trust property although
they are bound to use it for the benefit of the beneficiaries. This section considers the methods
of appointment and retirement of trustees. It also explains how trusteeship is affected by the
death of a trustee, and covers their powers and duties. Anyone over 18 and sane can be a
trustee.

12.4.1 Appointment of Trustee(s)

Under a trust created by deed, the initial trustees will be appointed by the deed itself. Where a
trust is created by a will then this should name the trustees, who are usually the executors as
well. Under a trust set up under the laws of intestate succession, the administrators will be
the trustees. Trustees are mortal and therefore it may be necessary to replace a trustee or
105
trustees at some time in the future. For this reason, a trust deed will often name the person or
persons (the appointor(s)) entitled to appoint new trustees. If there is no such provision, the
power to appoint new trustees rests with the surviving trustee(s) or the legal personal
representatives of the last surviving trustee.

Under the Trustee Act 1925, s.36, a new trustee can be appointed to replace a trustee who:
• is dead;
• remains out of the UK for more than a year;
• desires to be discharged;
• refuses to act;
• is unfit or incapable of acting (e.g. has become bankrupt or insane);
• is an infant.

A trustee can appoint an attorney to act for them (Trustee Delegation Act 1999). This is useful
if the trustee is going abroad for a while or is about to have a serious operation. The period of
delegation cannot exceed a year. The power must be attested by a witness and written notice
of its execution and the reason for it must be served on the appointor and all co-trustees
within seven days. There is no limit to the number of trustees a trust can have, except that the
maximum number for a settlement of land is four (Trustee Act 1925, s.34).

12.4.2 Death of Trustee

The position on the death of a trustee is governed by s.18 of the Trustee Act 1925. If one of two
or more trustees dies, their powers can be exercised by the surviving trustee(s). The only
exception to this is that a sole trustee cannot give a good receipt for the proceeds of a sale of
land unless that sole trustee is a trust corporation. If a sole or last surviving trustee dies, then
their legal personal representatives can act as trustees until an appointment is made by the
appointor. If no appointor was specified in the trust deed, or if they are now dead, the legal
personal representatives can continue to act as trustees or can appoint replacement trustees
under s.36. A trust is not made void by the death of all the trustees.

12.4.3 Discharge of Trustees

As we have seen earlier, a trustee can be replaced under s.36 of the Trustee Act 1925. If a
trustee wishes to retire without a new trustee being appointed, they can do so by deed under
s.39 of the Act. This can be done only if there will remain at least two individual trustees or a
trust corporation. In addition, the co-trustees and the appointor must consent to the
retirement in the deed.

12.4.4 Trust Corporations

A trust corporation is defined as the Treasury Solicitor, the Official Solicitor, other officials
prescribed by the Lord Chancellor, or a corporation either appointed by the court in any
particular case to be a trustee or entitled by rules made under the Public Trustee Act 1906,
s.4(3) to act as custodian trustee. Therefore, a corporation can be a trustee, and many
companies who meet the statutory criteria do act as such. A common example of trust
corporations is the major banks, who offer their professional services in the administration of
trusts and wills.
106
The advantage of having a corporate trustee is that it cannot die like an individual person.
The continuity of administration is therefore not impaired by the death of an individual. A
trust corporation may also have the professional expertise necessary for the running of a
large or complex trust. The trustees may have to deal with complicated matters of investment
and taxation, and the professional advice of a trust corporation specialising in this area can be
valuable. However, the services of a trust corporation have to be paid for and the scale of
charges may make this disadvantageous for a small or simple trust.

12.4.5 Trustees' Duties and Powers

The first duty of a trustee is to become familiar with the terms of the trust and then to gain
control over the trust property. This is done by obtaining possession of the property or of
whatever title documents represent it, such as share certificates. The trustees must also
ensure that their names are entered as owners of the property on any relevant register. For
example, a company's register of shareholders, or the Land Registry for a trust comprising
registered land. The trustee must then administer the trust property for the benefit of the
beneficiaries, in the manner set out in the trust. A trust deed will normally give the trustees
specific powers to deal with the trust property. For example, a trust fund containing a
portfolio of shares will often give the trustees power to buy and sell shares as they think fit, in
order to enable them to maximise the beneficiaries' funds by taking advantage of market
opportunities.

The Trustee Act 1925 contains some statutory powers which can be exercised in addition to
those expressly given in the trust. Section 31 gives trustees power to apply trust income to
any infant beneficiary in order to provide for their maintenance or education. Section 32
gives trustees power to apply capital for the advancement of a beneficiary, even if that
beneficiary's interest is contingent or liable to be defeated by the exercise of a power of
appointment or revocation, or to be diminished by an increase in the class to which they
belong. Any such payment would, however, have to be brought into account as part of the
beneficiary's share if they later became absolutely entitled. These powers can be varied by the
wording of a trust.

A trustee has a duty to invest any trust money not immediately required to be paid out. Trust
deeds often include powers to effect and maintain life policies. In exercising their duties
under a trust, trustees must use the utmost diligence to avoid any loss. If they depart from
this standard of care, the law will hold them liable for any loss caused by a breach of this duty.
Failure to act can amount to a breach of duty in some cases. However, when a trustee is
exercising a discretion as opposed to a duty, a different standard of care is required. This is to
act bona fide with the diligence that a prudent man of business would use in managing his
own affairs (Speight v. Gaunt (1883)).

