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Financial Planning and Advice > 2 - Financial Protection - (24/80) > Flashcards

2 - Financial Protection - (24/80) Flashcards

1
Q

Reasons for Under-insurance

A
  1. Over-reliance on the state
  2. Failure to plan
  3. Affordability
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2
Q

Insurance Trends

A

Health/morbidity = BMI, smoking, alcohol
Longevity/mortality = more older people, more living past 90
Employment = lower job security, more self-employment
Product design = some have become too complex

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3
Q

Protection priorities

A

Family is typically #1 priority - income and capital after disability/death

Mortgages and debt will need to be fully covered

Understanding amounts needed for dependants in the short and long term is crucial

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4
Q

Shareholder and Partnership cover components

A
  1. Cross option agreement (allows survivors to buy shares)
  2. Life cover (to pay for the shares)
  3. Trust (to transfer shares/cash tax-free)
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5
Q

Universal Credit

A

Replaces JSA, ESA, income support etc.

For low/no income and savings under £16k

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6
Q

Statutory Maternity Pay

A

Earn >£120/week, at employer for 26 weeks

90% of income for 6 weeks
Lower of £152/week or 90% of income for 33 weeks

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7
Q

Support for Mortgage Interest

A

Covers interest on £200k at 2.61%

Only £100k if claiming pension credit

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8
Q

Bereavement Support Payment

A

Paid for 18 months

Children = £3500 lump sum + £350 per month
No children = £2500 lump sum + £100 per month

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9
Q

Types of Joint Life Policies

A

First death = pays on 1 death; good for mortgage/dependants

Second death = pays on both dead; good for IHT

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10
Q

Term Life & Types of Term

A

Set length of time, no payout if no death

Level = Static cover
Increasing = Premium and cover goes up
Renewable = Renew for more cover with no U/W
Convertible = To WOL or endowment
Decreasing = Cover goes down
Family Income Benefit = income paid for remainder of term

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11
Q

Whole of Life & Types of WOL

A

Pays out whenever policyholder dies (more expensive than term)

Non-profit = No investment element
With-profits = Pays cover and investment bonuses
-> Reversionary - paid annually
-> Terminal -> Paid on claim
Low cost = Combo of with-profits and decreasing term
Unit-linked = Premiums buy fund units
-> Min, max or standard cover - max = higher initial cover, fewer units at the end

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12
Q

Endowment and Types of Endowment

A

Combines life with investment

Non-profit = No investment element
With-profits = Pays cover and investment bonuses
Low cost = Combo of with-profits and decreasing term
Low start = Lower cost to start, premiums and cover increase
Unit-linked = Greater transparency

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13
Q

Protection Law and Trusts

A

Must have a valid contract to take out a life policy

Write into trust to avoid life payout adding to estate value and IHT

Gifting to a discretionary/interest trust immediately invokes a 20% IHT charge

Every premium paid while policy is in trust is a ‘gift’ -> £3000 annual limit

Split trust best to have Life and CIC make different payouts on different events

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14
Q

Underwriting and Claims

A

U/W = age, health, weight, family history, lifestyle, hazardous activities, occupation, residency, travel

Claims = death certificate, title, birth certificate (prove age)

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15
Q

Protection assignment

A

Policy sold on secondary markets and transferred to someone else

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16
Q

Paid-up policy

A

Can convert a policy into this if unable to afford premiums
or
Surrender value is paid out

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17
Q

Taxation of Life Policies - Qualifying Policies

A

Qualifying = no tax

Term > 10 years
Premiums 75% of premiums paid
Premiums in any year not double prior year premiums
Annual premiums < 1/8 of total

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18
Q

Taxation of Life Policies - Non-Qualifying Policies

A

Non-Qualifying = taxed

All single premium

Tax charged on certain events:
Death
Assignment
Maturity
Excess withdrawals (over 5% per year allowance)
Surrender
19
Q

Top-Slicing Relief for Life Policies

A

Relief = difference between tax on gain and tax on average gain

  1. Work out tax if the encashment was to be taken fully and added to regular income in the year
  2. Single out tax on just the policy encashment
    - > Subtract basic rate tax from this to find X (assume taken at source)
  3. Work out the annual equivalent if the policy had been equally cashed out over the space of its life
  4. Find the tax on this annual equivalent
    - > Subtract basic rate tax
    - > Multiply this number by years held to find Y
  5. Subtract X from Y to get the top-slicing relief

Only needs to be worked out if cashing the policy takes someone into the higher rate tax band

20
Q

Income Protection - Benefits

A

‘Incapacity’ = Own vs suited vs any occupation
‘Own occupation’ usually best and most expensive

Usually 50-60% of last 12 months average earnings

Deferred period = 4/13/26/52 weeks; longer = cheaper policy

Proportionate benefit = lower pay if returning to work

Rehab benefit = IP makes up difference between regular income and new income e.g. part time due to disability

21
Q

Income Protection - Types of Premium

A 
Reviewable = every 1 or 5 years
Renewable = short-term, guaranteed renewal
Guaranteed = stable premium, fixed term

Occupations rate on risk from 1 to 4

22
Q

Income Protection - Underwriting and Claims

A

Much stricter than life; more exclusions

Claims don’t allow for drugs/alcohol, self-inflicted, pre-existing conditions etc

23
Q

Income Protection - Taxation

A

Personal IP policies are tax-free

Employer IP policies are TAXED at income rates

24
Q

What is Critical Illness?

