10 - Life Assurance Products Flashcards by Jordan Sidaway

Life Assurance Products

What are the three basic types of life assurance product?

Single Premium Bonds (aka investment bonds, onshore bonds)
Regular Premium Policies (aka savings policies)
Offshore Bonds

How well did you know this?

Not at all

Perfectly

Life Assurance Products

What’s the difference between an investment bond and an investment fund?

The investment bond is the product you invest in (like an OEIC or an ETF).

The investment fund is the underlying fund that the money goes into and gets invested to achieve the return.

They are NOT two different products.

How well did you know this?

Not at all

Perfectly

The premiums of life assurance products are split between which two aspects?

Life assurance element
Investment element

The higher the level of life assurance, the more of the premium is directed towards that and the lower the investment performance/return.

How well did you know this?

Not at all

Perfectly

With Profits

Are these single payment or regular premium products?

With Profits can be single premium or regular premium

How well did you know this?

Not at all

Perfectly

With Profits

What is the modern type of WP product that has replaced the traditional WP?

Unitised With Profits contracts

How well did you know this?

Not at all

Perfectly

With Profits

What is the difference between the bonus calculations for traditional and unitised WP plans?

Bonuses for unitised plans are calculated in advance by actuaries projections of the long term future performance of the fund. This makes the investment much more transparent and is the main reason unitised plans are more popular and have replaced traditional plans.

How well did you know this?

Not at all

Perfectly

With Profits

What is the return of the product based upon?

The return of the product is based on both the performance of the underlying fund investments AND the activites of the life assurance provider.

Note that the return is not DIRECTLY based on investment peformance (e.g. fund goes up 5% so you get a 5% bonus), but the actuaries estimates of future performance take into account the investment performance, so it does have an impact.

How well did you know this?

Not at all

Perfectly

With Profits

What is the key benefit of WP funds compared to other investments, in terms of protection?

Unit prices of with profits funds are guaranteed not to go down.

How well did you know this?

Not at all

Perfectly

With Profits

How do fixed price and variable price WP funds work?

The price of fixed price funds stays the same. Bonuses involve additional units being given to existing unit holders.

Variable price units on the other hand reflect bonuses by increasing the value of existing units.

How well did you know this?

Not at all

Perfectly

With Profits

How does free asset ratio relate to WP investments?

The free asset ratio is an indication of the financial strength of the life assurance company. If this is not at a healthy level it indicates a risk that they will have issues maintaining the WP performance in the future.

How well did you know this?

Not at all

Perfectly

With Profits

What is the MVR?

Any issues with it?

MVR is Market Value Reduction

This is a penalty applied to people exiting the fund to protect the people left in it.

There are “MVR free dates” when people can exit without paying an MVR, which is a potential issue for people left in the fund. Closed funds are likely to hold a lot of fixed interest (low risk) and the pot is getting smaller as people exit on MVR free days.

How well did you know this?

Not at all

Perfectly

What is pound cost averaging and what investments does it relate to?

Pound cost averaging relates to regular premium investments (i.e. not lump sum investments).

It relates to the fact that you invest a little bit over time so your “start price” is spread out over the year. The idea is it reduces your risk of investing on one date that happens to be a high point.

How well did you know this?

Not at all

Perfectly

With Profits

Two advantages to WP in terms of investment flexibility (vs collective investment funds)

Switching between funds is very low cost
All the usual funds available to OEICs (etc) are available in WP funds, but there are also guaranteed growth and guaranteed income funds, and property or mixed/managed funds

How well did you know this?

Not at all

Perfectly

With Profits

Any return other than the regular annual bonuses?

There will be a terminal bonus on death/maturity.

If the product is life assurance focused the death bonus might be higher than the maturity bonus.

How well did you know this?

Not at all

Perfectly

With Profits Savings Plans

What are they?

Restrictions?

Basically a WP investment with regular level investments.

Still get annual bonus, terminal bonus

Limited to £3,600 per year

How well did you know this?

Not at all

Perfectly

With Profits Savings Plans

What are the features of low cost plans?

Low cost plans might have increasing premiums (so early premiums are cheap but have to get more expensive later to make up for it) or have lower terminal bonus than death bonus.

These aren’t very popular now.

With Profits

Early encashment issues

May be a surrender penalty.

Might be better off selling.

Unlikely to get your terminal bonus (unless very close to maturity).

With Profits Lump Sum Investments

What are they?

