1 : 13 - Protection Planning and Solutions

Question 1

What are the potential gaps in coverage, when taking out life insurance or other protection policy?

(10)

Answer 1

1. Decreasing coverage
2. Unsure coverage
3. Inadequate coverage for disability
4. Inadequate face value
5. No withdrawal option
6. Depreciated value
7. No death benefits
8. Wrong beneficiary
9. Loss of benefits or severe depreciation for one unpaid premium
10. Not enough to retire on

Question 2

What is the potential problem with Decreasing coverage?

Answer 2

There are policies where the face value decreases over the term of the life insurance.

Question 3

What is the potential problem with Unsure coverage?

Answer 3

A life insurance policy has specific terms of coverage.

The specific claim conditions of any life insurance policy must be carefully read.

Question 4

What is the potential problem with Inadequate coverage for disability ?

Answer 4

Even if a policy provides both life and disability coverage, the level of disability benefits that can be claimed must be checked as well as under what types of circumstances disability coverage can be enforced.

Question 5

What is the potential problem with Inadequate face value?

Answer 5

An insurance policy should cover the client’s and their family’s needs for at least a year. It should be increased further if there are high levels of debt to be repaid.

Question 6

What is the potential problem with No withdrawal option?

Answer 6

Some life insurance policies with a potential cash value component allow withdrawal of money after a certain period of time.

However, some insurance policies – especially those with a very low premium – will not return any money. All those years of payments will then be lost.

Question 7

What is the potential problem with Depreciated value?

Answer 7

If an insurance policy with an investment component is purchased, part of the payments will be used to invest in high-yield accounts and a percentage of the proceeds will be returned to the policy.

Poor investment decisions by the insurance company could leave the client with a depleted policy and face value.

Question 8

What is the potential problem with No death benefits?

Answer 8

If the policyholder dies and the beneficiaries begin claims procedures, insurance companies may still refuse to pay if the policyholder omitted an important piece of
information from the insurance application form.

The concept of ‘utmost good faith’ (uberrimae fidei) applies to all forms of insurance, and insurers, and may enable insurers to refuse to pay benefits on the grounds that the policyholder was not entirely honest with the company.

Question 9

What is the potential problem with Wrong beneficiary?

Answer 9

If the policyholder does not update the name of the beneficiary given at the time of purchasing the policy, the wrong beneficiary may benefit or the original beneficiary may have already died so no one is able to claim.

Question 10

What is the potential problem with Loss of benefits?

Answer 10

It is vital to know the consequences of missing one premium payment. It is possible that the penalty is that beneficiaries could lose the death benefits or that these benefits will be significantly reduced after just one missed premium payment.

Question 11

What is the potential problem with having Not enough to retire on?

Answer 11

Typical life insurance provides cover in case of death. While the cash value equivalent of such a policy may be withdrawn in full upon maturity or converted to an annuity plan, this still does not make a life insurance policy a good retirement plan.

It is designed to provide the most benefit after death or serious illness.

Question 12

What are the main steps when assessing a clients overall position?

(5)

Answer 12

• Quantify their needs – both income and capital.
• Gather all the data.
• Analyse what they currently have – this is not just a matter of listing the existing arrangements, they must be analysed to show how far they meet the client needs.
• Be careful about recommending replacements – health may have changed, policies may be more expensive, so they might not be able to obtain same level of cover. May need top-up rather than replacement.
• Mention underwriting – new provider needs to determine if they are insurable and at what rate; existing cover will be taken into account.

Question 13

What is Family protection?

Answer 13

A person’s needs vary according to their circumstances and will change throughout their life.

Family protection incorporates the consideration not just of life assurance needs, but also of IP insurance, critical illness and related areas, such as LTCI and PMI.

Question 14

What needs to be considered in the case of the death (or incapacity) of any member of the household who was not engaged in paid work as they look after children

Answer 14

If they become unable to care for any children the result may well be that the other partner can no longer devote as much time to work, and the family’s income overall may suffer.

Extra expenditure could be incurred in terms of childminding and housekeeping as well as many other areas

Question 15

What capital needs have to be considered when assessing for a client’s potential death?

Answer 15

1. Debts/liabilities – do they have any debts that they would ideally like to be able to repay on death: mortgage, credit cards, other loans?
2. Other needs • Begin with the immediate expenses – such as funeral and legal. • If they have their own business, they may incur other professional expenses to wind it up and sort out tax affairs. • A contingency sum should also be considered for the survivor, in case of any unforeseen expenses.
3. What is the total capital required?

Question 16

What do you assess to calculate the net income immediately available?

Answer 16

• continuing earnings from partner or spouse
• payments from own employment, eg, full salary for six months
• state benefits: if you are going to omit these because you believe it is difficult to claim, be prepared to back this up with evidence to that effect
• existing health cover.

Question 17

What do you assess to calculate the net future income available?

Answer 17

• state pension
• annuity
• occupational pension.

Question 18

What questions should be asked when ‘Back-testing’ the recommendations for the client?

Answer 18

• Will the recommended policies themselves pay out when required?
• Will the recommended sums assured be enough to ensure they are unlikely to run out of money?
• Are the policies affordable within the client’s budget/disposable income?
• Have trusts been included for life policies where appropriate, so benefits are paid outside the estate?

Question 19

EG:

When you first meet the clients, they are married with one child, they have a mortgage of £120,000, and both work full-time. Five years later, their household income has increased owing to one of them having been promoted, while the other changed jobs. They are about to move to a larger house and increase their mortgage to £180,000.

Answer 19

Will the original IP be enough? Will the life cover set up five years ago be enough to meet their capital and income needs? Do their employers provide any benefits that were not available previously