A

Lump sum on serious diagnosis
Survival period of 14 or 30 days before payment

Policy reviews look at medical advancements, not policyholder health
-> More advanced = better diagnosis

Important to use a split trust if also owning life

Don’t cover abroad, self-inflicted, drugs etc.

25
Q

Long-Term Care Protection - Care Act 2014

A

Local authorities responsible for assessment of care needs

Includes means testing of finances; results in paying full costs for care if assets are valued over:
England and NI = £23,250
Wales = £24,000
Scotland = £28,000

£1 per week ‘tapered’ for every £250 between £14,250 and £23,250

State assistance of £60-89.60 per week

26
Q

Long-Term Care Protection - Types

A

Immediate Care = single premium, produces immediate income

Pre-Funded = purchased in advance; rarer

27
Q

Powers of Attorney - Laws

A

Mental Capacity Act 2005 = works out who can’t make decisions
Office of the Public Guardian = helps protect these people
Court of Protection = decides capacity and appoints deputies

28
Q

Powers of Attorney - Types

A

Ordinary PoA = defined period e.g. holiday
Lasting PoA = permanent; registered with OPG; signed by donor and attorney

Property and Financial Affairs
Health and Welfare

29
Q

Equity Release

A

Tax free

Lifetime mortgage = loan against house, no equity is sold

  1. Interest roll-up -> no payments; all paid when house is sold
  2. Interest paying -> regular payments

Home reversion = sell a stake in the house for below market value

30
Q

Insurance-Based Protection

A

Accident and Sickness = death, permanent disability, limb loss
PMI = budget/standard/comprehensive; U/W subject to moratorium
Hospital plan = all or part of hospital stay; recuperation benefits
Dental = covers gaps in PMI
Unemployment = ride to accident and sickness; covers redundancy
PPI = covers repayments on mortgage if unable to work

31
Q

Components of a Will

A 
Testator = person will is about
Beneficiaries
Executor = enforces will
Solicitor = writes will
Witnesses = need 2 independent

Will invalid on marriage, new will or beneficiary death

32
Q

Deed of Variation/Disclaimer

A

Deed of Variation = all beneficiaries sign to ignore and invalidate a will

Disclaimer = one beneficiary exits the will

Can be due to disagreement, don’t want IHT bill etc.

33
Q

PET Scale

A

0-3 years = 100% of IHT charge

Decreases by 20% for every year up to Year 7

34
Q

Selecting Appropriate Protection - Process

A
  1. Quantify needs
  2. Gather data
  3. Analyse existing products
  4. Consider the impact of switching/selling products
  5. Consider underwriting issues
35
Q

Selecting Appropriate Protection - Relevant Factors

A 
Decreasing cover
Level of disability cover
Level of sum assured
Death benefits
Accuracy of beneficiary information
Loss of benefits due to not paying premiums
Amount needed for retirement
36
Q

When to Review Life Policies

A 
When business values change (Partnership/Key Man)
Marriage/divorce
Children
Emigrating
Retirement
37
Q

Protection Planning Process (plugging shortfall)

A
  1. Capital needs (immediate and long-term)
    - > Include existing capital and sum assured of protection
  2. Income needs
  3. Calculate income and capital shortfalls
38
Q

Key Man Sum Assured Formula

A

Cover needed = [Salary x Annual Profit x Years to Recover] / [Total Staff Salaries]

39
Q

Protection Considerations

A
  1. Budget
  2. Cover needed
  3. Term/length
  4. Inflation - can index-link cover
  5. Existing employer cover
  6. Writing in a trust
  7. Presence of a will
40
Q

Market Value Reduction

A

Insurance bond bonuses may be reduced if the policyholder pulls out

41
Q

Life of another policy

A

Policy owned by one person but covering someone else’s life

e.g. wife holding a policy for her husband’s life -> avoids IHT

42
Q

Enduring vs Lasting Power of Attorney

A

Enduring = Property ONLY

Lasting = Property AND welfare (2 separate people)

43
Q

Who has the rights to the income from an interest in possession trust?

A

Life tenant

Financial Planning and Advice (5 decks)

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