Trustees must keep proper accounts of the trust property and these must be produced and
shown to the beneficiaries if required. The beneficiaries are also entitled to all reasonable
information concerning any dealings and investments of the trust fund. Where a trust
corporation is appointed as trustee, it will normally insist on there being a 'trustee charging
clause'. The powers commonly given to a trustee in a trust including a life policy are set out
107
later in the chapter.

12.4.6 Trustee Act 2000

This Act came into force on 1stFebruary, 2001 and applies to England and Wales only in the
UK. It sets out some of the duties and powers of trustees, in particular with regard to
investment. It states that trustees have a duty of care to use such care and skill as is reasonable
in the circumstances, having regard in particular to:

 any special knowledge or experience that they have or hold themselves out as
having; and
 if acting as trustee in the course of a business or profession, to any special
knowledge or experience that it is reasonable to expect of a person acting in the
course of that kind of business or profession.

The duty of care applies to matters such as investment, acquiring land, appointing agents,
insuring and valuing trust property, subject to anything to the contrary in the trust wording.

The Act gives trustees a specific power to invest anywhere as if they were absolutely entitled
to the trust assets. This general power of investment replaced the previous system of
approved investments under the Trustee Investments Act 1961, which has been repealed.
Trustees must have regard to the standard investment criteria when exercising any power of
investment. Trustees must from time to time review investments and consider whether,
having regard to the standard investment criteria, they should be varied.

The standard investment criteria are:

 suitability to the trust; and
 diversification as far as is appropriate.

Before exercising any power of investment, trustees must obtain and consider proper advice
about the way it is exercised. They must do the same on reviews. This does not apply if the
trustees reasonably conclude in all the circumstances that investment advice is unnecessary
or inappropriate. Proper investment advice must be given by a person believed by the
trustees to be qualified to give it by ability and practical experience. The general power of
investment applies to all existing and new trusts subject to any restriction in a specific trust
wording. However, no investment restriction in a pre-3rdAugust, 1961 trust can restrict this
general power. Trustees may acquire land or property for a justifiable reason and have the
powers of absolute ownership over it, subject to any restriction in the specific trust wording.

Trustees can authorise any person to exercise any or all of their delegable functions as an
agent. However, trustees cannot delegate the functions of distributing trust assets, deciding
whether payments come out of income or capital or appointing a trustee. The agent could be
a trustee and if two or more people are agents for the same function then they must act jointly.

More so, the agent cannot be a beneficiary of the trust. The trustees have specific power to pay
an agent for work done for a trust. The trustees will not be liable for the acts or defaults of an

108
agent unless they have failed in their duty of care. If trustees delegate investment functions
they must have a written policy statement for investments and a written agreement with the
agent including compliance with the policy statement. Trustees must keep these
arrangements under review.

Any trustee who is a trust corporation or a professional (but not a sole trustee) is entitled to
reasonable remuneration for services rendered to the trust if each other trustee has agreed in
writing, even if those services could be provided by a lay trustee unless the specific trust
wording says different. Trustees are also entitled to be reimbursed from trust funds, or may
pay out of trust funds, expenses properly incurred by them acting on behalf of the trust.
Trustees may insure any trust property and pay premiums out of the trust and those
premiums can come from income or capital. The Act applies to personal representatives
administering a deceased person's estate as well as to trusts created during a settlor's
lifetime.

12.5 Beneficiaries
As we explained earlier in the Chapter, it must be possible to ascertain the beneficiaries of a
trust at any particular time. As long as this requirement is fulfilled, the beneficiaries need not
be named but can be described, either singly (for example, 'my wife') or as members of a class
(for example, 'my children'). Often a beneficiary will be named but it is common for
beneficiaries to be described as a class to gain extra flexibility. For example, if a man has three
children X, Y, and Z and wants to set up a trust for them, he may name them as beneficiaries. If
he then has another child A, this child will not be able to benefit from the trust. However, if
the original trust was for 'all my children in equal shares', then future children such as A
couldbenefit.

12.5.1 Types of Beneficial Interest

A beneficiary may have an absolute interest, a life interest, a reversionary interest, or a
contingent interest. A life interest means that the beneficiary is entitled to the income from the
trust property for life, but cannot touch the capital. A beneficiary who has a life interest is
known as a life tenant. When a life tenant dies, his or her life interest ceases and the property
passes to the holder of the reversionary interest (or remainder man). A reversionary interest
is therefore the right to trust property after the termination of a life interest.

A contingent interest is one that is subject to a contingency and thus may not come into
possession. An example is A's interest where property is 'on trust for B if he is alive at my
death and if not for A absolutely'. A beneficiary under a power of appointment trust has a
contingent interest in the sense that an appointment to him may not be made, or if made may
be revoked. A beneficiary can be a sole beneficiary or one of several joint beneficiaries. Joint
beneficiaries will take in equal shares unless the wording of the trust says otherwise.

