2. Serving the Retail Consumer Flashcards

Question

Define a Term Assurance

Answer 1

A term assurance pays a lump sum upon death of the life assured

Answer 2

* Level Term Assurance * Decreasing Term Assurance * Family Income Benefit Policies * Increasable Term Assurance * Convertible Term Assurance * Renewable Term Assurance

Answer 3

An endowment policy is essentially a life insurance policy which, apart from covering the life of the insured, helps the policyholder save regularly over a specific period of time so that he/she is able to get a lump sum amount on the policy maturity in case he/she survives the policy term.

Answer 4

This is insurance you buy for the length of your life. Unlike term insurance, whole life policies don't expire. The policy will stay in effect until you pass or until it is canceled. The initial cost of premiums is higher than it is with term insurance because of the length of the policy.

Answer 5

* Non-profit * With-profit * Flexible

Answer 6

The non-profit whole of life policy guarantees to pay a fixed amount of life cover on the death of the life insured irrespective of the length of time since the policy was taken out.

Answer 7

The with-profit whole of life contract guarantees to pay a minimum level amount of life cover on the death of the life assured. This amount increases by the addition of annual (reversionary) bonuses. These bonuses permanently increase the basic guaranteed sum insured. Further, a final (terminal) bonus is usually paid on death which can increase the level of payout substantially.

Answer 8

The policy holder chooses between a minimum and maximum level of life cover. The policy allocates the policyholder's premiums to buy units in one of the funds offered by the life office. Then, every month, the life office calculates the cost of life cover for the next month and deducts this charge 'by 'cancelling' a portion of the PH's units to pay for it. In this way, the policy grows in value as the number of units held in the policy accumulates and the value of each unit increases. (NB: The cover selected at the outset can be changed within these upper and lower limits at any time)

Answer 9

* Unit-linked whole of life plan | * Universal life plan

Answer 10

IP policies are designed to replace lost income for an individual who, due to sickness or injury, is unable to work (Benefits are exempt from Income Tax). N.B Insurance pricing based on statistical gender differences is no longer permitted (2011)

Answer 11

Policies that pay a regular benefit while the insured person is unable to work due to sickness/injury. (Similar to IP policies but they have differences).

Answer 12

1. Types of benefit - A&S may also pay a one off lump sum 2. Period of time for which the policies pay benefits (1/2 years for A&S vs up to retirement age for IP). Deferred period is longer for A+S 3. A&S proposal forms have less health and occupation questions - more likely that different occupations will be accepted 4. A&S regular benefit is likely to be a fixed sum rather than a percentage of the PH's earnings

Answer 13

ASU is an annual policy with a maximum payout period of one to two years

Answer 14

1. Pay a lump sum opposed to a regular income 2. Payment is made on the diagnosis of specified illnesses (irrespective of ability to work) 3. CI cover can be provided by standalone policies or incorporated in Term, Whole of Life or endowment policies

Answer 15

Insurance policies which pay benefits if an insured person is made redundant - usually only in connection with mortgages and loans. Benefits are used to meet the debt's regular monthly payments.

Answer 16

1. Provide accident, sickness and unemployment cover 2. Pay out after a maximum of 60 days off work 3. Provide cover for a minimum of 12 months 4. Pay out to the self employed who have informed HMRC they have stopped trading and have registered for Employment and Support Allowance (ESA)

Answer 17

1. Receipt of State benefits may reduce the necessary private financial provision for illness, retirement or death; but 2. The low level of State benefits frequently emphasises the need for private financial provision

Answer 18

A universal non-means-tested benefit for parents to claim for their children. N.B. A tax charge is payable if the parent or their spouse/cohabiting partner has an income over £50,000

Answer 19

Child tax credit is paid to families with children regardless of whether the parents work. it is integrated within the tax system and administered by HMRC. N.B. New claims can only now be made by those entitled to the severe disability premium. It has been replaced by Universal Credit for the other new claimants.

Answer 20

Maternity Allowance pays a standard weekly rate of £151.20 or 90% of average weekly earnings, whichever is the smaller, to somebody who does not qualify for statutory maternity pay.

Answer 21

Provides help for adoptive parents to take time off work after adopting a child. It is paid at the standard rate or 90% of their average weekly earnings; whatever is less, for 39 weeks.

Answer 22

For new mothers, this is paid for the first six weeks at 90% of their average weekly earnings (before tax) with no upper limit and, for the remaining 33 weeks, at the lower of either the standard rate or 90% of their average weekly earnings (before tax). N.B. The receiver must have worked for the employer (without a break) for at least 26 weeks by the 15th week before the baby is due.

Answer 23

For new fathers, this is paid for one or two consecutive weeks at the lower of either the standard rate or 90% of their average weekly earnings (before tax). N.B. The receiver must have worked for the employer (without a break) for at least 26 weeks by the 15th week before the baby is due.

