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Cemap 2&3 Self Testing > 21. Using Endowment Policies For Mortgage Repayment > Flashcards

21. Using Endowment Policies For Mortgage Repayment Flashcards

1
Q

What are the two elements that endowment policies compromise of?

A
  1. Life Assurance
    - guaranteed sum assured on death during term
  2. Investment
    - aims to provide maturity value sufficient to pay off loan at end of term, possibly surplus for borrower
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2
Q

Will an endowment be guaranteed to pay off a mortgage loan on death? (2)

A

Yes, so long as
1. the term of the endowment matches the loan term for it to reach maturity or death occurs within term
2. Guaranteed sum assured is the same as the mortgage amount

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3
Q

Are the following endowments guaranteed to pay of the mortgage loan at end of term?
1. Non-profit
2. With profits
3. Low cost with profits
4. Unit linked

A
  1. Yes, so long as GSA is same amount as mtg
  2. Yes, so long as GSA is same amount as mtg
  3. No - GSA will be below mtg amount, rely on bonuses
  4. No - no GSA, totally dependent on performance of units
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4
Q

Can mortgage advisers give advice on endowment products?

A

No, not advice or recommendation - only financial advisers

Just general info

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5
Q

How are premiums invested into a with profits endowment? What are the things that managers use the fund to pay for? (6)

A
  1. Life assurance
  2. Guaranteed sum assured
  3. Bonuses already declared (past)
  4. admin fees
  5. create a reserve - for future bonuses if the fund doesn’t perform as well (future)
  6. Bonuses payable at the current time (present)
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6
Q

What sort of investments do managers invest funds into for with profit endowments?

A

Lower risk/cautious
e.g GILTS, Bonds, Cash

After all, there is a GSA, they need to make sure there is money to pay for this, unlike unit-linked where you could lose all your money

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7
Q

What is ‘smoothing’ in relation to with profits endowments?

A

Instead of seeing peaks and troughs in fund performance you get a smoother performance because manager holds back money in a reserve. Years when fund performs well, some of the money is held back and kept for years when it doesn’t perform so well/

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8
Q

Are bonuses guaranteed for with profits endowments?

A

No - reserve funds do run out

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9
Q

With profits endowments - can bonuses already awarded be taken away?

A

No, once it is added to either the death benefit or the maturity value it can’t be taken away.

However, if the plan is surrendered early, bonuses can be reduced

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10
Q

What is a surrender value? How will this relate to the current value the fund is at when it is surrendered?

A

The amount a fund is worth if it is surrendered early, before the date of maturity.

Will always been less than the current value of the fund and bonuses are not guaranteed

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11
Q

What is the Reversionary Bonus (with profits endowments)? How is it added? Is it guaranteed to be paid?

A

Bonus which is added annually. Calculated as a percentage of the fund’s guaranteed sum assured.

it is guaranteed to be paid on maturity so long as you don’t cancel early

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12
Q

What is the terminal bonus (with profits endowments)? How is it added? Is it guaranteed to be paid?

A

Added ON MATURITY (or death if you die first), with the aim to REWARD LONG STANDING CUSTOMERS. How much is at the discretion of the company, but can be a large portion of the policy value (around 40%).

NOT GUARANTEED - will not be paid in years of poor performance. If this happens, the maturity value will be much lower than expected.

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13
Q

What charges are incurred within with profits endowments? How are they paid? (3)

A
  1. Monthly policy fee (taken from premiums)
    - designed to cover admin costs
    - £2-3
  2. Investment Fund Management Costs (taken from the fund)
    - not clearly detailed in policy terms
  3. Market Value Adjuster (taken from fund)
    - only if plan is cashed in early. A portion of the fund will be taken as MVA, value of units paid out will be less to protect the interests of other investors
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14
Q

What does it mean to make a with profits endowment policy ‘paid up’?

A

When you want to stop paying premiums, but not cash in the plan early, you can make it paid up. The fund becomes frozen and reduced to a guaranteed sum assured and death benefit. Bonuses already paid are protected, but you don’t get any new ones.

Fund will continue to grow but much more slowly without premiums and bonuses being added.

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15
Q

With profits endowments - are bonuses being relied on to pay the mortgage?

A

No, GSA will cover mtg. Bonuses are designed to provide surplus cash

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16
Q

Do low cost with profits endowments have a Guaranteed sum assured?

A

Yes, but this is usually only 50-60% of the mortgage loan. You rely on bonuses to make up the shortfall.

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17
Q

If a low cost with profits endowment performs well, roughly how much of the fund is expected to be surplus cash, over the mortgage amount?

A

20%

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18
Q

Are low cost with profits endowments guaranteed to pay off your mortgage?

A

Yes on death, but not on maturity

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19
Q

How is life cover provided with low cost with profits endowments? What do you get when you die?

A

Arranged as DECREASING TERM ASSURANCE which moves in line with the mortgage.

