4 - Life Assurance Flashcards
Whole of Life policy
Long term insurance policy designed to pay out cash lump sum on death
New policies no surrender value (lower premiums)
Funeral Plans Life Assurance
Who uses it? What does it provide
Average age of buyers 65+
12-24 month period generally only payable on accidental death
After 12-24 months full sum payable, regardless of death
Assurance Bonds
Types of bond - time limit of bonds, what does it cover?
Generally no specific maturity date
Only nominal life cover provided
Standard unit linked or with profit bonds
Guaranteed income bonds
Guaranteed growth bonds
Annual management charge of life assurance funds typically
1%
Term Assurance
Definition
Pays cash lump sum on death if occurs during term of policy
Types of Term assurance
- Level Term Assurance - Sum assured is fixed
- Increasing Term Assurance - Sum assured increases either on fixed bases or in line with index such as RPI
- Decreasing Term Assurance - sum assured falls each year usually to zero by end of term. Premiums will often be payable for a period slightly sohrter than duration of cover
Renewable term assurance - renewed at end of term but will be higher
Convertibile - converting to whole of life or endowment assurance
Types of Decreasing Term Assurance
-
Mortgage Protection Assurance - sum assured that reduces each year in line with outstanding capital on a capital and interest repayment mortgage at specified interest rate. Decreases in line with linked interest rate assumed.
Family Income Benefit - sum assured expressed as an amount payable each year from death until a fixed future point. Payment may be increasing (Escalating). A form of decreasing term assurance - total instalments paid out early is greater than if claim is made later. Rate of interest is ued to reduce amount that would have been paid over remainder of term due to early payment.
Gift inter vivos term assurance - sum assured falls in line with any inheritance tax payable on potentially exempt transfers
Return of Premium term assurance
Pays out on death like other types of term assurance. With the addition of premiums paid if life assured survives until end of policy term.
Tends to be term assurance with endowment equal to premiums paid. (Genarlly higher premiums)
Pension term assurance
Date it was removed - what did it do
Before 2006 - tax relief on term assurance linked to pension plan
Relevant Life policies
Conditions- when is it paid, surrender value. How are the sums payable?
Normally written in trust for benefit for employee dependents
Payable on death of insured person under 75
Does not have surrender value
Sums payable or other benefits must be paid to
- Charity or individually beneficially entitled to individual
- Trustee or other person acting in fiduciariy capcaity who will secure sum.
Multiplans (Menu plans)
Single policies that incorporate different types of cover
Need for life cover
examples
- Mortgage
- Business liabilities
- Funeral
- IHT
- Outstanding loans
Determinants of type of life cover
- Who needs to be insured (joint or single life basis)
- How much life cover needed
- Term over which cover will be required
- Type of benefit needed - capital or income
- Who will receive benefit
- Should policy be written in trust?
Life Assurance Policy set up
Own Life
- Benefits individual themselves (Endowment policy) or write policy in trust (benefit dependents)
Life of Another
- Life assured and insured (owner) are two different people and client has an insurable interest on life of second party
- Also used in business to purchase survinving business co-owners assets (business assurance)
Joint life First death
- Suitable if life cover is needed on lives of both partners. Pay out if one partner dies, policy pays other partner
Joint life second death/ joint life last survivor
- Suitable for IHT liability
- Should be effected under trust so sum assured is received free of IHT and Probate
Types of need
Capital and Income needs (Assurance Policy)
Capital needs - mortgage/loans payment, emergency funds, IHT
Income - Support family after death of breadwinner
Types of need
Short- long term needs (Assurance Policy)
Short term capital - repayment of five year loans
Short term income - support education of children (limited duration)
Long term need - income required to support dependent relative
EGL (Excepted Group Life policies)
To mitigate lifetime allowance limit.
Lifetime allowance limit is unlimited from 2023/2024
Was 1,073,100 in 2022/2023
Flexible Life Assurance Policy
Whole of Life plan
Add convertibility feature to term assurance (can change to WOL without underwriting of persons state of health)
Add renweable policy - so cover can be guaranteed
How can insurers predict claims for life assurance
Mortality tables
Natural Premium
Definition
Each year will cost a little bit more than the next - more premium to pay
Was not as effective - as premiums charged were too high - unfit people did not take, and mortality rates increased
Replaced by Level premium system
Level Premium System
Definition and insurance principle
Level premium charged through duration of policy
**Premium higher in early years **form reserve to pay heavier claims in later years (When premium is lower than risk associated)
Insurance Principle - claims at early date subsidised by policy where claims occur at later date
1st year - Few deaths, not much total premium paid out in claims - balance goes in reserve for future claims
2nd Year - more deaths than first - slightly lower proportion goes in reserve
3rd year - Each successive year - claims csot will be higher and amount going intoreserve will be slightly lower. Reserve grows until cost of one year claimants match premiums. Reserve eventually used up.
Pure Premium
Definition
Premium required to pay claims for that year or for each year under level premium system.
Interest on Premiums
Pure premiums - money invested as soon as its paid
Natural Premium - invested for part of year until claims made (small interest)
Level Premium - Reserve is invested, can have substantial interest if life assurance is long policy
Premium loading fees
examples
Salaries
Comission paid
Cost of office building
Regulatory cost
Underwriting cost
Frequency Loading
If paid more frequently, higher charges. Discount for paying annually for example.
Trust
Three parties
Settlor
Trustee
Beneficiaries
Trust for gifts (Exemptions)
Gifts totalling up to £3,000 a year
Regular gifts from income that do not affect the donor’s standard of living
Married Women Property Act (1882)
Pros and cons (3)
- Relative simple
- Greatest protection against creditors
- Lack of flexibility about beneficiaires - limited to children and spouse
Discretionary Trusts
Changed flexible interest in possession trusts
Assets could be regarded as creating chargeable lifetime transfers
Could be subject to periodic change every 10 years
What are the differences in tax with discretionary trusts and flexible interest in possession trusts
None since Finance Act 2006
Discretionary trust what does it allow for trustees to do?
