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.
Long-Term Care Protection - Care Act 2014
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
Long-Term Care Protection - Types
Immediate Care = single premium, produces immediate income
Pre-Funded = purchased in advance; rarer
Powers of Attorney - Laws
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
Powers of Attorney - Types
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
Equity Release
Tax free
Lifetime mortgage = loan against house, no equity is sold
- Interest roll-up -> no payments; all paid when house is sold
- Interest paying -> regular payments
Home reversion = sell a stake in the house for below market value
Insurance-Based Protection
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
Components of a Will
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
Deed of Variation/Disclaimer
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.
PET Scale
0-3 years = 100% of IHT charge
Decreases by 20% for every year up to Year 7
Selecting Appropriate Protection - Process
- Quantify needs
- Gather data
- Analyse existing products
- Consider the impact of switching/selling products
- Consider underwriting issues
Selecting Appropriate Protection - Relevant Factors
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
When to Review Life Policies
When business values change (Partnership/Key Man) Marriage/divorce Children Emigrating Retirement
Protection Planning Process (plugging shortfall)
- Capital needs (immediate and long-term)
- > Include existing capital and sum assured of protection - Income needs
- Calculate income and capital shortfalls
Key Man Sum Assured Formula
Cover needed = [Salary x Annual Profit x Years to Recover] / [Total Staff Salaries]
Protection Considerations
- Budget
- Cover needed
- Term/length
- Inflation - can index-link cover
- Existing employer cover
- Writing in a trust
- Presence of a will
Market Value Reduction
Insurance bond bonuses may be reduced if the policyholder pulls out
Life of another policy
Policy owned by one person but covering someone else’s life
e.g. wife holding a policy for her husband’s life -> avoids IHT
Enduring vs Lasting Power of Attorney
Enduring = Property ONLY
Lasting = Property AND welfare (2 separate people)
Who has the rights to the income from an interest in possession trust?
Life tenant
