5 Flashcards
How do WOL policies differ to term assurance policies? (2)
- More expensive than Term Assurance
- Permanent (not limited by an expiry date)
What are WOL policies useful for?
Can be useful to pay IHT arising rather than liquidating estate
What are the four types of WOL policies?
- Non-profit policy
- With-profits policy
- Low-cost policy
- Unit-linked policy
How does the sum assured of a non-profit WOL policy differ to a with-profits policy?
- Non-profit: Payout fixed sum assured
- With-profit: Sum assured increased with bonus payments
How much does the policy holder get back when they cancel a non-profit WOL policy?
Nil - no surrender value
What are the premiums like for non-profit WOL policies?
Level premiums paid throughout term but reviewed every 10 years (risk assessment)
What are the features of the bonus payments on with-profits WOL policies? (2)
- Bonus payments depends on performance of life company
- Bonus not guaranteed but once added can’t be removed
What is a benefit of with-profits WOL policies?
Smoothed returns to investors
Why do most insurers of with-profits WOL policies reserve the right to apply market value reducers (MVRs) which reduce the surrender value?
To protect interests of policyholders who remain invested in adverse market conditions
How do the premiums of with-profits WOL policies compare to non-profit WOL policies?
With-profits have higher premiums than non-profit policies
How does the surrender value ‘low-cost policies’ differ to with-profits WOL policies?
Less becase surrender value based on with-profits element only
What are ‘low-cost’ WOL policies?
Combination of with-profits WOL policy and decreasing term assurance
What is the advantage of ‘low-cost’ WOL policies?
Cheaper than full with-profits policies
How does a ‘low-cost’ WOL policy work? (2)
- Bonuses increase payout from with-profits element
- Decreasing term sum is reduced progressively
What is the aim of unit-linked WOL policies?
Higher life cover in earlier years, and higher investment content later
How are unit-linked policies flexible? (3)
- They are more like an investment than insurance
- Can often be surrendered without penalty
- Can change fund preferences over time, i.e. moving between stock, bond, and funds
What are the premiums of a unit-linked WOL policy used for?
A portion of the premium is invested in funds, while the rest pays for life cover
How often are the premiums of unit-linked WOL policies reviewed?
Premium levels reviewed every 10 years
How are the premiums of unit-linked WOL policies reviewed? (2)
- Performance levels assessed against original growth assumption
- If actual growth is higher: sum assured can be increased or premiums reduced or benefit from higher investment value
What does endowment assurance do?
Combine protection and investment over a term
What does an endowment assurance policy payout if policyholder dies during term and if they survive the term?
- Death during term then insurance pays out
- If survive term then investment pays out
Why is endowment assurance no longer popular?
Reputation tarnished by mis-selling scandal in 1980s
What are the modern alternatives to endowment assurance?
Modern alternatives include regular savings accounts with unit trust or investment trust and life assurance
What are the features of ‘without-profits endowment policies’? (3)
- Level premiums
- Guaranteed sum in the event of death or when the policy matures
- No potential for growth
How common are without-profits endowment policies?
Expensive and rare, usually legacy policies
What are the features of ‘low-cost endowment policies’? (4)
- Minimum sum assured on death
- No minimum assured on maturity
- Has a with-profits element
- Amount paid on maturity will depend on bonuses added
What are the features of ‘low-start endowment policies’? (4)
- Lower initial premium
- Premium increases
- For those who expect income to increase
- Might not be able to afford subsequent increase
What is a feature of ‘unit-linked endowment policies’?
Operate the same as other unit linked policies
What are the conditions for ‘Qualifying policies’? (3)
- 10 years or more
- Premiums (at least) annually
- Sum assured not less than 75% of premiums payable over the term
What are the premium rules for ‘qualifying policies’? (2)
- Premiums paid in any one year not more than twice those paid in any other year
- Premiums paid in any one year not more than 1/8 paid over the term
What is the taxation of original beneficiary on qualifying policies? (3)
- Proceeds are free of income tax and CGT
- Written into trust to avoid IHT
- Underlying fund pays corporation tax
What is an investment bond used for?
Investment purpose with small amount of life cover
What are investment bonds also referred to as? (3)
Life Company Bond, Life Assurance Bond,
Single Premium Life Assurance Bond (SPLAB)
What is a feature of unit-linked investment bonds?
Investment used to buy units in life company’s funds
What are the different investment bond types? (7)
- Unit-linked bonds
- Distribution bonds
- Guaranteed and Protected Equity Bonds
- Guaranteed Income Bonds (GIBs)
- Guaranteed Growth Bonds
- Capital redemption bonds (CRBs)
- Offshore Bonds
What should be considered when buying non-qualifying single premium life assurance policy?
There may be tax implications
What are the features of distribution investment bonds? (3)
- Distinguishes between income and capital
- Income distributed while capital left intact
- Equity content no more than 60%
What is a similarity of capital redemption bonds (CRBs) to normal investment bonds?
Same tax treatments as life assurance/investment bonds
What are the differences of CRBs to normal investment bonds? (2)
- CRBs maximum fixed term of 99 years,
- While life assurance bonds lasts until life assured dies
What are the features of ‘Guaranteed and Protected Equity Bonds’? (3)
- Structured product
- Combines call options + fixed term deposits
- To provide growth and guarantee capital
Why are ‘Capital redemption bonds (CRBs)’ popular with employers?
No need to link bond to life of employees (usually directors) who could then leave the company in the future.