Answer 24

Financial support for those on low incomes with severe disabilities who are not eligible for Jobseeker's Allowance or Employment Support Allowance. N.B. Others on low support must now apply for Universal Credit.

Answer 25

New style, contribution-based and income-based. N.B. Only those entitled to the severe disability premium can apply for contribution-based or income-based JA. Other new claimants must apply for the 'new style' JA. This works in the same was as the CB type.

Answer 26

Working Tax Credit is paid to people on low incomes and can, in certain cases, include 'childcare element' to help with up to 70% of childcare costs. N.B. Similar to Child TC, this is administered by HMRC and has been replaced by the Universal Credit for new claimants, unless they are entitled to the severe disability premium. If aged 25+ must work at least 30 hours per week

Answer 27

A paid loan which needs to be repaid with interest when the home is either sold or its ownership transferred to someone else (e.g. on death). Qualifying claimants (homeowners with either mortgages or home improvement loans, who are in receipt of a qualifying benefit) get help paying the interest portion of their mortgage or loan repayments on up to £200,000 of their mortgage or loan in the form of payments. The payments are made directly to the lender after a waiting period of 39 weeks after claiming the income-related benefit.

Answer 28

A tax-free benefit for those over State pension age who are physically or mentally disabled who are physically or mentally disabled and need help with personal care and/or their mobility.

Answer 29

An interest-free loan for those on a low income who need help with certain important costs, such as clothing, furniture and travel.

Answer 30

A taxable benefit for those who look after someone who is disabled. They do not have to be related to, or live with, the person they care for.

Answer 31

A tax-free benefit for disabled people, including children, who have difficult walking and who need somebody to look after them. N.B this allowance is ending for those born after 8 April 1948 and are 16 over and is being replaced by the Personal Independence Payment (PIP)

Answer 32

The successor of incapacity benefit, ESA is paid to those with an illness or disability but aims to get them into some kind of work.

Answer 33

A standard rate per week, it is paid by employers for up to 28 weeks if somebody is unable to work because of illness.

Answer 34

The taxable, earnings-related component of the State Pension made up of one or more of the State Graduated Pension, State Earnings Related Pension and the State Second Pension. N.B. This is paid in addition to the Basic State Pension for those retiring prior to 6 April 2016. For those returning after that date, a deduction is made from the new State Pension for anytime spent contracted out of these schemes.

Answer 35

This guarantees a minimum income to those of State pension age by topping up the weekly income. N.B. There is also a savings credit for those aged 65 and over of up to £13.97 (single) / £15.62 (couple) per week although this is not usually available to those retiring on or after 6 April 2016.

Answer 36

The avoidance of poverty in old age.

Answer 37

The pension available to all those who have reached State pension age. As of October 2020 this is 66 years. N.B. The state pension acts as a safety net, but there is increasing uncertainty due to life expectation increasing and number of relative workers decreasing.

Answer 38

- Age - Income - Dependents - Previous and current pension arrangements - State provision

Answer 39

They are free of income tax and CGT but the proceeds are also free of tax. (In contrast to a pension which is tax as earned income). N.B. The whole some can be taken as a tax free lump sum at any time.

Answer 40

A CPA is taxed as earned income on the whole of the income paid at 20%, 40% and 45% rates. The income from a PLA is separated into an interest and a capital element. N.B. PLA annuity rates tend to be better than the equivalent rates for CPAs. (The former have to compete for business where as the latter have a ready-made market.

Answer 41

State pensions are available to people who have paid, or been credited, with 35 qualifying years of National Insurance contributions (NICs) and, not been contracted out of the State Pension at any time during their working life. Amounts: NSP - Post April 2016 = £175.20 (2020/21) BSP - Pre April 2016 = £134.25 (2020/21) (Proportionately smaller if insufficient NI credits). N.B. Those who retired prior to April 2016 were able to build up rights to an Additional State Pension.

Answer 42

1. Occupational | 2. Personal

Answer 43

Occupational Pension schemes are set up by an employer and trustees are appointed to over see them. There are two types; defined benefit and defined contribution.

Answer 44

Sometimes known as pooled funds, this type of scheme sets out to provide members with a pension that is related to their earnings. The schemes rules define exactly, what salary is paid during retirement. N.B. An actuary advises the trustees how much money needs to be paid into the fund to pay the promised benefits.

Answer 45

In these schemes, rates of contributions tend to be expressed as percentages of earnings, but sometimes they can be expressed as a fixed monetary amount. N.B. Each member of the scheme is given an identifiable 'pot'. The contributions are paid to the scheme for a member and added to their pot and invested for them.