12.5.2 Enforcing the Trust

In general, the beneficiaries cannot exercise control over the trustees during the currency of
the trust. The trustee is bound by the trust wording and the rules of equity, but personal
judgment can be used in exercising the powers and duties involved. A trustee does not have
always to consult the beneficiaries and comply with their wishes. Nevertheless, the
109
beneficiaries do have methods whereby they can ensure that the trust is properly
administered. One way is by using their right to insist that the trust accounts be audited by a
solicitor or accountant. A beneficiary can also apply to the court for the determination of a
specific question, or even for directions as to the general administration of the trust.

The beneficiaries can, in some cases, put an end to the trust under the rule in Saunders v.
Vautier (1841). Under this rule, if the beneficiaries are all ascertained, if there is no possibility
of further beneficiaries, and if they are all of full age and capacity, they can then direct the
trustees to hand the trust property over to them absolutely. This can only be done if the
beneficiaries are together entitled to the whole beneficial interest. When this is done it
effectively puts an end to the trust. A trustee who commits a breach of trust or acts
fraudulently, will be liable for any loss caused to a beneficiary. An aggrieved beneficiary can
therefore enforce their rights against such a trustee by legal action.

12.6 Trusts Including Life Policies

If a trust includes a life policy, the trust deed will often include some or all of the following
provisions:
 a covenant by the settlor to pay premiums;
 a covenant by the settlor to restore the policy if it becomes void;
 a covenant by the settlor to revive, or effect, a new policy if the original policy lapses;
 a power for the trustees to pay premiums out of the trust property;
 a power for the trustees to borrow to pay premiums;
 powers for the trustees to surrender the policy, to convert it, or to exercise any option
in it;
 a wide power for the trustees to deal with the policy in any manner they think fit.

12.7 Married Women's Property Act 1882 (MWPA)

Life assurance policies may be effected under trust from outset in two ways. They can either
be under the Married Women's Property Act or under a non-statutory trust. This section
deals with the Married Women's Property Act (commonly called the MWPA) and another
section below deals with non-statutory trusts.
Section 11 of the Act enables a person to create a trust over a life policy simply by expressing it
to be for the benefit of a spouse, civil partner or children.

12.7.1 MWPA policies

The policy must be effected by a man on his own life or a woman on her own life. Despite the
title of the Act, the proposer does not have to be married and therefore a bachelor, spinster,
widower or widow may utilise the provisions of the Act. Although the Act applies only to
England and Wales, the proposer does not have to be resident or domiciled there. If the
contract is made in England then it can be under the Act and be governed by English law.

As the policy must be effected by a man on his own life or a woman on her own life, joint life
policies cannot be effected under the Act. If a joint life trust policy is required, it will have to
be effected under a non-statutory trust. The policy has to be a policy of assurance on life. This
phrase is not defined in the Act, but would extend to all types of life assurance except
110
annuities or income protection insurances. The policy must be expressed to be for the benefit
of husband, wife, civil partner or children. It is not necessary for the Act to be mentioned in
the policy but this is preferable for avoidance of doubt. The words used do not have to
expressly declare a trust, as long as they are such as to bring it within the Act.

An example of this principle is the case of Gladitz, Guaranty Executor and Trustee Co. Ltd v.
Gladitz (1937). Gladitz took out a policy covering death by accident and also providing
disablement benefits. The policy provided that: 'it is understood and agreed that all claims
under the policy shall be payable to Winifred Gladitz, wife of the assured, if she is living at
the happening of the event upon which the claim becomes payable'. It was held that a policy
which provides a death benefit and also provides for payment on other events is nevertheless
a policy of assurance effected by a man on his own life within the Act, even though the Act is
not mentioned in the policy. It was also held that the wording concerning claims was
sufficient to express it to be for the benefit of the wife. The policy did therefore create a valid
trust under the Act.

12.7.2 MWPA beneficiaries

The class of beneficiaries is restricted to spouses, civil partners and children. 'Children' does
not include stepchildren or grandchildren but does include illegitimate children from 1
January 1970 (Family Law Reform Act 1969). Adopted children can also be included since
1958 (Adoption Act 1958).The beneficiaries can be named or unnamed. If the beneficiary is
named then there can be no doubt as to the identity, but if the beneficiary is described by
relationship only, then the wording will have to be examined to ascertain exactly who is the
beneficiary.

An example of this type of problem was the case of Re Collier (1930). The policy was expressed
to be for the benefit of the life assured's wife, but she was not named. The wife died before the
life assured, who did not remarry. The court held that the trust was for the benefit of the
person who by surviving the life assured became his widow. As on the death of the life
assured there was nobody of this description, the trust had ceased and the policy reverted to
the estate of the assured (a resulting trust).

A similar case was Re Browne's Policy, Browne v. Browne (1903), where the policy was for the
benefit of the assured's 'wife and children'. The wife living at the date of the policy died, but
the life assured remarried and was survived by his second wife and children of both
marriages. It was held that the policy moneys were for the benefit of the second wife and all
the children jointly.

