Example 8 |
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Term extends beyond retirement age and policy reconstruction |
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Background |
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45 year old male non-smoker, having taken out a £50,000 loan in 1998 for a term of 25 years. Unsuitable sale identified on the grounds of affordability and complaint raised on 12th policy anniversary. |
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It has always been the intention of the complainant to retire at State retirement age 65. |
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Term from date of sale to retirement is 20 years and the maturity date of the mortgage is 5 years after retirement. |
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Established facts |
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Established premium paid by investor on policy of original term (25 years): |
£81.20 |
Premium that would have been payable on policy with term from sale to retirement (20 years): |
£111.20 |
Actual policy value at time complaint assessed: |
£12,500 |
Value of an equivalent 20-year policy at time complaint assessed: |
£21,300 |
Difference in policy values at time complaint assessed: |
£8,800 |
£4,320 |
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Basis of compensation |
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The policy is reconstructed as if it had been set up originally on a term to mature at retirement age, in this example, a term of 20 years. The difference in the current value of the policy actually sold to the complainant and the current value of the reconstructed policy, as if the premium on the reconstructed policy had been paid from outset, is calculated. The complainant has gained from lower outgoings (lower premiums) of the actual endowment policy to date. In calculating the redress, the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. |
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Redress generally if it is not unreasonable to take account of the whole of the gain from lower outgoings |
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Loss from current value of reconstructed policy less current value of actual policy: |
(£8,800) |
Gain from total lower outgoings under actual policy: |
£4,320 |
Net loss: |
(£4,480) |
Therefore total redress is: |
£4,480 |
Redress if it is unreasonable to take account of gain from lower outgoings |
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Loss from current value of reconstructed policy less current value of actual policy: |
(£8,800) |
Gain from total lower outgoings under actual policy: |
Ignored |
Therefore total redress is: |
£8,800 |
Additional Information |
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If the policy is capable of reconstruction, the complainant must now fund the higher premiums himself for the remainder of the term of the shortened policy until maturity. In this example the higher premium could be £111.20. However the firm should provide the complainant with a reprojection letter based on the reconstructed policy such that the actual monthly payment required to achieve the target sum could be even higher, say £130. The reprojection letter should set out the range of options facing the complainant to deal with the projected shortfall, if any. |
Related provisions for DISP App 1.4.3
1 - 4 of 4 items.
34Firms are entitled to mitigate losses by making use of the Traded Endowment Policy (TEP) market (see DISP App 1.3.8 G to DISP App 1.3.10 G). This allows firms to sell policies on the TEP market to meet the costs of redress, rather than using the surrender value. Where this method is adopted, firms should pay to the investor, as part of the redress package, a cash lump sum representing that proportion of the policy realised which would have related to the windfall augmentati