2: Financial Protection Needs Flashcards
What type of insurance offers a lump sum payment on the death of the life assured?
Life assurance
What type of insurance provides a regular income if the insured is unable to work due to accident or illness?
Income protection insurance
What type of insurance provides a lump sum payment if the insured is diagnosed with one of the specified critical illnesses?
Critical illness cover
What type of insurance offers cover for the costs of long-term care due to old age or infirmity?
Long-term care insurance
What type of insurance provides a regular income to cover loan or credit card repayments in cases of illness, accident, redundancy, or unemployment?
Payment protection insurance
What type of insurance provides a lump sum or income benefits if the insured suffers an accident or illness?
Personal accident and sickness insurance
What type of insurance offers a lump sum or income benefits if the insured suffers an accident or is unable to work due to sickness, redundancy, or unemployment?
Accident, sickness, and unemployment insurance
What type of insurance provides cover for the costs of private medical treatment?
Private medical insurance
What type of insurance offers small lump sum benefits for medical treatments or daily hospital stays?
Health cash plan
What type of insurance combines multiple covers, such as life assurance with critical illness cover or income protection insurance, into one contract?
Menu plans
What type of insurance can help avoid long NHS waiting times and ensure quicker access to treatment?
Private medical insurance
Name 2 types of insurance that will help mitigate the effects of being off work through accident or illness?
Income protection
Accident, sickness, and unemployment cover (ASU)
What’s the difference between assurance and insurance?
Assurance: Covers events that are certain to happen, like death (e.g., life assurance).
Insurance: Covers events that might happen, like accidents or illnesses (e.g., health insurance).
How long is protection typically available for mortgage repayments or other loan and credit card arrangements?
2 years
What remains most people’s protection against redundancy, since it is impossible to insure fully against?
Personal savings.
What is usually the most appropriate insurance for a single person without dependants who is buying their first home, and why?
Income protection – as the person has no dependants, the most important cover is one to enable them to continue to make their mortgage payments.
Why might a child be dependent on their parents long after age 21?
Physical and/or mental disability
What is the IHT rate on estates exceeding the nil-rate band?
Up to 40% of the excess
What is the nil-rate band and residence nil rate band for IHT in 2024/25?
£325,000 and £175,000
What happens if a potentially exempt transfer (PET) fails?
It falls back into the donor’s estate and may result in a tax bill.
What is the tax rate for chargeable lifetime transfers (CLTs) exceeding the nil-rate band?
20% initially, with further tax possible if the donor dies within 7 or 14 years.
Are transfers between spouses or civil partners subject to IHT?
No, they are generally exempt, and unused allowances can be transferred.
A person gifts £100,000 to their child. Five years later, they pass away, leaving an estate worth £400,000. How is the £100,000 treated for IHT purposes, and is there any tax due?
The £100,000 gift is treated as a Potentially Exempt Transfer (PET). Since the donor died within seven years, the PET is considered to have “failed” and falls back into the estate. The estate total is now £400,000 + £100,000 = £500,000. After the nil-rate band of £325,000, the taxable amount is £175,000, with IHT at 40%, making the tax due £70,000.
An individual transfers £400,000 to a trust (discretionary) in a single year. What is the immediate tax implication if the nil-rate band has already been used?
As the nil-rate band has been exhausted, the excess £400,000 incurs a chargeable lifetime transfer (CLT) tax of 20%, which is £400,000 x 20% = £80,000. If the donor dies within 7 years, there could be further tax implications.
A married couple jointly owns an estate worth £800,000. One spouse passes away, leaving the entire estate to the other. What steps should be taken to minimise IHT on the death of the surviving spouse?
Transfers between spouses are exempt from IHT, so no IHT is due at the first death. The surviving spouse should ensure unused allowances (such as the nil-rate band and residence nil-rate band) are transferred to maximise protection.
What is the key difference between a PET and a CLT in relation to trusts?
PET: Applies to gifts to an absolute/bare or disabled person’s trust; only taxed if the donor dies within 7 years.
CLT: Applies to gifts to other types of trusts and may incur an immediate 20% tax if the amount exceeds the nil-rate band.
Bob dies, leaving a cash-only estate of £500,000 to his son, James. He had made no lifetime gifts. What is the IHT payable (ignoring transferable allowances)?
To calculate the inheritance tax (IHT) payable:
IHT payable: £175,000 × 40% = £70,000.
What is key person insurance?
It’s protection for businesses against the loss of critical individuals, covering life assurance, critical illness, or income protection.
Why do partnerships have unique protection needs?
A partner’s death might not align with the terms of their will, creating challenges for the partnership.
What is the benefit of policy splitting after divorce?
It allows both parties to retain cover without underwriting and can be beneficial if health has deteriorated or new policy terms are less favourable.
How much life insurance can someone take out for their ex-spouse’s life?
Limited to the amount of maintenance they receive, as that’s their insurable interest.
How does the breakdown of a long-term relationship differ from divorce in terms of legal consequences?
It doesn’t carry the same legal consequences but may lead to a review of protection cover.
Sarah and John recently divorced, and the court has ordered John to pay Sarah £1,500 per month in maintenance. Sarah wants to insure John’s life to ensure financial security if he passes away unexpectedly. How much life insurance can Sarah take out for John’s life, and why is there a limit?
Sarah can take out life insurance on John’s life up to the amount of the maintenance payments she receives—£1,500 per month. This is because her insurable interest in John’s life is limited to the financial dependency created by the maintenance payments. She cannot insure him for more than this amount.
Is liquidity an important factor in assessing assets for insurance needs?
Yes, because not all assets can be accessed quickly during emergencies.
What regulatory requirement ensures proper assessment of assets, liabilities, and financial dependants?
FCA ‘know your customer’.
How is income replacement provided by the employer taxed?
It is subject to income tax and National Insurance.
Why must employee benefits be considered during a protection needs review?
To avoid duplicating cover already provided by the employer and to fill any gaps.
Why might an employer be able to get cheaper private medical insurance premiums
than an individual?
Bulk cover deals