The situation is different where the beneficiary is named. This was shown in the case of
Cousins v. Sun Life Assurance Society (1933). Here a husband effected a policy under the
Act for the benefit of 'my wife Lilian Cousins'. She died during his lifetime and he tried to
obtain the surrender value. It was held that as the wife was specifically named she took a
vested interest immediately the policy was effected. This interest then passed to her estate on
her death. You will thus see that the death of an absolute, named beneficiary does not
111
destroy the interest, which continues for the benefit of the estate. It is unusual to leave the
wife unnamed in modern trust wordings. However, in view of the rising incidence of
divorces this could prove advantageous as it would be the life assured's current wife who
would benefit from any policy proceeds.

If a policy is effected for the benefit of a named wife, then a subsequent divorce will not of
itself destroy her interest. However, when granting a decree of divorce, nullity or judicial
separation the court may make an order varying, for the benefit of the marriage partners and
their children, the terms of any settlement made on the partners (Matrimonial Proceedings
and Property Act 1970). Therefore, a husband can apply during divorce proceedings for the
terms of a trust policy to be varied and the court may grant this. An example of this principle
(under previous legislation) is Gulbenkian v. Gulbenkian (1927), where the court agreed to
delete the wife's interest under an MWPA policy. MWPA trust wordings involving child
beneficiaries can make the interests of children contingent on their attaining majority or
surviving the life assured. Child beneficiaries may be named or unnamed. As previously
explained, leaving children unnamed caters for the possibility of future children.

When drawing up a trust wording it is important also to consider whether the beneficiaries
are to be restricted to the children of the existing marriage, or to any legitimate child of the life
assured. Since the Family Law Reform Act 1969, where the words 'child' or 'children' are used
unqualifiedly, they will include illegitimate children. The position on the death of a child
before that of the life assured must also be determined. A deceased child's interest can be
made to pass to that child's estate or to any brothers and sisters, according to the wishes of the
settlor.

A power of appointment trust can be created under the MWPA as long as the class of potential
beneficiaries is restricted to spouse, civil partner and children. This is useful to retain
maximum flexibility for the future and if the life assured is not at present sure how he or she
wants the benefit split. A 'gift-over' provision should be inserted in case no appointment is
made.

12.7.3 Trustees of MWPA policies

Trustees can be appointed by the policy itself, and nothing further is necessary to perfect their
legal title. The assured can also appoint trustees by a memorandum under hand.
Appointment of trustees is generally made in the policy. In the common case of a policy for
the benefit of the wife, the husband will appoint her and himself as joint trustees. He can
thereby retain some control over the policy during his lifetime but she, as surviving trustee,
can claim the policy proceeds on death simply and speedily by producing the policy and
proof of death. The assured can vest the power to appoint new trustees in themselves or in
another person or persons. By retaining this power, again they can exercise control over the
trust during their lifetime.

If no appointment is made, the assured themselves will be the trustee, and if they die then
their duty passes to their legal personal representatives. They will need a grant to prove their
title and thus it is wise to ensure that there is always at least one trustee in existence at the
112
death of the life assured, in order to simplify and speed up claim settlement. After the issue of
an MWPA policy, new trustees can be appointed and existing trustees can be discharged in
the ordinary way, as earlier explained above.

12.7.4 Creation of an MWPA trust

A trust under the MWPA can be created by using any suitable words in a policy taken out
by a person on their own life for the benefit of spouse, civil partner or children. No
particular form of words is required and the Act need not even be mentioned(see the
Gladitz case earlier mentioned above).In practice, the procedure is that along with the
proposal form, the assured submits an MWPA form of request. This requests the life
office to issue the policy under the Act and names the beneficiaries and trustees.

A form of request, is required tom be completed at inception. The first part of the form relates
to a specific proposal. The form then goes on to name the beneficiaries and appoint the
trustees. The trustees are given wide powers to deal with the policy, and there is a trustee
charging clause in case a professional trustee is appointed. The counter-signatures of the
trustees are not legally necessary, but in practice they are valuable to show that the trustees
concur in and acknowledge their appointment. Difficulties could occur on a claim if a trustee
was not aware of their appointment. When the policy is issued, it will have a clause on the
lines of 'This Policy is effected under the Married Women's Property Act 1882 (section II) for
the benefit of X absolutely. Trustees appointed are A and B.' Often the full trust wording will
be repeated in the policy or on an attached memorandum. The trust is then fully created.

12.7.5 Creditors and MWPA policies

Greater protection from creditors is given to MWPA trust policies than to any other
settlement a person may make. Some trusts can be avoided by the trustee in bankruptcy
within five years of being set up. In the case of an MWPA policy the trustee cannot claim the
interests of the spouse, civil partner and children, even if the policy was effected with intent
to defraud creditors. The only claim a trustee in bankruptcy can have is for premiums paid by
the bankrupt where the policy was taken out with intent to defraud the creditors. This
protection is almost unique in English law.

12.8 Non-Statutory Trust Policies

A policy can be written under trust even though it is not under the MWPA; such a policy can
be termed a 'non-statutory trust policy'. A non-statutory trust policy would be required if the
beneficiaries were outside the limits of the Act: for example, partners in business. A non-
statutory trust would also be required if the policy were a joint life assurance.