Answer 46

The individual has their own pension and the provider has a direct responsibility to them to pay the benefits promised in the contract. A stakeholder pension is a type of personal pension that meets specific stakeholder pension requirements. N.B. With these types of pension, the PH decides how much they can afford to save. This will be paid to the provider who will invest it for the PH.

Answer 47

This includes the pension schemes of nationalised industries and the statutory superannuation schemes for civil servants and other quasi-public servants, such as NHS employees, lecturers and teachers, police officers and fire officers.

Answer 48

These are provided by non-Government employers ranging from large public companies to sole traders.

Answer 49

Schemes that manage their own investment contributions to provide future benefits.

Answer 50

These are provided by life assurance pension providers which may be independent or part of a financial services group. N.B. A range of types of organisation provide investment funds for pensions, these include unit trusts, open-ended investment companies (OEICs), banks, insurance companies and investment managers.

Answer 51

This phrase tends to be used where the objective of the client is to turn small amounts of money put aside on a regular basis into bigger lump sums.

Answer 52

This phrase tends to where a sum of money has been accumulated over time, inherited or arisen as the result of a windfall.

Answer 53

Shortest timescale of investment. Refers to a readily available 'pot of money' or an 'emergency fund'. For those earning, 3-6 months expenditure should be used as a guide, or 10% of total investments.

Answer 54

Investments which cover the 5-15-year period. Some overlap with short term investments. Savings for large purchases/events over a longer period than an individual would save for on their own.

Answer 55

Investments of 15 years or longer. For longer term savings it is important to maintain and build on their value. Fortunately, there are a wider range of potential investment choices for long term investments.

Answer 56

1. Shares - A stake in a company. (Most volatile) 2. Bonds - Loans to a company or the Government 3. Property - either commercial or residential 4. Cash 5. "Alternatives" - encompasses a range of further investment types such as absolute return funds, hedge funds, derivatives, commodities and other tangibles (e.g. antiques, fine art and wine etc.)

Answer 57

Diversification - purchasing multiple investments.

Answer 58

A pooled investment provides a relatively easy way of spreading investment risk by investing in a range of assets. N.B. The most comment types are Open-Ended Investment Trusts, Unit Trust, Investment Trusts, and Life Funds.

Answer 59

A Tax Wrappers holds investments, such as an ISA and pension, and you pay less or no tax.

Answer 60

A platform is a proprietary (protected) system that provides access to define selection of collective investments. N.B. Within the platform there may be different products that all use the defined selection of investments, but effectively provide access to different tax wrappers e.g. ISAs, OEICs, offshore bonds, pensions etc.

Answer 61

Shares are also known as equities or stocks. When you buy shares in a company, you are buying a part of that company, (become a shareholder), which usually means you have a right to vote on certain issues. N.B. You can either buy new shares when the company starts up ans sells to raise money (through an Initial Public Offering) or buy existing shares on the Stock Market.

Answer 62

The main factor determining the price of a share is the perception of its current value to its owner. N.B. A factor which affects the price is a change in opinion as to how well the company itself is currently performing or could perform in the future.

Answer 63

A bond is a loan to a company, the Government or a local authority, and in return investors get a regular income from the interest until the loan is paid.

Answer 64

- Loan stock - Fixed interest - Debt insecurities - GILTS (loans to the government) - Corporate bonds (loans to companies)

Answer 65

Investors normally get a regular, stable income. N.B. They are not generally here to provide long-term capital growth.

Answer 66

The company who have lent the money will default, and be unable to pay the interest due or return the money at the end of the term. N.B. These risks do not usually apply to GILTS.

Answer 67

Problems of inflationary risk

Answer 68

This offers a level sum assured in return for a level premium throughout the term of the contract

Answer 69

These policies are designed to meet the needs of individuals with a decreasing liability on death, such as those with loans that are gradually being repaid.

Answer 70

These are a special form of decreasing term assurance whereby, on the death of the life assured, the life office will make a series of regular annual or monthly payments, instead of one lump-sum payment.

Answer 71

This provides for the sum assured to be increased regularly over the term of the contract (e.g. by 5% per annum), without any evidence that the life assured is still in good health, or alternatively offers the option to the PH to make such increases. N.B. For this variation the life office will charge higher premiums which also increase as the sum assured increases. This allows the PH to ensure that their life assurance maintains its value in real terms against inflation.

Answer 72

This allows the PH to change the term policy into either an endowment policy or a whole of life policy with up to the same sum assured at any time before the end of the term of the original policy. N.B. This is a valuable feature if the PH's need is for additional savings (convert to endowment) or longer-term protection (convert to whole of life).

