2 - Financial Protection - (24/80) Flashcards
Reasons for Under-insurance
- Over-reliance on the state
- Failure to plan
- Affordability
Insurance Trends
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
Protection priorities
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
Shareholder and Partnership cover components
- Cross option agreement (allows survivors to buy shares)
- Life cover (to pay for the shares)
- Trust (to transfer shares/cash tax-free)
Universal Credit
Replaces JSA, ESA, income support etc.
For low/no income and savings under £16k
Statutory Maternity Pay
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
Support for Mortgage Interest
Covers interest on £200k at 2.61%
Only £100k if claiming pension credit
Bereavement Support Payment
Paid for 18 months
Children = £3500 lump sum + £350 per month
No children = £2500 lump sum + £100 per month
Types of Joint Life Policies
First death = pays on 1 death; good for mortgage/dependants
Second death = pays on both dead; good for IHT
Term Life & Types of Term
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
Whole of Life & Types of WOL
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
Endowment and Types of Endowment
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
Protection Law and Trusts
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
Underwriting and Claims
U/W = age, health, weight, family history, lifestyle, hazardous activities, occupation, residency, travel
Claims = death certificate, title, birth certificate (prove age)
Protection assignment
Policy sold on secondary markets and transferred to someone else
Paid-up policy
Can convert a policy into this if unable to afford premiums
or
Surrender value is paid out
Taxation of Life Policies - Qualifying Policies
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
Taxation of Life Policies - Non-Qualifying Policies
Non-Qualifying = taxed
All single premium
Tax charged on certain events: Death Assignment Maturity Excess withdrawals (over 5% per year allowance) Surrender
Top-Slicing Relief for Life Policies
Relief = difference between tax on gain and tax on average gain
- Work out tax if the encashment was to be taken fully and added to regular income in the year
- Single out tax on just the policy encashment
- > Subtract basic rate tax from this to find X (assume taken at source) - Work out the annual equivalent if the policy had been equally cashed out over the space of its life
- Find the tax on this annual equivalent
- > Subtract basic rate tax
- > Multiply this number by years held to find Y - 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
Income Protection - Benefits
‘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
Income Protection - Types of Premium
Reviewable = every 1 or 5 years Renewable = short-term, guaranteed renewal Guaranteed = stable premium, fixed term
Occupations rate on risk from 1 to 4
Income Protection - Underwriting and Claims
Much stricter than life; more exclusions
Claims don’t allow for drugs/alcohol, self-inflicted, pre-existing conditions etc
Income Protection - Taxation
Personal IP policies are tax-free
Employer IP policies are TAXED at income rates
What is Critical Illness?
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.