A non-statutory trust policy is similar to an MWPA policy, but whereas a policy under the Act
creates a valid trust from outset, care is needed in drafting the trust forms to ensure that a
non-statutory trust is completely constituted. If not completely constituted, the trust can be
revoked by the settlor, and this possibility could have unfortunate taxation implications.
Procedure varies from company to company but normally the proposer completes a
declaration requesting the office to issue the policy under the trusts set out in it. The
declaration would be similar to the MWPA form of request, but instead of appointing

113
trustees it would request the company to issue the policy to the assured as sole trustee. The
company might then incorporate the trust wording into the policy, possibly on its face or
more probably as a separate page or attachment. Once the policy has been issued, the
assured can appoint further trustees by means of a simple deed of assignment. This will
often be supplied by the company.

Occasionally there may be a purported appointment of trustees merely by naming them in

the declaration or on the policy. Unlike the MWPA trust, this is not fully effective as the legal
title to the policy would not vest in the additional trustees. It is therefore submitted that this is
a dangerous practice which could result in the 'trustees' not being able to give the office a
valid discharge on a death claim when the only properly constituted trustee, the assured,
dies. Where a joint life second death policy is being effected under trust, it is advisable for a
third trustee who is not a life assured to be appointed, to make sure there will be a trustee
alive when a death claim arises.

12.8.1 Stamp Duty

There is no longer any stamp duty on assignments or declarations of trusts of life policies and
the stamp duty exemption wording is not therefore required – Finance Act 2003 s.125.

12.9 Dealings with Trust Policies

The trustees of a trust policy are the owners of the policy at law, and the life office should deal
with them rather than with the beneficiaries. Any forms of discharge will need to be
signed by all the trustees, as will any loan applications or policy alteration authorities.

12.9.1 Powers of Trustees

Most trust wordings will give the trustees specific powers or a more general power 'to deal
with the policy in any manner that they think fit'. One legal view which has strong support
holds that if the policy conditions give the assured the power to surrender, convert and so on,
these rights pass to the trustees to whom a policy is assigned unless the trust wording
expressly or implicitly prohibits these things. However, the Married Women's Policies of
Assurance (Scotland) (Amendment) Act 1980 made it clear that a trustee of a policy under
the 1880 Act does have power, subject to any specific terms of the trust, to exercise any
options in the policy or to surrender it. Where a policy contains options, these must be
exercised for the benefit of the beneficiaries, as the rights under the options are part of the
trust property unless specifically excluded in the trust wording.

If an office is aware that the trustees' intended action is a breach of the trust, it should not
accede to their request. If it allowed the transaction to take place then it would be liable to the
beneficiaries, on the principle that a person dealing with a trustee cannot obtain a good title
under a document executed in breach of trust if that person knew of the breach. However,
there is no obligation on a life office to investigate the situation unless it has good reason to
suspect a breach. If payment is being made under a trust policy and the office knows the
purpose for which the money is required, it must be satisfied that it is within the purposes of
the trust. If the office knows that the trustees will use the money in breach of trust it will not
get a valid discharge.
114
12.9.2 Dealings by Beneficiaries
A beneficiary cannot claim against the life office, as he does not have the legal interest. A
beneficiary can, however, deal with his beneficial interest and it is possible for the beneficial
interest to be assigned absolutely or mortgaged. Any person acquiring the beneficial interest
should serve notice of this on the trustees.

When considering beneficiaries' rights, you must always remember that if the beneficiaries
are all of full age and capacity, together entitled to the whole beneficial interest, and there is
no possibility of further beneficiaries, they can put an end to the trusts or vary them under the
rule in Saunders v. Vautier (1841). The working of this rule was illustrated in Re Smith, Public
Trustee v. Aspinall (1928). In this case the trustees held a fund on trust with a discretion to
apply property for the maintenance of a wife, with gifts-over to the children. All the
beneficiaries were ascertained and were of full age and capacity. It was held that the trustees
must allow a mortgage effected by the beneficiaries, because they could require the trustees
to hand over the whole fund under the rule in Saunders v. Vautier (1841).

12.9.3 Claims under Trust Policies

When a claim is made by trustees of a life policy, their title should be examined. The
documents of title required would be:
 the policy;
 the deed of appointment of trustees (unless the policy is under the MWPA);
 any deeds of appointment of new trustees;
 any deeds of retirement of trustees;
 the death certificates of any trustees who have died.

When the office is satisfied as to the trustees' title, it can safely pay the claim, unless it has
knowledge of a breach of trust. The discharge of all the trustees will be required. At the
outset of the claims correspondence it may be advisable for the office to confirm that the
policy was issued under trust and to name the beneficiaries. The reason for this is that it is
not uncommon, particularly under MWPA policies, for the claimant not to be aware of the
factthat the policy is under trust.

Where the trustees request payment to themselves or to the beneficiary/ies this can be safely
done, but if they request payment to be made to an apparently unconnected third party then
the office must make some investigation before payment, to satisfy itself that no breach of
trust is involved.

115
 Chapter 13
The Nigerian Pension Scheme
Learning Objectives

After studying this chapter, you should be able to understand the:

 historical development of pension in Nigeria – past and present
 have an overview of the current pension report act in operation

Introduction
This chapter explains the Nigerian Pension Scheme with emphasis on the one currently in
operation.

13.1 Historical Development of Pension in Nigeria – Past and Present

During the colonial era, the government of the day realised that there was need to provide
income at old age for the members of the State and also ensure that there was financial
security for elderly members of the society. This led to the enactment of the Pension
Ordinance Act of 1951 which was retroactively backdated to January 1946.

