5 - PROTECTIONS Flashcards
fAttitudes towards protection insurance
- UK has developed welfare state = state will provide
- Family models are changing, becoming more informal/complex
- Tech developments, comparison sites = commoditisation of insurance and increased comp
- Changing attitudes to personal risk
- Growth of consumerism and intense scrutiny of industry
- People often don’t think they require protection when they clearly do
- Overestimate amount of cover they have and blind to the type they need
- Post pandemic people considering life/health but concerns company will not pay out
- Widespread misunderstanding of even basic policies
Purpose of insurance
- protect again financial consequences arising from occurrence of insured event
life insurance - event = death - can provide lump sum/regular income/both
designed to
- pay for final expenses (e.g. funeral/legal)
- pay off outstanding debt
- provide income to maintain lifestyle of dependents
-estate planning for IHT liability (especially for children when both parents have died)
- for bis to ensureffthreshol they can survive death of key person
Main drivers of sales of life assurance prods
- affordability : price generally v important (as prems fall, demand rising)
- movements in housing market : + corr between price and demand, renters less likely to purchase
- income/head and other economic factors (inflation negatively correlated)
- whether client has dependents
- AGE = generally buy more as you age
Protection gap
= refers to gap between insured and uninsured losses
= what cover needed to maintain living standards of dependent - cover already in place (either through indiv policies or employer sponsored group life cover)
- based on multiples of gross income
Health trends
Morbidity vs mortality
A morbidity rate tracks data on illness and disease within a population, while a mortality rate tracks the number of deaths from illness or disease within a population.
- both improving
Longer life spans could result in extended mortgage terms + challenge underwriters = how to assess new normal health profiles for older lives
- generally people used to retire without a mortgage
Reasons for advice on cover
- policies stay on risk for longer when an advisor has been involved
- clients may not understand need for protections without advice
- more compliance or UW issues without advice
- may buy wrong type of cover
insurable interest
-economic stake in event for which assured purchases policy - to mitigate risk of loss
assured = person who counterparty who contracts with life office to establish pol = origial owner of pol
-only needs to exist @ date policy commences - changes after fact can occur
3 types of life assurance
= provides assurance for those left behind
Can also be split into those that have protection element only and those that have protection + investment
Term assurance = - pays lump sum (or series of lump sums) on death within the term
Whole life assurance = cpolicy that provides cover for whole lifetime, ensuring death benefit is paid out
Endowment assurance = combines life assurance with savings or investment component
Term assurance
- @ pure protection end of the spectrum
- pays lump sum (or series of lump sums) on death within the term
- term is establish @ outset and covered only within this period
- benefits can be level or increase/decrease over time
- usually no investment element = pure protection policy that doesnt accrue value over time/no investment element
- usually level premiums except with increasing term assurance
- quali if over 10y @ outset
- no inherent value, no pay out if life assured survives to end of term
- no surrender value @ any time
- usually no limit on amount of cover but comp will want more info for large amounts
- normally can select up to 40ys so long as ends pre 70th bday
- can be purchased on reviewable or guaranteed basis - guaranteed = prems fixed @ outset and wont change, reviewable means cover reviewed after initial 10y period and prems will increase to maintain level of cover (then every 5y after)
Types of term assurance
+ unit linked = quite a costly wat of buying both term cover and insurance linked investments
rare to recommend
Level term assurance
Level = sum assured is same/level amount regardless of when you die in term
- known payment on death within term
- fixed premium and sum assured
- unpaid premiums lead to policy lapse
- often used with interest only mortgages (when capital paid back @ end of term)
- policy expires @ end of term with no payout if insured survives
- cheaper than whole life because only for specific time period
- often cheapest and most basic option avail
Uses of level term assurance
Level = sum assured is same/level amount regardless of when you die in term
Uses
Family protection
- used to protect during calc period where death of main breadwinner would cause big hardship
- TF lump sum to meet capital debts + can generate income
- may not be ideal as most people expect income to increase over time (sum assured is static
Interest only mortgages
- provide cover alongside interest only mortgage, no capital paid out so liability remains the same
- well covered by level term
IHT planning
- can be used for IHT planning where lifetime gift means part/all of estate may be above NRB if death <7y
- alternative is decreasing term policy
Renewable term assurance
Term assurance that allows holder to renew for additional terms without undergoing new medical exam or providing new evidence of insurability
- similar to level term in basic structure but w/ renewable option
- renewable option on policy expiry date usually before age 65
- no health evidence required when exercising option (guaranteed insurability)
- length of renewed term is normally restricted by original term
- premium likely to increase when option exercised due to being older and increased mortality risk
- used by indivs concerned about future health and insurability