Just a WP invesment with a single lump sum investment instead of regular premiums (savings plans/endowments).

Usually written with whole of life cover.

With Profits

What are the typical charges

5% bid offer spread

1% AMC

With Profits

What are the 6 types of investment bond?

Guaranteed Income
High Income
Guaranteed Growth
Unit Linked
Distribution
Guaranteed/Protected Equity

With Profits

Features of:

Guaranteed income bonds

Guaranteed income bonds

Up to 5 year maturity
Income guaranteed and paid in arrears annually
Capital returned at maturity

So they’re similar to fixed income/bonds.

With Profits

Features of:

High income bonds

High income bonds

Give up the capital guarantee to achieve higher level of income
Based on derivatives
Capital only returned if stock index meets pre-set targets

With Profits

Features of:

Guaranteed Growth bonds

Guaranteed Growth bonds

Capital guaranteed
No income
Various maturity dates and possibility to roll-over

With Profits

Features of:

Unit Linked bonds

Unit Linked bonds

Income doesn’t get paid, rolled up and paid out at maturity as capital
So better for high rate tax payers (CGT better than tax on income)
Get 5% tax deferred withdrawals
Can be encashed at any time

_With Profits_ Features of: 5. Distribution bonds

5. Distribution bonds * Capital guaranteed * Income paid depending on income generated by the fund

_With Profits_ Features of: 6. Guranteed/Protected Equity bonds

6. Guranteed/Protected Equity bonds * Fixed maturity * Based on derivatives, a bond plus a call option * So capital is guaranteed with extra return if the index goes up

_Investment Bonds_ Why are investment bonds good investments for trusts?

Trusts pay very high tax on income but investment bonds don't generate taxable income. Bonds can get assigned to the beneficiaries with no tax charge. 5% withdrawal tax deferral feature

_Investment Bonds_ What are the implications of offshore bonds (compared to onshore investment bonds)?

Offshore bonds usually have higher costs Income is rolled up and investors pay income tax on everything at maturity. For onshore investment bonds they would pay as capital (CGT) so the rate is lower and they get the exempt amount each year. They still get the 5% tax deferred withdrawal benefit and can be useful for high rate taxpayers in some cases (invest now when you're high rate, get the gain later when you're retired).

What is a personal portfolio bond?

This is when you wrap your personal investment fund up in a bond. HMRC don't like it so slap you with a big tax rate (as if you earned a 15% return).

_Friendly Society Policies_ Benefits Limits

Benefits are no gains or income tax Limited to £270 per annum Need to hold for at least 7.5 years

_Life Assurance Tax_ What is the internal tax treatment of the life assurance fund?

Similar to other entities, 20% corporate tax on most items. No tax on UK (franked) dividends but do pay tax on gains. Gilts and corporate bonds don't get taxed (same as for individual investors).

_Taxation of Life Assurance_ Implication of being a qualifying policy Requirements for a qualifying policy

No tax at maturity on qualifying policies * At least 10 years * Premiums at least annually * Must have paid at least 75% of the premiums * Premiums in any 1 year never more than twice any other year * £3,600 annual premium limit

_Taxation of Life Assurance_ Tax implications of early enchasment

If the policy becomes non-qualifying (less than 10 years, haven't paid 75% of premiums) it loses the tax protection and becomes a chargeable event

_Taxation of Life Assurance_ Tax on non-qualifying policies

Don't have the qualifying protection so the gain is taxable. Not taxed on CGT, use top-slicing and pay income tax. So split the final gain across the number of years you held the policy, and stick that gain on top of your income in each of those years. The extra income tax payable in each year is the tax you pay.

_Taxation of Life Assurance_ What is segmentation?

Segmentation is splitting your investment bonds into clusters of smaller bonds. It gives you some flexibilit and tax benefits.

_Selling Policies_ What are the regulatory rules regarding the ability to sell policies?

* IFAs must avise clients that selling is an alternative to encashment * Life funds must also advice clients that selling might be better than enchashment * IFA must make sure the client understands the tax position

_Selling Policies_ Tax implications for the seller

No special implications, same as encashment. If the policy is qualifying (\>10 years, 75% premiums paid etc) you pay no tax on the gain. Otherwise pay top-slicing tax on the gain.

_Selling Policies_ Tax implications for the buyer

If it's a qualifying policy and they hold to maturity/death there is no tax on the gain. Othewise they pay tax, but normal CGT instead of the tax slicing rule, since they just bought an asset and realised a gain.