In 1961, the National Provident Fund (NPF) Scheme was established to address pension
related issues in the organized private sector. This was because prior to that time, pension
matters were only addressed as it relates to public/civil servants. This continued until 1972
when the Udoji Commission Report presented a report that led to the establishment of the
National Providence Fund and consequently the Nigerian Pension Board. The Pension board
worked tirelessly but because of very many challenges and inefficiencies, some of which are
highlighted below, the Board was replaced with the Pension Act No. 102 along with the
Armed Forces Pension Act 103, both in 1979. The major inefficiencies are:

 Lack of understanding and enlightenment about the scheme by the employees and
majority of their beneficiaries
 Contribution was only by the employers and this created additional burden on the
finances of the employers
 Misappropriation of funds and seemingly illiquidity when funds are required to be
assessed by employees/beneficiaries.

Over the years, the Act had been modified severally from the Pension Act No. 75 of 1987 to the
Local Government Pension Edict in the same 1987 which led to the establishment of the Local
Government Staff Pension Board. In 1993, this was replaced by the National Social Insurance
Trust Fund (NSITF) Scheme using Decree No. 73 out of such employments. During the
period, the Local Government administrators also established its own pension plan so as to
ensure that their employees are not without a pension at the end of their service with the local

116
government. This was done by the establishment of the Local Government Pension Board.

In 2004, the National Assembly passed into law the New Pension Reform Act 2004 where we
significantly changed the model of financing prior pensions plans from the unfunded
defined benefits scheme to the joint contributory scheme. The federal government initiated
this type of pension scheme to eradicate the challenges experienced during that period where
the pension fund was in huge deficits – which was mainly as a result of the fact the benefits
were usually simply budgeted for, poor administration and arbitrary changes (usually
always increases) in pension amounts.

In 2014, the Pension Reform Act was modified and it is what is currently being used in the
administration of the pensions affairs in the country as at date.

The contributory pension scheme being currently operated is a mandatory scheme that
compels both the employer and the employee in both public and private sector to collectively
save a minimum of eighteen percent of an employee's month emolument into the employee
retirement savings account (RSA) from where the employee will be paid the retirement
benefit at retirement.

After being paid the stipulated retirement benefit, the remaining amount will then be
utilized to purchase either an annuity or arrange a programmed withdrawal for the retiree,
as wouldbe chosen by the retiree.

Also in 2014, the scope of coverage of the contributory pension scheme as expanded to the
self-employed and the persons working in organizations with less than three employees.
This is because research showed that this category of workers are the larger percentage of
workers' population in the country and had been left out of the coverage areas over the years.
Eventually in March 2019, the formal launching of the micropension plan was carried out and
the first set of contributors kicked off the scheme.

Both the National Insurance Commission and the Pensions Commission have at various
times issued circulars to clarify any grey issues on the Act over the period of time. Such
circulars are crucial to the understanding and practice of pensions in Nigeria and as such
candidates are advised to keep themselves abreast of all future developments as it unfolds.

The regulator in charge of pension matters as at date is the National Pensions Commission
(PENCOM), while the National Insurance Commission (NAICOM) regulates the Group Life
aspect of the Pension Reform Act making the Act to have dual regulators overseeing its
successful implementation although these two bodies are under the Federal Ministry of
Finance.

As at June 2019, the total value of pension fund assets based on audited valuation reports and
as reported by PENCOM was N9.33 trillion.

117
13.2 Current Pension Status in Nigeria
The current pension regulation in Nigeria can be further assessed bide this link:
https://www.pencom.gov.ng/wp-content/uploads/2018/01/PRA_2014.pdf. Candidates are
advised to visit this link and familiarise themselves with the contents of the 62-paged
document as it relates to pension, life assurance and all other salient factors.

