11. Life Assurance

Question 1

Key features of investment bonds? (4)

Answer 1

Investment is lump sum only - no regular premiums

Life assurance element limited to 10% policy value on death - no guranteed sum assured

Non-qualifying

Unit-linked or with-profits

Question 2

What is segmentation of an investment bond?

Answer 2

Splitting investment into multiple sub-policies
Avoids tax on excess withdrawals as individual sub-bonds can be encashed early

Question 3

What is an open-architecture investment bond?

Answer 3

Funds available from other providers

Question 4

What are the criteria for qualifying life assurance policies? (6)

Answer 4

• Premiums paid at least annually
• Policy term at least 10yrs
• Provide a death benefit (sum assured) of >75% of premiums payable over term
  - whole-of-life term ends age 75
  - endowments; 75% requirement reduces by 2% p.a >55yo
• Premiums in any year cannot be more than 2x any other year
• Premiums in any year cannot exceed 12.5% of total premiums over term
• Must run for 75% initial term (max 10yrs) to remain qualifying

Question 5

What is the tax treatment of qualifying and non-qualifying life assurance policies?

Answer 5

The LA fund pays 20% CT, and investor is treated as having paid 20% basic rate tax.

Qualifying: no further tax to be paid
Non-qualifying: higher/additional rate tax if applicable

Question 6

Describe a with-profits endowment (2) and the 2 types?

Answer 6

Excess gains from investments are held in reserve or added to policyholder’s guaranteed sum assured (reversionary bonus)

Terminal/final bonus also paid on maturity/death

Full endowment: guaranteed sum assured equal to target maturity value - expensive
Low-cost endowment: guaranteed sum assured much lower than target maturity value, so relies on bonuses

Question 7

Key features of unitised with-profits endowment? (2)

Answer 7

Investor buys units in with-profits fund
Bonuses either increase value of units or allocate new units

Question 8

What are Market Value Adjuster/Reductions?

Answer 8

Charge if switching between funds in a unitised with-profits endowment, to protect other policyholders

Question 9

Key features of unit-linked endowment? (4)

Answer 9

Provide guaranteed death benefit but maturity value depends on investment performance
If fund is behind target, investor can either increase premiums or reduce sum assured
Offer + Bid price applies + 5% initial charge
Early surrender charge may apply

Question 10

What is the tax treatment of with-profits endowments sold on secondary market? Seller + Buyer

Answer 10

Seller has no CGT or income tax if qualifying policy (75%/10yr criteria)

At sale, the policy becomes non-qualifying, so buyer is taxed on maturity

Question 11

Key features of with-profits investment bond? (3)

Answer 11

Original capital is guaranteed
Annual reversionary or terminal bonuses added (sometimes guaranteed)
Can withdraw at certain intervals otherwise MVA/MVR apply

Question 12

Tax treatment of guaranteed income + growth bonds?

Answer 12

Income: 5% initial capital can be taken tax-free (excess withdrawals taxed as gains) then whole return is taxed at maturity

Growth: gain taxed as CGT

Question 13

Describe a distributor bond?

Answer 13

Income and capital separated
Income paid out regularly but capital remains invested

Question 14

Tax treatment of investment bonds?

Answer 14

Fund manager pays 20% CT on gains
Investor deemed to have paid 20% basic rate
Non-payers can reclaim, higher + additional pay more

Question 15

Calculation of tax liability of investment bond?

Answer 15

Surrender proceeds
+ Total withdrawals made
- Initial investment
- Excess withdrawals (already taxed)

Question 16

Describe an annuity

Answer 16

Offered by life assurance companies
Lump sum in return for guaranteed income for life or agreed term
Rates based on life expectancy incl postcode

Question 17

Describe the following types of purchase annuity:
Life
Temporary
Annuity certain
Immediate
Deferred
Escalating
“With proportion”
Capital-protected
Enhanced
Impaired life
Investment-linked
Contingent

Answer 17

Life: payments made until death or longer if guarantee in place
Temporary: until agreed term or death if sooner
Annuity certain: pays until end of term regardless of death
Immediate: payments begin as soon as purchased
Deferred: payments begin in future (vesting date). Refund if die early
Escalating: payments increase by set % or RPI (initial payments low)
“With proportion”: pro-rata payment from last payment to death
Capital-protected: guaranteed to pay at least investment (into estate)
Enhanced: smokers/ill - rates increased by c.25%
Impaired life: serious ill/life-shortening - medical underwriting
Investment-linked: invested in index-linked or with-profits fund. Investor sets growth rate to determine payments - could grow (reduce) if performance is better (worse)
Contingent: dependent on event e.g remaining alive

Question 18

Tax treatment of purchase annuities?

Answer 18

Split into capital + interest
Capital is returned investment so tax-free
Interest taxed as savings income, 20% deducted at source - NRB + PSA apply

Question 19

Describe compulsory purchase annuities (5)

Answer 19

Purchased using pension proceeds
Cannot be taken until retirement age (55)
Lifetime but can add guaranteed term
Single life or can add spouse (50%-100% original rate)
All income taxable

Question 20

Calculation of new year’s annuity rate?

Answer 20

Initial/previous base rate ÷ (1+ABR) = base annuity

Base annuity x (1+bonus) = new base annuity

Add any temporary bonus but this does not affect following years base annuity

Discount by ABR then uplift by bonus