If you die within the term, you get your mortgage paid off as the decreasing term assurance plugs the gap between the GSA and your mortgage amount

20
Q

Are you able to lose all of your money and get nothing at all at the end of term with a low cost with profits endowment?

A

Not so long as you keep up your premiums and don’t cancel.

There is a GSA, you won’t lose this, it’s just not enough to cover the mtg on its own

21
Q

Low costs with profits endowment - can bonuses be taken away once they are awarded?

A

No

22
Q

What is a low cost low start endowment? How does it differ from the low cost-with profit?

A

Exactly the same as low cost with profit but with one difference

Premiums are much LOWER FOR THE FIRST 5 YEARS. In these 5 years, they increase by 20% each year until they reach the full amount after 5 years. The full amount after 5 years will be MORE EXPENSIVE THAT LOW COST WITH PROFITS

23
Q

Do unit linked endowments have a guaranteed sum assured?

A

No, not guaranteed to get anything on maturity but you do have a guaranteed death benefit if you die within the term

24
Q

What type of life assurance is provided with unit linked endowments?

A

VARIABLE TERM ASSURANCE

when you die, you get the value of your fund back and then this is topped up by variable term assurance to reach the amount of your mtg

25
Q

With unit linked endowments, what are the premiums used to pay for?

A

Premiums are used solely to purchase units

26
Q

Unit linked endowments - how to managers cover the cost of life cover, admin fees etc?

A

They cash in units, leaving the remaining funds invested to build value

27
Q

Unit linked endowments - are any units set aside into a reserve fund (i.e smoothing) like with With profit endowments?

A

No, all units that are not cashed to pay for life cover / fees remain within the fund

28
Q

How do you calculate the fund value of unit linked endowments?

A

Number of units * unit price

29
Q

What is the offer price?

A

The price at which units are purchased at

30
Q

What is the bid price?

A

The price at which units are sold back to the manager at

31
Q

What is the bid offer spread?

A

Difference between the bid price and offer price

32
Q

How are the cost of premiums set for unit-linked endowments?

A

At the start of plan, company estimates what the annual growth of the fund will be along with the annual running costs.

If the fund performs as they predicted you get your target maturity figure. If it exceeded expectations you get more. If it performs lower than expected, you will get less

33
Q

Which endowment is considered to be flexible, allowing you to alter the term, sum assured and premium amounts? (subject to company policy)

A

Unit-linked

34
Q

How are units chosen with unit linked endowments?

A

The plan holder choses a risk profile (low, medium, high). The manager invests in funds of the chosen risk.

35
Q

What charges are incurred with a unit-linked endowment? (5)

A
  1. Initial charge - 5% taken from each unit when purchased
  2. Monthly management fee - taken from premium before investment
  3. Annual fund management charge - 0.5-1.5% cashed in from fund value
  4. Early surrender charge - if surrendered within first 10 years, units get deducted (earlier it is, more decucted)
  5. Charges to cover the cost of benefits, e.g. life cover, taken by cashing in units
36
Q

Which endowment requires reviews to be carried out during the term? What would be a typical review pattern for a 25 year plan?

A

Unit linked

25 year plan
year 10, 15, 20 & then annual for remainder

37
Q

Describe what is meant by a unitised with profits endowment?

A

Combines the security of a with profits endowment with the potential of unit linked growth

Premiums buy units within a with profits fund at a set price, the set price is a guaranteed minimum that will be paid on maturity - can’t go below this

38
Q

What are the two types of units available in unitised with profits endowments?

A
  1. Variable units
  2. Fixed units
39
Q

How are fixed units priced? How are bonuses added?

A

Fixed price at the time of purchase with DOES NOT INCREASE.

Bonuses are added by ADDING MORE UNITS TO THE POLICY AT THEIR CURRENT PRICE, NOT BY INCREASING THE VALUE OF UNITS ALREADY OWNED

40
Q

How are variable units priced? How are bonuses added?

A

Purchase price is based on company’s with profits PERFORMANCE at time of purchase.

Bonuses are ADDED TO THE UNITS ALREADY PURCHASED AND IT’S VALUE WILL INCREASE. Once increased, bonuses cannot be taken away

41
Q

What option of flexibility is included with unitised with profits?

A

Ability to switch in and out of other unit linked funds

42
Q

Can you cash out of a unitised with profits endowment early?

A

Yes, but may incur a MVA - market value adjuster

43
Q

True or false, all endowments are ‘qualifying’ ?

A

False

All are qualifying if they were taken out before 21st March 2012

After this, depends on premium amount

44
Q

What are the new rules which determine whether an endowment is qualifying for all policies taken out after april 6th 2013?

A

If the premium exceeds £3,600 per year either at the start or any point during the term then it is non qualifying and taxable

45
Q

What is a restricted relief policy? What rules apply to them with regards to taxation?

A

Endowment policies taken out between 21st march 2012 and 5th april 2013

If any premiums paid on or after april 6th 2013 exceed £3,600, the part of any gain arising from this is non-qualifying

Cemap 2&3 Self Testing (29 decks)

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