118
 INDEX

expensive, 3, 9, 13, 18, 21, 35, 114

A explanation, 65
account, 51, 61, 69, 70, 71, 91
F
accumulation, 15, 24
administrative, 67, 117 factor, 17, 50, 55
administrators, 4, 102 form, 1, 9, 10, 11, 14, 15, 18, 19, 22, 35, 37, 43, 47,
advance, 13, 28, 62, 78, 87, 88, 98, 113 48, 49, 50, 53, 56, 58, 67, 69, 71, 80, 86, 87, 88, 93,
age, 3, 6, 8, 10, 11, 14, 18, 19, 20, 21, 24, 26, 27, 29, 97, 98, 99, 101, 109, 110
30, 31, 32, 35, 47, 48, 49, 53, 57, 58, 59, 60, 61, 63, frequency, 33, 62, 65, 67, 74
73, 97, 99, 104, 106, 113, 116 fund, 1, 3, 4, 14, 15, 16, 17, 18, 19, 20, 25, 29, 36, 59,
allocation, 15, 20, 24, 36, 65, 67, 68 65, 67, 68, 93, 113, 114, 117
alteration, 73, 74, 75 future, 10, 12, 15, 16, 17, 21, 22, 23, 25, 27, 28, 58,
amount, 3, 10, 11, 14, 17, 18, 19, 20, 21, 22, 23, 24, 60, 67, 69, 75, 88, 95, 96, 119
27, 30, 33, 45, 53, 56, 57, 60, 61, 65, 67, 69, 71, 78,
87, 91, 92, 93, 94, 97, 98, 109, 111, 115, 116, 117, G
annuity, 3, 5, 59, 118
gratuity, 91, 92, 93, 94
apply, 17, 22, 24, 25, 28, 65, 69, 78, 90, 92, 93, 94, 99,
104, 106, 108, 110, 113 H
association, 30, 38, 56
assurance, 4, 3, 5, 1, 3, 5, 6, 8, 9, 10, 11, 12, 13, 18, 20, historical, 5, 1, 113
21, 22, 23, 25, 26, 28, 30, 31, 32, 37, 39, 47, 48, 55,
58, 59, 60, 64, 65, 71, 75, 77, 78, 82, 99, 106, 114, I
115 impose, 11, 49, 62, 71
authority, 16, 18, 51, 74, 75, 101 inflation, 11, 12, 13, 21, 35, 113
information, 3, 43, 48, 49, 50, 51, 111, 115
B installation, 3, 139, 141
bankruptcy, 67, 75, 77, 78, 96, insurable, 8, 9, 39, 48, 56
business, 3, 5, 15, 17, 37, 38, 39, 41, 47, 49, 55, 56, 69, insurance, 4, 3, 5, 1, 2, 3, 5, 8, 25, 26, 29, 30, 38, 40,
78, 112, 114, 115, 117, 118 41, 42, 43, 51, 58, 59, 61, 86, 106, 109, 113, 118
interest, 3, 8, 9, 13, 16, 20, 37, 38, 39, 48, 56, 58, 61,
C 71, 75, 77, 78, 80, 82, 84, 85, 87, 88, 90, 92, 93, 94,
96, 101, 108, 109, 111, 11
calculation, 6, 61 internal, 64, 67
cash, 9, 12, 14, 15, 17, 22, 24, 36, 37, 38, 96, 111
interpretation, 47
client, 47, 51, 127
investment, 9, 13, 14, 15, 16, 17, 19, 20, 28, 61, 62,
common, 1, 12, 18, 22, 26, 34, 39, 49, 59, 62, 69, 73,
74, 95, 117
75, 77, 88, 93, 111, 113, 116, 118 investments, 3, 1, 15, 17, 22, 117
company, 29, 36, 38, 39, 40, 48, 52, 56, 67, 77, 78, 80,
109, 113, L
contract, 8, 10, 12, 16, 17, 19, 20, 21, 22, 24, 28, 29,
31, 32, 37, 47, 48, 61, 62, 64, 65, 69, 75, 82, 86, legal, 3, 37, 69, 75, 76, 77, 84, 85, 86, 87, 93, 94, 98,
101, 102, 106, 109, 110, 113, 114, 115 101, 102, 106, 108, 109, 113
critical, 8, 25, 27, 28, 29, 36, 57, 65, 66, 119 life assurance, 5, 1, 3, 8, 9, 28, 30, 58, 59, 123, 152
currency, 65, 84, 87, 111 limit, 32, 33, 35, 43, 47, 49, 50, 63, 104, 112, 113, 114
limited, 11, 13, 18, 33, 35, 38, 53, 57, 75, 108
D loan, 11, 18, 23, 31, 73, 78, 84, 87, 88, 90, 92, 93, 94,
111
deduction, 69
defraud, 56, 99 M
development, 5, 1, 23, 25, 114
duration, 20, 21, 31, 33, 60, 61, 62, 82, 87, 115 management, 15, 24
Manual, 67
E maximum, 12, 20, 27, 35, 36, 49, 93, 111, 113, 115,
money, 11, 12, 13, 16, 22, 37, 60, 65, 82, 86, 88, 89,
economy, 90, 113 90, 93, 98, 106, 112
employer, 28, 29, 33, 36, 41, 43, 45
mortality, 1, 6, 21, 47, 56, 59, 60, 61, 62, 113, 116, 12
endorsements, 64, 67 mortgage, 11, 67, 73, 75, 78, 82, 87, 88, 89, 90, 92, 93,
119
 94, 98, 111 profits, 13, 14, 15, 17, 18, 19, 22, 23, 24, 39, 95, 98,
motorcycle, 55, 57, 65 106, 115
proof, 64, 80, 84, 88, 92, 94, 96, 97, 98, 99, 104, 106,
N 108, 110, 111
property, 16, 37, 38, 75, 78, 87, 88, 90, 92, 93, 94, 96,
national provident fund, 159
nominal, 33, 116, 117 104, 108
proportion, 22, 58, 60, 96, 102, 114, 115
notice, 69, 77, 78, 80, 82, 86, 88, 89, 90, 93, 94, 96,
109, 110, 147, 157 proposal, 18, 47, 48, 49, 50, 53, 55, 57, 58, 64, 72, 73,
98, 101, 102, 104, 114, 119, 127, 155
notices, 64, 65, 69, 79, 83
protection, 8, 9, 10, 12, 13, 19, 20, 21, 25, 26, 29, 32,
O 37, 38, 78, 114
purchase, 11, 15, 16, 19, 22, 23, 25, 29, 31, 36, 40, 49,
obligation, 37, 69, 78, 142, 157 88, 94, 113
occupation, 26, 31, 32, 33, 34, 36, 52, 99
offer, 11, 12, 13, 15, 16, 18, 19, 20, 24, 25, 29, 30, 32, R
33, 35, 36, 58, 65, 101
office, 6, 8, 10, 11, 13, 14, 15, 16, 17, 18, 20, 21, 23, reassurance, 3, 5, 49, 50, 112, 113, 114, 115, 116, 117,
119, 121
24, 26, 27, 28, 29, 30, 31, 32, 34, 35, 36, 39, 47, 48,
49, 50, 51, 53, 56, 58, 61, 62, 64, 65, 67, 68, 69, 71, records, 6, 51, 67, 69, 74, 79, 80, 96, 101
reinstatement, 71, 73
73, 74, 75, 77, 80, 82, 83, 84, 86, 92, 93, 94, 96, 97,
98, 99, 101, 102, 104, 106, 108, 109, 110, 111, 112, remittance, 69, 71, 115
renewal, 10, 11, 30, 43, 69
113, 114, 115, 116, 117
report, 43, 45, 49, 50, 51, 110, 118
ownership, 64, 67, 75, 96, 97, 111

