4 - Life Assurance

Question 1

5 types of life assurance

Answer 1

• Whole of life assurance
• Term assurance
• Pension term assurance
• Relevant Life policies
• Multiplans

Question 2

Whole of life plans

What are they?

Unit linked and surrender value issues

Answer 2

Pay out when you die, whenever that happens (no fixed term).

Can be unit-linked or just a regular insurance policy.

Unit-linked uses unit cancellation to pay for the protection element.

Unit-linked can have a surrender value but generally they don’t (this would involve a bigger investment element and bigger premiums). Guaranteed cover type can have a good surrender value, standard or maximum cover don’t.

Question 3

Insurance bonds

How do they fit in?

Answer 3

These are effectively life assurance plans with a focus on the investment element.

Question 4

Term Assurance

What do the following features mean:

• Level/increasing/decreasing
• Term 100
• Increasing/increasable
• Convertable
• Reviewable

Answer 4

• Level/increasing/decreasing - refers to the amount of cover, can be used to get higher cover in years where you would need more cash
• Term 100 is term assurance until 100th birthday
• Increasable - means you can increase the amount in the future
• Convertible - can convert to whole of life or (sometimes) an endowment
• Reviewable - insurer can review the premiums periodically and increase them (risky for the client but may make initial premiums lower

Question 5

Pension Term Assurance

What is it?

Answer 5

Only exists in legacy plans (pre-2006), you get tax relief on contributions to term assurance which is linked to a pension. The life office can confirm whether an existing policy is a valid pension linked policy, you would still get tax relief if it was.

Question 6

Relevant Life Policies

What are they?

Answer 6

There is a list of requirements to be a valid “relevant life policy”.

• Include that they should pay something if the person dies before age 75.
• Should be no surrender value or other benefits.
• Usually part of a group scheme

Question 7

Multiplans

What are they?

Answer 7

A flexible product where you can pick and choose characteristics.

Question 8

Natural vs Level Premiums

Answer 8

In the old days insurers used natural premiums, which are low when you are young as the chance of paying out is low, but rises as you get older. But this leads to people cancelling policies when they need them most (old age).

Level premiums stay flat throughout the life, with excess payments in early years effectively sitting in reserve and earning interest and offsetting high risk premiums in later years.

Question 9

Pure Premium

Answer 9

Pure premium is the simple mathematical charge to pay for your risk in that year.

Under the level premium system you’ll pay more than this initially, with the extra sitting in reserve and offseting bigger pure premiums later in your life.

Question 10

Premium Loadings

Answer 10

After the pure premium and impact of interest is taken into account, the life office adds a “premium loading” to decide how much to charge you.

This covers their costs, salaries of their staff, profits etc.

Question 11

Trusts

Married Womens Property Act Trust

Answer 11

This is fairly old school, a simple absolute trust described by law.

Advantages are simplicity and a high level of protection against creditors.

But it doesn’t have much flexibility, beneficiaries are limited to children and spouse.

Question 12

Trusts

Flexible and Discretionary Trusts

Differences and when each is used

Answer 12

Flexible trusts can have a list of beneficiaries, discretionary trusts can be changed by the trustees in the future as they see fit.

Flexible trusts are “interest in possession” type. In the old days they were exempt from IHT for this reason unlike discretionary trusts, so were more popular.

Now they are treated as chargeable lifetime transfers the same as discretionary, so people tend to go for discretionary due to the extra flexibility.

Question 13

Trusts

When is a split trust used?

Answer 13

A split trust is used for a policy with BOTH a critical illness and death benefit.

Since the subject would receive the critical illness payment, but beneficiaries get the death payment, the trust needs to be split to direct the payouts accordingly.

Question 14

Underwriting

What does the underwriting process involve?

Answer 14

Entirely up to the insurer, may be as simple as 3 basic questions (rejected if any of the answers are negative) or include additional requriements.

Question 15

Underwriting

What are these additional underwriting processes?