Allows trustees to decide who should benefit from trust proceeds without restriction. No potential beneficiary has an interest in trust capital or income until trustee says so
Can financial advisors be trustees?
NBot usually due to potential personal liability for decisions and conflicts of interests
What policies can be written in trusts?
Existing life assurance not already in trust or assigned to third party
New policy unless assigned to third party
Any life assurance written part of pension scheme usually under master discretionary trust
Who do individuals have to register with when creating trust
HMRC
What is the time frame trustee have to distribute funds before registration becomes required to HMRC
2 years
What is a typical underwriting application consist of
Details including age
Current stae of health
Medical history
Occupation and any hazardous pursuits
Lifestyle
What is a moratorium?
Usually for short-term policies.** It excludes any condition** for treatment for applicant in **last 5 years. **Conditions will remain excluded for two years if no further treatment is required. Any further tretment exclusion will run for another two years after subsequent treatment.
What is continuing personal medical exclusions?
Underwriter adopts underwriting decisions by previous insurer and accepts risk. Typically to gain more applicants without need of full underwriting application.
Tele-underwriting benefits
Shorter Application form
Faster underwriting (less evidence from doctors)
Less non-disclosure
Two types of Tele-underwriting
Big T tele-underiting: few questions on form instead asked over phone
Little t underwriting only supplemntary questions asked, most question asked on application form
Who pays for additional medical charges with tele-underwriting
The Insurer
Who should GDPR report to in data breach
Information Commision officer
What were insurance generally provided on the principle of
utmost good faith
Nature of non-disclosure
Reasonable - normally claim will be in full despite not all material being disclosed if customer was honest
Careless - Proportionate remedy will apply
Deliberate or reckless - insurance will be void
Agent of consumer vs Agent of insurer with consumer disclosure
If agent of consumer makes reckless decision without customer knowledge , insurer can avoid policy
If agent of insurer makes reckless decision, insurer is bound by action and cannot avoid policy
Terminal illness benefit
Additional benefit added to term or whole of life policy
Sum assured is normally payable if life expectancy is less than 12 months
Various types of assignments
Absolute Assignment
Assignments by way of mortgage
Assignments by operation of law on bankruptcy
Assignments to trustees
Joint ownership
Tenancy in common
Joint tenancy
Policies of Assurance Act 1867
Allows any person entitled to life policy has legal power to sue in own name to recover monies payable
What kind of assignment is notice giving in Policies of Assurance Act
Assignment -> an assignee who gives notice to assurers can claim precedence over all othe interests where notice have not been given, even if date of assignment is later than other interests
Priority of notice regulates priority of claim
Priority rule [what can be done] e.g. charges, how long notice
Assignee must give notice of assignment asap
Assurance company must state what notice of assignment can be given
Assurance company must on request acknowledge receipt in writing of notice of assignment
Assurer can charge a fee not exceed £0.25 for acknowledging receipt of notice (such acknowledgement is conclusive evidence of receipt of notice)
Definition of Assignment
Transfer of ownership from one person to another.
Constructive notice
**Usually Express although can be implied. **Can also be implied from correspondance on office files, even if no formal notice has been served.
Newman vs Newman (1885)
Notice does not need to be given in any form
Effect of giving notice
(4)
Give assignee right to sue in own name
Bind insurers so if they pay other claimant, will be held responsible
Gain priority of claim over early assignees who failed to give notice
Preserve priority of claim ovser subsequent assignees
Absolute Assignments
Complete transfer of policy - by sale or gift
What are the conditions for assignment of life policy
**Must be in writing **not mere delivery
**Deed of assignment **(can be done by interchange of letters offering and accepting sale with proof of payment
Must be dated during currency of policy and during lifetime of life assured
Deed of Assignment
Assignor should be person legally entitled to policy prior to agreement
Asignee should be person claiming
Signature of assignor must match previous signatures
Dates should be checked to see if its in currency of policy
What is Equity of redemption
Distinguishes a mortgage from absolute assignment
Once loan is paid off, asset used as mortgage is returned to borrower
What is it called when an office gives a loan on security of one of its own policies?
Mortgage deed
Who are life policies often mortgaged to?
Banks, building socieities and life office themeselves
Claims under mortgage policy
If more than one, priority of claim under doctrine of notice
If there was a claim on a mortgaged policy, who would the life office pay – the mortgagee or the mortgagor?
Mortgagee
What are the two types of claims
Maturity and Death
What is the period that life office will tell policyholder before maturity claim of endowment policy
1-2 months before maturity date
Who can sign the discharge of maturity claim
Only person with legal title to the policy
What is required when death claims occur
Proof of death
Proof of title
Proof of age
Signature of legal claimant
What is needed for proof of death
Only Original death certificates not photocopied
Presumption of death
Seven years absent
Or swear to death if court allows (missing person)
Can life office see cause of death
Yes as long as office has written authority of deceased personal representatives - usually to see if life assured died from something outside cover
How much would life office pay claims without grants
£5,000 where value of estate is less than £10,000 -> generally small claims
Often only if provided payment goes to surviving spouse
What happens if two lives died under joint life policy?
Senior dies first.
Payment made to younger person estate
In suicide, who burdens the responsibility to find if death is suicide
Life office
What happens if a policy is lost
Claimant executes statutory declaration before a magistrate or solicitor
What do FCA require life office to make sure endowment policies who seek surrender values
Made aware of other options available - they may be able to sell policyon traded market