P retention, 49, 50, 112, 113, 114

retirement, 29, 30, 35, 36, 37, 98
payable, 9, 11, 12, 14, 18, 19, 20, 21, 22, 23, 24, 25, risk, 1, 3, 9, 12, 20, 25, 27, 31, 34, 38, 39, 47, 48, 49,
26, 27, 28, 32, 33, 34, 36, 39, 41, 43, 45, 57, 61, 62, 51, 52, 53, 55, 56, 57, 58, 60, 71, 104, 108, 112,
64, 65, 69, 71, 75, 77, 96, 97, 98, 104, 106, 108 113, 114, 115, 116, 117, 118, 119
payment, 9, 15, 19, 24, 25, 26, 27, 28, 33, 36, 43, 64,
65, 69, 71, 77, 80, 82, 84, 94, 97, 98, 99, 102, 104, S
106, 109, 110, 111
pension, 1, 2, 22, 23, 29, 32, 33, 34, 35, 36, 81, 86, 87, salary, 29, 30, 31, 35, 36, 71
satisfactory, 43, 71
88, 91, 92, 95, 96, 97, 98, 99, 100, 101, 116, 117,
118 scheme, 3, 28, 29, 30, 31, 32, 36, 41, 43, 71
security, 16, 18, 21, 78, 82, 84, 87, 88, 89, 92, 93, 111
percentage, 11, 14, 24, 30, 35, 36, 60, 62, 65, 119
standard, 21, 24, 25, 26, 33, 35, 65, 67, 93, 114
permanent, 18, 26, 27, 31, 55, 75
status, 21, 31, 73
policy, 3, 5, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19,
20, 21, 22, 23, 24, 26, 27, 28, 29, 30, 31, 32, 33, 34, surplus, 14
35, 36, 37, 38, 39, 40, 41, 43, 44, 45, 47, 48, 49, 52,
T
55, 56, 57, 59, 60, 61, 62, 63, 64, 65, 67, 69, 71, 73,
74, 75, 77, 78, 80, 81, 82, 84, 86, 88, 90, 92, 93, 94, transactions, 18
95, 96, 97, 98, 101, 102, 104, 106, 107, 108, 109, transport, 55
110, 111, 113, 115, 119 trust, 15, 32, 37, 38, 67, 84, 98, 102, 108
policyholder, 12, 13, 14, 15, 16, 17, 19, 21, 23, 25, 27, trusteeship, 4, 6, 115
28, 32, 35, 36, 65, 69, 71, 73, 74, 75, 92, 93, 94, 96,
97, 98, 110, 111 U
population, 6, 30, 114
underwriting, 3, 19, 25, 28, 36, 39, 47, 48, 50, 51, 52,
practice, 3, 4, 49, 62, 69, 90, 104, 106, 111, 113
53, 55, 56, 61, 62, 73, 114
pregnancy, 34, 65
premium, 1, 3, 6, 9, 10, 11, 12, 15, 18, 19, 20, 22, 23, V
24, 25, 26, 27, 28, 30, 31, 32, 33, 34, 35, 36, 37, 41,
43, 45, 47, 53, 55, 56, 57, 58, 59, 60, 61, 62, 64, 65, valuation, 1, 14, 65
69, 71, 72, 73, 74, 92, 101, 104, 106, 113, 115, 116, variations, 8, 35
117, 113
price, 15, 17, 18, 19, 24, 65, 90, 94 Y
produce, 12, 55, 62, 64, 96, 97, 98, 102, 110 year, 10, 11, 13, 14, 17, 19, 21, 23, 24, 30, 31, 32, 33,
production, 32, 77, 80, 82, 94, 97, 102, 104, 109, 111 34, 35, 39, 41, 43, 45, 50, 54, 57, 58, 59, 60, 61, 62,
profit, 13, 14, 18, 19, 21, 22, 32, 56, 62, 78, 95, 113, 70, 71, 75, 96, 107, 108, 113, 115, 116
116, 117, 119
120
121