ProtectionAug 19 2016

Insurers clash over legal issues

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Insurers clash over legal issues

Three of the UK’s largest insurers are at odds over legal definitions, which could result in huge tax implications for consumers.

In January, Aviva launched the first relevant life policy with integrated critical illness (CI), meaning that the full premium would be tax deductible. Although other firms were expected to follow suit, the legality of this plan is now being challenged.

Both Legal & General and Royal London have decided against it, stating that implementing such a plan would breach tax rules.

Ian Smart, product architect at Royal London, said, “If we set up a policy using our current CI definitions – which is essentially what Aviva has done – we would be concerned about the tax liability the customer could end up with.”

Mr Smart explained that in order to satisfy HM Revenue & Customs requirements on CI, the policy would need to be linked to retirement, which could restrict cover to total permanent disability. “Trying to put CI into a relevant life policy to get a little bit of tax saving would end up with a much inferior product,” he added.

Aviva has remained firm in its stance, citing confirmation from a QC that the product is viable and compliant. Therefore, questions are now being directed towards HMRC to understand how some of the UK’s insurers have received conflicting responses to the legislation.

Alan Lakey, director at CIExpert, believes the regulator will eventually hide behind its most recent decision, describing the organisation as “a rudderless ship.”

He added these concerns have deterred him from recommending the Aviva policy, with fears that advisers could eventually take the blame.

Mr Lakey said, “On the Fos website it makes it very clear that if you replace a plan that is inferior, then it has said it will likely find against you if a complaint is made.”

craig.rickman@ft.com