- also used for key person protection (that employer takes out on employee where loss would significantly impact bis (5y term and under qualifies for corp tax relief)
- initial prem higher than level term
Uses of renewable term assurance
Term assurance that allows holder to renew for additional terms without undergoing new medical exam or providing new evidence of insurability
USES
- when there is a definite need for cover but dont know how long that will last
- useful where need for initial cover is clear but eventual length is uncertain (tho will often be cheaper to buy the longest term practicable then lapse cover in standard level term cover)
- useful for business insurance scenarios e.g. key person - terms <5yquali for corp tax relief
Increasing term assurance
Death benefit increases over time usually to keep pace with inflation or need for rising coverage (i.e. growing family)
- term assurance usually = level premiums : increasing term is the exception
- annual coverage increased by set % or IL
- no new health evidence required @ each increase so increases guaranteed insurability for increases in sum assured
- premiums increase each time sum assured rises
- prems higher than level term
- cover normally continues up to 65
- rate of increase differs between policies
-policyholder has the right to freeze sum assured @ any point - useful for family protection particularly with growing fam
- inflation linkage ensures sum assured is maintained in real terms
- some pols have guaranteed insurability options = allow sum assured to be increased by big amounts e.g. 50% alongside key events e.g. childbirth
Decreasing term assurance
Death benefit decreases over time often in line with a declining financial obligation e.g. mortgage)
- sum assured decreases each year
- premiums generally fixed throughout term so more affordable than level or increasing (obvs different cover)
-designed to cover financial commitments that reduce over time - can have shorter premium payment term vs policy term ( to stop people cancelling in last few years when payout is v low)
- also used as ‘gift inter vivos’ policies for lifetime gifts over NRB (7y sum, sum assured constant for 3y then reduces @ 20% pa to shadow taper relief)
Uses
- typically to ensure PH during period of debt repayment - commonly repayment mortage
Convertible term assurance
Term assurance with option allowing holder to convert into whole life or endowment policy without medical or evidence of insurability (so long as sum assured doesnt increase)
- Level term with convertibility option @ end or during current term
- premiums recalculated @ conversion - likely higher since life and endowment policies both have investment elements - but market rate for whatever policy
used by those concerned about health who many not be able to afford whole life or endowment policy @ present - term is cheaper than whole life/endowment
- initial prem higher than level term as there is greater flex
Uses
- where current need for term assurance but likelihood of more substantial policy in future
- often endowment/whole life pol would be better from outset but cost usually stopping this
Family income benefit
Provides regular, TF income to beneficiaries rather than lump sum in event insured dies within term
- term assurance
- no benefit on survival
- income paid monthly/quarterly/annually and continues to end of term (e.g. until youngest turns 21)
- helps to replace lost family income
- level prems throughout policy
- premiums generally fixed throughout term
- income remains constant but total payout reduces as policy term progresses
- avoids investment risk for beneficiary and cost of advice (vs a lump sum which would need investing)
- used where protection needs are high but affordability is a key issue
Uses of family income benefit
Term assurance that provides regular, TF income to beneficiaries rather than lump sum in event insured dies within term
- can provide cheapest cover
- suitable for protection needs where clients in early stage of lives and starting fam may mean only 1 income avail
- useful in joint life pols, consequence of death of main earner is loss of income but consequence of death of home partner - childcare and home help needed
- one of most useful and best value protection prods
- no complex investment decisions as may have with lump sum payout
Unit linked term assurance
Combines death benefit with an investment component - portion of premium foes towards term life coverage while rest is invested in funds and policy value fluctuates based on investment performance
- generally more expensive vs regular term assurance because of investment option
- fund chosen by customer in line with risk profile
- units are purchased with premiums
- only type of term policy where premiums are reviewed and they can go up if units dont perform (usually reviewed every 5y)
- premiums may initially be cheap but can rise on review
- rare you would ever rec this
Term assurance summary
Writing into trust
- life cover should be written into trust where appropriate
NORMALLY - life assurance policy pays sum assured to estate on death = aggregated with other assets and included for IHT
= way to legally place the ownership of a life insurance policy into a trust rather than having it form part of the PH’s estate
- most people settle pol in trust @ same time as taking it out - standard form - assign death benefit to named beneficiaries
- if policy becomes payable then lump sum paid to trustees and so doesnt form part of deceased estate for IHT purposes
- avoids need of production of grant of probate to access so benefits paid more quickly
- also allows control over the distribution of payout
Means client making a git for IHT purposes and policy normally wont form part of estate (CLT) if client lives for 7y after setting up the trust
- can ensure death benefit is payable without need for grant of probate/letters of administration
- can choose who benefits from assets and who you want to manage them
