2 retail customers

Question 1

7 hierarchy of needs of a client

Answer 1

1. Budgeting
2. mangaging debt
3. Borrowing, including house purchase
4. protection
5. retirement planning
6. saving and investing
7. estate and tax planning

Question 2

Why is budgeting important

Answer 2

Budgeting assessment will allow you to examine whether a proportion of income might be redirected away from a current area of expenditure to an area of higher priority.

Income and expenditure analysis are very important and will play significant part of obtaining your client’s agreement to proceed with any recommendations. It should be carried out as an integral part pf the advice process.

Question 3

Managing debt and borrowing

Answer 3

Expenditure can be considered under three headings:
• Essential spending
• Everyday spending
• Occasional or non-essential spending

Debt consolidation – means negotiating a new loan to repay an existing loan or loans, often with a lower interest rate and lower monthly payments

Question 4

Mortgages and loans

Answer 4

Mortgage is actually the security offered in exchange for the loan.
When the security is signed over to the lender in exchange for the mortgage. This transfer of ownership is called the assignment, in this case a temporary for the term of the loan.

Question 5

2 main ways mortgage can be repaid

Answer 5

1) Capital and interest repayment – where monthly repayments to the lender include a sum to cover a contribution towards the repayment of the capital, plus a sum to cover interest.
2) Interest-only – where the interest accruing on the loan is paid and the outstanding capital remains the same. The objective with this type of loan is to repay it from another source at the end of the term (e.g. ISA, pension fund)

Question 6

Both capital and interest and interest-only loans can be structured in a number of different ways, the most popular of which are:

Answer 6

• Capped
• Cap and collar
• Discount
• Euro ( or other foreign currency)
• Equity-linked, also called shared appreciation mortgages
• Fixed interest
• Flexible
• Offset
• Tracker

Question 7

what is equity release

Answer 7

Equity release describes a range of products only available to older clients, typically over the age of 60. It allows them to release the equity (cash) tied up in their home. The products have no fixed term and allow them to stay in their home for the rest of their life, or until they move into a long-term care facility.
Equity release schemes are either lifetime mortgages or home reversion plans.

Question 8

what is lifetime mortgages

Answer 8

when taking out a lifetime mortgage, clients can choose to borrow a lump sum or instead go for a drawdown facility or even combination of both. When the home is sold, it is used to pay off the loan.

Question 9

Home reversion plan

Answer 9

the client sells all or part of the home in return for a cash lump sum, or regular income. The part of the home belongs to the reversion provider, but the client is allowed to carry on living in it under lese until they die or move into a long-term care facility. Because of this, the client will usually only get between 20% and 60% the market value of their home. The older they are when they star the scheme. The higher percentage they will get.

Question 10

There are 2 home purchase plans that complies with Sharia (Islamic Law) not paying interest

Answer 10

2 Sharia-compliant home plans
• Ijara – monthly payments made towards buying the properly are held by the firm and used to buy the home at end of the agreement.

• Diminishing Musharaka -each payment made towards buying the properly buys an extra slice of the firm’s share. As the client’s share increases, the firm’s share gets smaller and so does the rent pay for use of the firm’s share

Question 11

what is buy to let mortgages

Answer 11

Buying a property to let is a long-term investment which aims to generate an income from rents and a capital gain when selling the property. There is no guarantee that there will be a profit on the investment or that the rental income will exceed any associated mortgage and other costs.

Question 12

Consumers buy to let

Answer 12

mortgages cover lending to some consumers are regulated by the FCA

Question 13

Business buy to let

Answer 13

business buy to let mortgages are not regulated

Question 14

2 main types of loans

Answer 14

• Unstructured – mortgages and loans on commercial properly would fall into the category of unstructured loans.
• Structured – loans ten to used for smaller purchases like sofa or a car. Usually has penalty if loan paid before end of the date.

Question 15

Individual protection needs are influenced by many factors, but the most important include:

Answer 15

• Age
• Dependants
• Income
• Financial liabilities
• Employment status
• Existing cover

Question 16

what is term assurance

Answer 16

Term assurance pays a lump sum (or, in the case of family income benefit, a series of lump sums) on the death of the life assured.
It usually offers the cheapest way to purchase life assurance where the need for cover is likely to last for only a certain length of time. The various types of term assurance include he is following:

• Level term assurance
• Decreasing term assurance
• Family income benefit policies
• Family income benefit polies
• Increasable term assurance
• Convertible term assurance
• Renewable term assurance

Question 17

what is endowment policies

Answer 17

Endowment policies pay a lump sum on the death of the life assured but these policies are primarily savings vehicles.

Endowment policies are not usually suitable as a means of providing a significant level of life cover where the client’s budget is limited. This is because the bulk of the premium is directed towards the savings element of the contract, leaving relatively little to provide the life cover.

Question 18

what is whole of life policies

Answer 18

Whole of life policies are primarily geared towards providing a substantial level of life cover, but some do have an element of investment.

Whole of life policies provide cover for the lifetime of the assured.

Question 19

whole of life policies with non-profit, with profit and flexible

Answer 19

The non-profit whole of life policy guarantees to pay a fixed amount of life cover on the death of the life insured, whether this occurs one day after the policy was taken out or 30 years later.

With- profit whole of life contract guarantees to pay a minimum level amount of life cover on the death of the life assured, and this amount increases annually by the addition of annual (or reversionary) bonuses, although these bonuses are not guaranteed.

Flexible
the policy holder chooses between a minimum and maximum level of life cover.