Answer 73

This allows the client to effect a term assurance policy for say, three of five years, at the end of which the client has the guaranteed right to effect a similar policy for a similar term without having to give the life office any evidence that they are still in good health. N.B. The short initial term means that premiums are very low, while the guaranteed ability to renew means that the client will not then be left without life assurance at the end of the term (assuming they take up the renewable option). Although the premiums will be low for the initial term, the premium rates will increase with age each time a new policy is taken out under the option.

Answer 74

The lender guarantees that the interest rate will not rise above a given level for a certain period of the loan

Answer 75

The lender guarantees that the interest rate on the loan will not rise above (the cap) or fall below (the collar) a given level. N.B. The two can be applied together to produce an upper and lower limit for a given period of time.

Answer 76

The interest rate charged for an initial period of the loan is reduced by a set percentage below the standard rate charged by the lender

Answer 77

The interest and capital of the loan is designated in euros (or other currency), usually to take advantage of lower interest rates).

Answer 78

The lender takes a stake in the equity of the property that has been purchased. The mount loaned, on which interest is charged, is less than the amount advanced for the purchase. N.B. On the sale of the property, the proportion of the lender's equity stake is repaid to them.

Answer 79

The interest rate charged remains fixed for a given period. The borrower takes a risk that interest rates generally might fall below the rate charged, but in exchange have a known liability for mortgage interest over the fixed period. N.B. These schemes often carry redemption policies.

Answer 80

Monthly payments can be varied if required and lump-sum capital repayments made at any time. As capital is repaid, this creates a reserve from which the borrower can withdraw cash up to the initial mortgage amount at any time.

Answer 81

This is where a mortgage account and a current account are linked. Interest is charged on the net balance of the two accounts, so if money is kept in the current account the size of the mortgage is effectively reduced. Even the effect of a monthly salary going in can have an effect and reduce the overall interest payments.

Answer 82

A variable rate mortgage where there is an automatic link built in, so the interest 'tracks' an index, usually the Bank of England base rate or London Interbank Offer Rate (LIBOR). They are designed to move as the index moves.

Answer 83

F: Usually pays higher interest than current account A: Instant or easy access B: You usually get back at least what you put in

Answer 84

F: The maximum you can put in is £20,000 per tax year. Sometimes pays higher interest than normal deposit accounts and is tax exempt. A: Instant or easy access, but some can have notice periods. B: You usually get back at least what you put in. Interest is tax-free

Answer 85

F: You have to give notice to take your money out A: Involves a penalty if you withdraw your money without giving enough notice. B: You usually get back at least what you put in

Answer 86

F: You usually have to leave your money in for one year or more (the term). A minimum deposit is often required. A: Might be difficult or could involve a penalty if you withdraw during the term. B: You usually get back at least what you put in

Answer 87

F: Your current account is with the same provider as your savings account. You regularly transfer the same amount each month into this account for a fixed period. A: Usually interest is only paid yearly, and you can only withdraw yearly. B: You usually get back at least what you paid in. You get a higher interest rate.

Answer 88

A pooled investment is where investors' money is 'pooled' together into a fund which is then invested in one or more asset classes by a fund manager.

Answer 89

- Professional expertise - Spreading your risk - Reduced dealing costs - Less administration - Choice

Answer 90

- Open-ended investment funds - Life and pension funds - Endowments - Investment Trusts

Answer 91

Life offices run open-ended life funds which are linked to their 'investment bond' life products. Investment bonds are designed to produce medium to long-term capital growth, but can also be used to give investors an income via a regular withdrawal facility.

Answer 92

Endowments are regular premium policies which combine investments with life cover and are sometimes used to repay interest-only mortgages.

Answer 93

An investment trust is a listed company with a set number of shares. It is allowed to borrow money to invest (called gearing). N.B. These are closed-ended - there is a set number of shares available, and will remain the same no matter how many potential investors there are.

Answer 94

CFDs are contracts stating that one of two parties will pay the other the difference between the current value of an asset and its value at a later date.

Answer 95

- The investment components are cash or stocks and shares, and there is no restriction on how a contribution may be divided between the components - No withdrawals are possible before age 18 - Normal ISA tax benefits apply, except there is no personal liability on income generated from contributions made by a parent - The annual limit for contributions is £9,000 - Existing Child Trust Funds can be transferred into JISAs

Answer 96

- Organise an estate to reduce the overall liability | - Provide for money to cover the liability

Answer 97

- To move value out of an individual's estate, but without giving immediate benefit to their desired beneficiaries - To provide a tax-free lump sum on death, sufficient to pay the potential IHT liability

Answer 98

- Know your client - Assess Needs & Objectives - Research - Recommendations - Communication - Suitability Reports

Answer 99

Cost of guaranteed premiums increases due to to possible future medical advances. Considerably cheaper.

Answer 100

Can be bought when needed or bought in advance. Regulated and further qualifications needed.