- protect beneficiaries from IHT
- decision is irrevocable, once done any further decisions must be signed off by named trustees
Quali rules for life assurance prods
Means policy will be free of IT and CGT - non quali will be subject to IT (not CGT)
- policy term is originally 10y +
- premiums paid yearly or more frequently
- premiums subject to an annual limit of 3.6k (for pols issued post April 2013)
- premium limit is the aggregate of all quali policies
- sum assurance is not less than 75% of all premiums paid over the term
- premiums paid in any one year not more than 2x those paid in any other year (to prevent insurers charging massive prem in year 1 then basically nothing subsequently) and not more than 1/8th of prems paid over term
- quali policies will become non quali if surrendered before 10y or 2/4 of term policy if less (e.g. 9 y for 12y policy) = and would have to pay tax on any profit made
- single premium life assurance bonds (onshore/offshore) both lump sum investments so not qualifying
Endowments
Combines life assurance over specific term, with guarantee there will be some kind of pay out
- paying out lump sum either on death (all pols) or @ end of specified term (if non profit)
-designed to provide steady mix of protection and investment
- can have investment component
- death within period = can be fixed or - higher of endowment sum assured or policy value
- higher prems than term assurance as portion of prem goes to saving/investment component
- designed to provide assurance alongside savings/investment vehicle to accumulate cash value over time
- usually monthly prem
- quali if over 10y @ outset
- historically missold as repayment plans for mortgages not often used for this now
- often used for school fee planning
- can include critical illness cover
- cash in value if you survive term
- maturity proceeds are tax free as long as you are original owner (there is 2ndary market)
- still sold but rarely after miseliing scandal (cash in values not guaranteed, were sold alongside interest only mortgages but not with enough cover, funding shortfall prems increased a LOT)
Non profit full endowment
- guaranteed payout of fixed sum @ maturity or death
- most basic form, level prems
- combines protection wiht savings component
- rare these days as v expensive - prems paid must cover sum @ maturity without benefit of investment bonuses
- forerunner of other types of policy which were introduced to help with affordability
- fixed level premiums - higher than term because of guaranteed payout
- no further participation in perf of life office profits
- inefficient in todays market but old pols around
- accumulates value over time unlike term assurance
With profit full endowment
- guaranteed to pay @ end of term if you survive or on death if before + profits added to policy annual/term basis
- more expensive
- can mature @ higher val than sum assured if fund performs well
- bonuses not guaranteed but there was a good run with markets when these were introduced so often paid - returns liked to perf of with profit fund through reversionary and terminal bonuses
- smoothing mechanism of profits over time where some held back ingood years
- MVRs can be applied in times of poor perf if wanted to surrender, transfer or mature
Low cost endowment
- operate baso in same way as low cost whole of life
- combo of profit base and decreasing term assurance
- often used for mortgages since cheaper than full endowment
- two sums assured (Death benefit guaranteed + endowment sum assured which is lower than death benefit)
- bonuses could take you up to full mortgage amount
- bonuses added to endowment sum assured
- on death the higher of death benefit or endowment sum assured plus bonuses is paid
- on maturity just endowment sum assured + bonuses is paid (often this is heavily reliant on terminal bonus)
- misold as banks were selling alongside interest only mortgages and not warning people of risk of shortfall on maturity based on investment perf or endowment sum assured (mortgage guaranteed to be paid on death due to sum assured) - ha dv low surrender vals often lower than prems paid
Low start endowment
- development of low cost endowments but with initially lower premiums e..g 1st 5y
- prems increased after first 5-10y then higher for rest of term
- aimed at profesh indivs whose income is likely to rise (docs, accountants etc)
- were often misold tho those whose income was not likely to rise as/not enough to keep up with increasing prems
- lots of pols surrendered early and provided minimal return to assured
Unit linked endowments
- with profit policies that paid bonuses each year become unpopular when bonuses decreases so new option
- premiums buy units
- often wider selection of funds than whole of life as this is more of a pure investment product
- guaranteed sum assured
- units cancelled monthly to pay for life cover
- on death amount paid is higher of guaranteed sum assured or value of unity
- on maturity value of units is paid
- units bought monthly @ NAV so more visibility than with profit endowment
- return increases as unit pries rises over policy term
- low surrender vals in early years (due to high level of initial charges) as with other endowments
- no smoothing unlike with profits, also more vol as value fluctuates with units
Endowment summary
Whole of life policies
Pay out of sum assured on death of life assured whenever this occurs
- coverage provided for whole life ensuring death benefit is paid regardless of when it occurs
- open ended term
- comparatively expensive (insurer knows they will pay out as you will die at some point)
- useful estate planning tool for tax and other costs that will occur on death
- may have investment component which offers flexibility and enhances returns - can be almost wholly investment or almost wholly life cover
- no expiry date so can be assigned as security for a loan
- normally used for estate planning and IHT mitigation
Whole of life summary
