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5 Flashcards

1
Q

How do WOL policies differ to term assurance policies? (2)

A
  1. More expensive than Term Assurance
  2. Permanent (not limited by an expiry date)
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2
Q

What are WOL policies useful for?

A

Can be useful to pay IHT arising rather than liquidating estate

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3
Q

What are the four types of WOL policies?

A
  1. Non-profit policy
  2. With-profits policy
  3. Low-cost policy
  4. Unit-linked policy
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4
Q

How does the sum assured of a non-profit WOL policy differ to a with-profits policy?

A
  1. Non-profit: Payout fixed sum assured
  2. With-profit: Sum assured increased with bonus payments
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5
Q

How much does the policy holder get back when they cancel a non-profit WOL policy?

A

Nil - no surrender value

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6
Q

What are the premiums like for non-profit WOL policies?

A

Level premiums paid throughout term but reviewed every 10 years (risk assessment)

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7
Q

What are the features of the bonus payments on with-profits WOL policies? (2)

A
  1. Bonus payments depends on performance of life company
  2. Bonus not guaranteed but once added can’t be removed
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8
Q

What is a benefit of with-profits WOL policies?

A

Smoothed returns to investors

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9
Q

Why do most insurers of with-profits WOL policies reserve the right to apply market value reducers (MVRs) which reduce the surrender value?

A

To protect interests of policyholders who remain invested in adverse market conditions

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10
Q

How do the premiums of with-profits WOL policies compare to non-profit WOL policies?

A

With-profits have higher premiums than non-profit policies

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11
Q

How does the surrender value ‘low-cost policies’ differ to with-profits WOL policies?

A

Less becase surrender value based on with-profits element only

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12
Q

What are ‘low-cost’ WOL policies?

A

Combination of with-profits WOL policy and decreasing term assurance

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13
Q

What is the advantage of ‘low-cost’ WOL policies?

A

Cheaper than full with-profits policies

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14
Q

How does a ‘low-cost’ WOL policy work? (2)

A
  1. Bonuses increase payout from with-profits element
  2. Decreasing term sum is reduced progressively
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15
Q

What is the aim of unit-linked WOL policies?

A

Higher life cover in earlier years, and higher investment content later

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16
Q

How are unit-linked policies flexible? (3)

A
  1. They are more like an investment than insurance
  2. Can often be surrendered without penalty
  3. Can change fund preferences over time, i.e. moving between stock, bond, and funds
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17
Q

What are the premiums of a unit-linked WOL policy used for?

A

A portion of the premium is invested in funds, while the rest pays for life cover

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18
Q

How often are the premiums of unit-linked WOL policies reviewed?

A

Premium levels reviewed every 10 years

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19
Q

How are the premiums of unit-linked WOL policies reviewed? (2)

A
  1. Performance levels assessed against original growth assumption
  2. If actual growth is higher: sum assured can be increased or premiums reduced or benefit from higher investment value
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20
Q

What does endowment assurance do?

A

Combine protection and investment over a term

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21
Q

What does an endowment assurance policy payout if policyholder dies during term and if they survive the term?

A
  1. Death during term then insurance pays out
  2. If survive term then investment pays out
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22
Q

Why is endowment assurance no longer popular?

A

Reputation tarnished by mis-selling scandal in 1980s

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23
Q

What are the modern alternatives to endowment assurance?

A

Modern alternatives include regular savings accounts with unit trust or investment trust and life assurance

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24
Q

What are the features of ‘without-profits endowment policies’? (3)

A
  1. Level premiums
  2. Guaranteed sum in the event of death or when the policy matures
  3. No potential for growth
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25
Q

How common are without-profits endowment policies?

A

Expensive and rare, usually legacy policies

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26
Q

What are the features of ‘low-cost endowment policies’? (4)

A
  1. Minimum sum assured on death
  2. No minimum assured on maturity
  3. Has a with-profits element
  4. Amount paid on maturity will depend on bonuses added
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27
Q

What are the features of ‘low-start endowment policies’? (4)

A
  1. Lower initial premium
  2. Premium increases
  3. For those who expect income to increase
  4. Might not be able to afford subsequent increase
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28
Q

What is a feature of ‘unit-linked endowment policies’?