• GP Report
• Subject access request
• Paramedical
• Medical examination
• Questionnaires
• Health Screening

Answer 15

• GP Report - A letter/report from your own GP
• Subject access request - Info you request on yourself under data protection act
• Paramedical - Short medical quesionnaire and basic tests (BMI, blood pressure)
• Medical examination - By your own GP or a third party doctor
• Questionnaires - Medical or occupational/lifestyle
• Health Screening - Non-invasive tests like saliva swab, urine sample, hair test

Question 16

Underwriting

What is tele-underwriting?

Answer 16

Tele-undewriting is a phone process where they take you through a set of questions to speed up and simplify the undewriting process.

Question 17

Non-Disclosure

What is it?

What are the three levels and the remedy in each case?

Answer 17

Non-disclosure is when the client gave false or misleading info when taking out insurance (or didn’t mention something important).

• Reasonable - No effect on the payout
• Careless - Proportionate remedy
• Reckless or deliberate - Insurer can void the policy

The insurer can only change the payout if they would have made a different underwriting decision if they had known the information (i.e. “if we knew that we would have declined insurance/charged a higher premium”)

Question 18

What is terminal illness benefit?

Answer 18

This is a feature available in life assurance policies which accelerates the death benefit if you are diagnosed with a terminal illness (meaning you have less than 12 months to live).

Question 19

Shared Ownership

What is the difference between:

Tenancy in common; and

Joint tenancy?

Answer 19

Joint tenancy is a true joint ownership, if one person dies their share passes to the other person (since they are joined).

For tenancy in common they each own their own share, if one dies their share passes to their descendants or beneficiaries. Although they have something in common, they are not joined.

Question 20

Assignation

What is this?

2 types

Answer 20

Essentially when a life policy is sold (or otherwise transferred) to somebody else.

Crucially the new owner (asignee) is legally allowed to claim against the insurer in their own name without the involvement of the original owner (asignor).

The two types are absolute and mortgage. Absolute means you’ve actually sold or given away the policy, mortgage means it’s still yours but you’ve used it as security against a loan.

Question 21

Assignation

Requirements of absolute assignation

Answer 21

Absolute assignation requires a written agreement.

This must be dated while the life assured is still alive and also during the life of the policy itself.

It must be for the whole policy, not a part of it (you can still sell the whole policy to a group of people who would hold the whole policy jointly).

Question 22

Assignation

When is a mortgage assignation used?

Who does the claim get paid to if mortgaged?

Answer 22

Life offices will often lend against their own policies (assuming there is a surrender value), also banks may lend against life policies.

The life office will pay the whole claim amount to the lender since the policy has been assigned to them. The lender has the responsibility of using the proceeds against the borrowed balance and passing the remaining funds to any other lenders who hold a lower priority mortgage, or the original owner.

Question 23

Claims

Two types of claim

Answer 23

Maturity and death claims.

Question 24

Claims

General requirement for claims to be paid

Answer 24

For both death and maturity claims the policy must be produced as proof of entitlement to the claim.

If the policy can’t be produced there is a risk to the life office that there may have been an assignment of the policy they don’t know about. So they will protect themselves, perhaps by asking the claimaint to execute a statutory declaration.

If it has been assigned at some point then the written proof of assignment is also required.

Question 25

Claims

Extra requirements of death claims

Answer 25

Need proof of death, which is usually the original death certificate.

If they die abroad a foreign death certificate is required, but a death questionnaire or investigation may also be required.

If they go missing they are presumed dead after 7 years, but potentially earlier than that depending on circumstances.

Cause of death is relevant because suicides generally aren’t paid out.

Proof of age may also be required if it affects the payout.

Question 26

Claims

Difference between grant of probate and grant of letters of administration.

What if two jointly assured lives die together?

Answer 26

Grant of probate is when there is a will to determine what happens, letters of administration is when there is no valid will.

In the case of joint deaths it will be established which person died first. If that is not possible the older person is deemed to have died first.