For investment bonds, what are the features of ‘Guaranteed Growth Bonds’? (4)
- pay no income
- minimum guaranteed sum at maturity
- Return depend on market conditions
- Maturity dates available (1-5 years)
For investment bonds, what are the feature(s) of ‘Guaranteed Income Bonds (GIBs)’? (4)
- Provide guaranteed income (1-5 years)
- On maturity, capital is returned
- Allowed investment: £5,000 - £1 million
- Heavy penalties for early encashment (if available)
What is a benefit of investing in offshore bonds?
Benefit from gross roll up (little tax paid by insurance company)
What is a con for investing in offshore bonds?
Higher charges
How are ‘offshore bonds’ structured?
Issued by companies domiciled offshore but structured similarly to onshore bonds
How can you make tax deferred withdrawals from investment bonds? (3)
- Can withdraw 5% of original investment per year (on average)
- Cumulative withdrawals possible (e.g. 2% in year one and 8% in year two)
- Can be continued for 20 years
What are the withdrawals from investment bonds viewed as tax wise?
Viewed as a return of capital
For investment bonds, tax is deferred until which chargeable events? (DAMPS)
- Death
- Assignment (transfer of ownership)
- Maturity
- Partial surrender (over a specified limit)
- Surrender (encashment)
What are the tax implications for onshore investment bonds? (3)
- Gain includes tax deferred withdrawals (up to 5% p.a.)
- Gain is taxed as saving income at MR - BR
- Life company covers BRT
How does tax liability of BRT taxpayers differ to HRT/ART taxpayers when investing in investment bonds?
- Basic rate taxpayers no further liability
- HRT and ART taxpayers pay additional 20% or 25%
What are the available tax relief for investment bonds? (2)
Can use personal allowance and top-slicing relief may apply
What are the disadvantages of investment bonds to collective investment schemes (CIS)? (5)
- Invested in similar types of assets, but tax treatment is different
- CIS can be within a tax wrapper (ISA)
- CIS can use CGT annual exemption
- SPLABs pay more tax in the fund
- SPLABs high and opaque charges compared with CIS
What are the advantages of investment bonds to collective investment schemes (CIS)? (4)
- Withdrawals from SPLABs do not count as income so can be tax-efficient
- Defer tax liability when more efficient
- Can be written in trust to avoid IHT
- Embedded life assurance
What does buying an annuity give?
Series of fixed cash flows received at regular intervals for a finite time period
The size of the annuity depends on a number of which factors? (3)
- Age and life expectancy
- Interest rates
- Options built into annuity
What are the options available when buying annuities? (5)
- Single or joint life
- Guaranteed or non-guaranteed
- Escalating (a medical condition that implies a shorter life) or non-escalating
- Frequency of payments
- Payments in advance or arrears
What are the different types of annuities? (3)
- Purchased life annuities
- Pension annuities
- Immediate needs annuities
How and when can you buy ‘purchased life annuities’?
Purchased from any source of money, at any age
How are the payments from ‘purchased life annuities’ treated tax wise? (3)
- Annuity treated partly return of capital and interest
- Return of capital element is tax free
- Interest element taxed as savings income, received net of BRT
How do they calculate the return of capital element of ‘purchased life annuities’? (2)
- Return of capital each year is based on life expectancy of individual
- The older they are, the more is considered return of capital due to shorter life expectancy.
From what funds are ‘pension annuities’ bought?
Must come from pension funds
How are pension annuity payments taxed? (2)
- Payments are taxable in full
- Provider deducts income tax as per policy holder’s tax code
What are ‘immediate needs annuities’ used for?
Used for long-term care when annuitant has specific health issues
How are ‘immediate needs annuity’ payments taxed?
No income tax liability when used for medical care and paid to care provider
How do you know when you’re eligible for payout on income protection insurance?
Circumstances when benefit is payable are clearly defined
What are the premiums like for income protection insurance?
Premiums are relatively expensive
What are income protection insurance used for?
Provides regular income when unable to work due to long-term sickness or incapacity.
What are payouts like for income protection insurance? (2)
- Payment is usually after a certain waiting period
- Payments cease when policyholder returns to work
What is payout like for critical illness cover and how do you know if you are due payout?
- Pays a lump sum if policy holder suffers from illness
- Illnesses covered are closely defined
What are the premiums like for critical illness cover?
Often term-based protection with reviewable premiums
What is critical illness cover usually used for?
To pay off a mortgage or adapt a home
What does a ‘long term care’ protection policy do?
You purchased it with a lump sum and it will pay regular income until death (like an annuity)
Are ‘long term care’ protection policy payments taxable?
Tax free if paid directly to care home
What are the different types of business protection? (6)
- Key person protection
- Shareholder/partnership protection
- Damage to assets
- Terrorism
- Equipment breakdown
- Employer’s liability
What does ‘key person protection’ protect against?
Company insures against loss it may suffer from death or illness of a key employee
What does ‘shareholder/partnership protection’ do?
Provides remaining owners with funds to buy out shares of deceased or critically ill partner
What other protection solutions are available on top of the main types of protection policies? (4)
- Private medical insurance
- Mortgage payment protection insurance
- Accident, sickness and unemployment
- Household cover
What does private medical insurance do?
medical expenses paid by the policy
What does mortgage payment protection insurance cover?
Covers monthly mortgage repayments if salary drops due to accident, sickness or unemployment
How does an ‘accident, sickness and unemployment cover’ work?
Taken out for annual periods - provide income or a lump sum after an accident
What should be considered regarding ‘household cover’? (2)
- Wealth managers unlikely to deal with this but may provide holistic advice
- Should be documented in fact find
What should be considered when assessing protection products?
SPF QITCC
Suitability
Price
Features
Quality of service
Investment choice and performance
Tax implications
Charges
Cancellation rights