A

Operate the same as other unit linked policies

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29
Q

What are the conditions for ‘Qualifying policies’? (3)

A
  1. 10 years or more
  2. Premiums (at least) annually
  3. Sum assured not less than 75% of premiums payable over the term
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30
Q

What are the premium rules for ‘qualifying policies’? (2)

A
  1. Premiums paid in any one year not more than twice those paid in any other year
  2. Premiums paid in any one year not more than 1/8 paid over the term
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31
Q

What is the taxation of original beneficiary on qualifying policies? (3)

A
  1. Proceeds are free of income tax and CGT
  2. Written into trust to avoid IHT
  3. Underlying fund pays corporation tax
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32
Q

What is an investment bond used for?

A

Investment purpose with small amount of life cover

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33
Q

What are investment bonds also referred to as? (3)

A

Life Company Bond, Life Assurance Bond,
Single Premium Life Assurance Bond (SPLAB)

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34
Q

What is a feature of unit-linked investment bonds?

A

Investment used to buy units in life company’s funds

35
Q

What are the different investment bond types? (7)

A
  1. Unit-linked bonds
  2. Distribution bonds
  3. Guaranteed and Protected Equity Bonds
  4. Guaranteed Income Bonds (GIBs)
  5. Guaranteed Growth Bonds
  6. Capital redemption bonds (CRBs)
  7. Offshore Bonds
36
Q

What should be considered when buying non-qualifying single premium life assurance policy?

A

There may be tax implications

37
Q

What are the features of distribution investment bonds? (3)

A
  1. Distinguishes between income and capital
  2. Income distributed while capital left intact
  3. Equity content no more than 60%
38
Q

What is a similarity of capital redemption bonds (CRBs) to normal investment bonds?

A

Same tax treatments as life assurance/investment bonds

39
Q

What are the differences of CRBs to normal investment bonds? (2)

A
  1. CRBs maximum fixed term of 99 years,
  2. While life assurance bonds lasts until life assured dies
40
Q

What are the features of ‘Guaranteed and Protected Equity Bonds’? (3)

A
  1. Structured product
  2. Combines call options + fixed term deposits
  3. To provide growth and guarantee capital
41
Q

Why are ‘Capital redemption bonds (CRBs)’ popular with employers?

A

No need to link bond to life of employees (usually directors) who could then leave the company in the future.

42
Q

For investment bonds, what are the features of ‘Guaranteed Growth Bonds’? (4)

A
  1. pay no income
  2. minimum guaranteed sum at maturity
  3. Return depend on market conditions
  4. Maturity dates available (1-5 years)
43
Q

For investment bonds, what are the feature(s) of ‘Guaranteed Income Bonds (GIBs)’? (4)

A
  1. Provide guaranteed income (1-5 years)
  2. On maturity, capital is returned
  3. Allowed investment: £5,000 - £1 million
  4. Heavy penalties for early encashment (if available)
44
Q

What is a benefit of investing in offshore bonds?

A

Benefit from gross roll up (little tax paid by insurance company)

45
Q

What is a con for investing in offshore bonds?

A

Higher charges

46
Q

How are ‘offshore bonds’ structured?

A

Issued by companies domiciled offshore but structured similarly to onshore bonds

47
Q

How can you make tax deferred withdrawals from investment bonds? (3)

A
  1. Can withdraw 5% of original investment per year (on average)
  2. Cumulative withdrawals possible (e.g. 2% in year one and 8% in year two)
  3. Can be continued for 20 years
48
Q

What are the withdrawals from investment bonds viewed as tax wise?

A

Viewed as a return of capital

49
Q

For investment bonds, tax is deferred until which chargeable events? (DAMPS)

A
  1. Death
  2. Assignment (transfer of ownership)
  3. Maturity
  4. Partial surrender (over a specified limit)
  5. Surrender (encashment)
50
Q

What are the tax implications for onshore investment bonds? (3)

A
  1. Gain includes tax deferred withdrawals (up to 5% p.a.)
  2. Gain is taxed as saving income at MR - BR
  3. Life company covers BRT
51
Q

How does tax liability of BRT taxpayers differ to HRT/ART taxpayers when investing in investment bonds?

A
  1. Basic rate taxpayers no further liability
  2. HRT and ART taxpayers pay additional 20% or 25%
52
Q

What are the available tax relief for investment bonds? (2)

A

Can use personal allowance and top-slicing relief may apply

53
Q

What are the disadvantages of investment bonds to collective investment schemes (CIS)? (5)

A
  1. Invested in similar types of assets, but tax treatment is different
  2. CIS can be within a tax wrapper (ISA)
  3. CIS can use CGT annual exemption
  4. SPLABs pay more tax in the fund
  5. SPLABs high and opaque charges compared with CIS
54
Q

What are the advantages of investment bonds to collective investment schemes (CIS)? (4)

A
  1. Withdrawals from SPLABs do not count as income so can be tax-efficient
  2. Defer tax liability when more efficient
  3. Can be written in trust to avoid IHT
  4. Embedded life assurance
55
Q

What does buying an annuity give?

