The premium holiday that changed the guarantee
Mr Tam, 52, has paid HK$48,000 a year for eight years into a 20-year regular premium ILAS. Forty per cent of each premium is allocated to a "Guaranteed Fund" promising 120% of the premiums allocated to it at the end of policy year 15, subject to two conditions in the product brochure: no withdrawals from that fund, and no premium holiday longer than 12 consecutive months. The other 60% sits in two equity funds. In March 2023 he lost his job, stopped paying and asked for a premium holiday; the service officer told him the policy would "stay exactly the same". Fourteen months later he withdrew HK$100,000 for living costs, and the insurer redeemed it pro rata across all funds. He then resumed paying HK$30,000 a year. In 2024 he died. The death benefit is the higher of 101% of account value or total premiums paid less withdrawals, less any indebtedness.
1. What did the premium holiday actually do to the policy, and was the service officer's "stay exactly the same" answer accurate? Explain what happens to charges, cover and the guarantee during a period of non-payment.
Read the worked answer
A premium holiday is not a pause button for the policy's economics.
- Charges continue. The policy fee, mortality and morbidity charges and fund management fees keep being deducted from the account value, because cover continues and the funds still levy their fees. With nothing paid in, the account value is eroded by charges net of investment return.
- Cover continues conditionally. The death benefit normally remains in force during an approved holiday, but only to the extent the account value can support the deductions. If the account value falls to zero, the policy lapses and cover ends - a real risk in a long stoppage on a front-loaded policy.
- Conditions apply. The holiday must fall within the product's terms (minimum premiums paid before eligibility, maximum holiday length), and exceeding the maximum may be treated as a lapse or may affect guarantees.
So "stay exactly the same" was wrong on the two things that mattered: the account value kept being charged, and the 14-month stoppage breached the 12-month condition attached to the Guaranteed Fund. The accurate answer would have set out the effect on charges, on the guarantee, and on the terms for resuming. Staff explaining product terms must work from the policy provisions, and the conversation should be recorded or confirmed in writing.
2. Explain how the HK$100,000 withdrawal and the 14-month stoppage affect the Guaranteed Fund promise. Is any part of the guarantee still intact?
Read the worked answer
Read the guarantee as a contract with conditions, not a promise about the whole policy.
- The 120% promise attaches only to premiums allocated to the Guaranteed Fund, only at the end of policy year 15, and only if the conditions are met.
- Withdrawals: although the redemption was spread pro rata across all funds, part of it came out of the Guaranteed Fund, and value has been taken out of the structure. A guarantee of this kind is normally reduced pro rata to reflect withdrawals, and many wordings void the enhancement entirely once money is taken from the guaranteed fund.
- The stoppage: 14 months breaches the "no premium holiday longer than 12 consecutive months" condition. On the wording described, that breach alone can extinguish or reduce the guarantee for the affected period.
Conclusion: the enhanced 120% maturity promise is very likely lost or materially reduced. The units in the Guaranteed Fund still carry their market value and the policy is not void, but the client has probably lost the uplift he was paying a guarantee charge for, without realising it.
That is the heart of any complaint from his estate: were both conditions explained at the point of sale, and again when the holiday was granted? If the sales or service file cannot show that, the insurer has a conduct exposure quite separate from the contract wording.
3. On Mr Tam's death, how should the claim be assessed? Identify the death benefit that applies and the deductions the insurer can properly make.
Read the worked answer
Work through the formula rather than the illustration.
- Death benefit = the higher of (a) 101% of account value at the valuation date and (b) total premiums paid less withdrawals, less indebtedness.
- Total premiums paid: eight years at HK$48,000 = HK$384,000, plus the resumed HK$30,000 = HK$414,000 (adjust for any premium unpaid at the date of death). Deduct the HK$100,000 withdrawal, leaving HK$314,000.
- Comparison: if the account value at death was, say, HK$350,000, then 101% = HK$353,500, which exceeds HK$314,000, so HK$353,500 is payable.
- Proper deductions: any outstanding premium, policy loan or other indebtedness, and charges accrued to the date of death. If he died within the grace period with a premium unpaid, the insurer will normally deduct the overdue premium from the claim.
- The Guaranteed Fund maturity promise does not pay out on death unless the policy wording specifically incorporates it into the death benefit. On these facts it does not, and it has probably been lost in any event.
Process: pay within the policy's claim service standard once the death certificate, claim form and proof of the beneficiary's entitlement are received; give the beneficiary the calculation in writing; and expect the guarantee question to be raised. Check the sales file and the premium holiday call record before responding, because the answer to the guarantee question may determine whether the insurer defends the calculation or offers a goodwill settlement.