A

Series of fixed cash flows received at regular intervals for a finite time period

56
Q

The size of the annuity depends on a number of which factors? (3)

A
  1. Age and life expectancy
  2. Interest rates
  3. Options built into annuity
57
Q

What are the options available when buying annuities? (5)

A
  1. Single or joint life
  2. Guaranteed or non-guaranteed
  3. Escalating (a medical condition that implies a shorter life) or non-escalating
  4. Frequency of payments
  5. Payments in advance or arrears
58
Q

What are the different types of annuities? (3)

A
  1. Purchased life annuities
  2. Pension annuities
  3. Immediate needs annuities
59
Q

How and when can you buy ‘purchased life annuities’?

A

Purchased from any source of money, at any age

60
Q

How are the payments from ‘purchased life annuities’ treated tax wise? (3)

A
  1. Annuity treated partly return of capital and interest
  2. Return of capital element is tax free
  3. Interest element taxed as savings income, received net of BRT
61
Q

How do they calculate the return of capital element of ‘purchased life annuities’? (2)

A
  1. Return of capital each year is based on life expectancy of individual
  2. The older they are, the more is considered return of capital due to shorter life expectancy.
62
Q

From what funds are ‘pension annuities’ bought?

A

Must come from pension funds

63
Q

How are pension annuity payments taxed? (2)

A
  1. Payments are taxable in full
  2. Provider deducts income tax as per policy holder’s tax code
64
Q

What are ‘immediate needs annuities’ used for?

A

Used for long-term care when annuitant has specific health issues

65
Q

How are ‘immediate needs annuity’ payments taxed?

A

No income tax liability when used for medical care and paid to care provider

66
Q

How do you know when you’re eligible for payout on income protection insurance?

A

Circumstances when benefit is payable are clearly defined

67
Q

What are the premiums like for income protection insurance?

A

Premiums are relatively expensive

68
Q

What are income protection insurance used for?

A

Provides regular income when unable to work due to long-term sickness or incapacity.

69
Q

What are payouts like for income protection insurance? (2)

A
  1. Payment is usually after a certain waiting period
  2. Payments cease when policyholder returns to work
70
Q

What is payout like for critical illness cover and how do you know if you are due payout?

A
  1. Pays a lump sum if policy holder suffers from illness
  2. Illnesses covered are closely defined
71
Q

What are the premiums like for critical illness cover?

A

Often term-based protection with reviewable premiums

72
Q

What is critical illness cover usually used for?

A

To pay off a mortgage or adapt a home

73
Q

What does a ‘long term care’ protection policy do?

A

You purchased it with a lump sum and it will pay regular income until death (like an annuity)

74
Q

Are ‘long term care’ protection policy payments taxable?

A

Tax free if paid directly to care home

75
Q

What are the different types of business protection? (6)

A
  1. Key person protection
  2. Shareholder/partnership protection
  3. Damage to assets
  4. Terrorism
  5. Equipment breakdown
  6. Employer’s liability
76
Q

What does ‘key person protection’ protect against?

A

Company insures against loss it may suffer from death or illness of a key employee

77
Q

What does ‘shareholder/partnership protection’ do?

A

Provides remaining owners with funds to buy out shares of deceased or critically ill partner

78
Q

What other protection solutions are available on top of the main types of protection policies? (4)

A
  1. Private medical insurance
  2. Mortgage payment protection insurance
  3. Accident, sickness and unemployment
  4. Household cover
79
Q

What does private medical insurance do?

A

medical expenses paid by the policy

80
Q

What does mortgage payment protection insurance cover?

A

Covers monthly mortgage repayments if salary drops due to accident, sickness or unemployment

81
Q

How does an ‘accident, sickness and unemployment cover’ work?

A

Taken out for annual periods - provide income or a lump sum after an accident

82
Q

What should be considered regarding ‘household cover’? (2)

A
  1. Wealth managers unlikely to deal with this but may provide holistic advice
  2. Should be documented in fact find
83
Q

What should be considered when assessing protection products?

SPF QITCC

A

Suitability
Price
Features
Quality of service
Investment choice and performance
Tax implications
Charges
Cancellation rights

last dance (7 decks)

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