5 - PROTECTIONS Flashcards
1
Q
fAttitudes towards protection insurance
A
- 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
2
Q
Purpose of insurance
A
- 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
3
Q
Main drivers of sales of life assurance prods
A
- 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
4
Q
Protection gap
A
= 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
5
Q
Health trends
Morbidity vs mortality
A
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
6
Q
Reasons for advice on cover
A
- 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
7
Q
insurable interest
A
-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
8
Q
3 types of life assurance
A
= 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
9
Q
Term assurance
A
- @ 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)
10
Q
Types of term assurance
A
+ unit linked = quite a costly wat of buying both term cover and insurance linked investments
rare to recommend
11
Q
Level term assurance
A
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
12
Q
Uses of level term assurance
A
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
13
Q
Renewable term assurance
A
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
14
Q
Uses of renewable term assurance
A
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
15
Q
Increasing term assurance
A
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
16
Q
Decreasing term assurance
A
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
17
Q
Convertible term assurance
A
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
18
Q
Family income benefit
A
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
19
Q
Uses of family income benefit
A
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
20
Q
Unit linked term assurance
A
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
21
Q
Term assurance summary
A
22
Q
Writing into trust
A
- 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
23
Q
Quali rules for life assurance prods
A
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
24
Q
Endowments
A
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)
25
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
26
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
27
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
28
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
29
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
30
Endowment summary
31
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
32
Non profit whole of life
- provides lifetime cover without any profit
- level premiums payable throughout life
- some cease collecting premiums at specific age (e.g. 85) though initial prems higher
- fixed sum assured on death
- no participations in profits of life office
- no surrender value
- common for sum assured to paid on condition on min survival period (usually 2y)
- often v lightly underwritten
- often small amounts insured
- prems higher than term cover as certain payout
33
Use of not for profit whole of life assurance
- pols with small sums assured are sometimes sold to older clients directly e.g. on TV ads
- popular in IHT market
34
With profit whole of life assurance
Similar to non prof whole of life but here death benefit = sum assured + bonsues
- participation in with profit fund
- holder benefits from investment performance via bonuses
- annual/reversionary bonuses (cant be removed once applied tho not guaranteed before)
-bonus level depends on perf of life office/funds/assets/liabilities
- can be simple or compound % of sum assued
- terminal bonus expressed % of total reversionary bonus
- payment on death = sum assured + bonuses
- MVR (market value reducer) - applied on surrender/switching to reduce surrender value but not on death
35
Uses of with profit whole of life assurance
- standard form of whole life cover for family protection + IHT planning
- with profits should be less risky than unit linked as allocation of bonuses should provide smoother increase in benefits
- MVR likely to be applied during period of adverse market/economic conditions
- FCA has COBS rules than companies must follow when applying MVRs
- most legacy with profit funds are now in gradual run off to wind up
36
Low cost whole of life
-combo of with profit whole of life and decreasing term assurance but sold as one policy
- much lower premiums
- pays out full sum assured on death based on combo of value of 2 elements
- bonuses add value to pay out while decreasing term sum assured is gradually reducing
- lower surrender value/benefits than full with profits
- death benefit = greater of basic sum assured + bonuses or guaranteed sum assured
- premiums and death benefits lower than standard whole of life
USES
- family protection and IHT planning
- used basically for same purpose as normal whole of life but lower cost
37
Unit linked whole of life
3 types + UL becoming increasingly common
- flex structure
-investor can vary weighting to investment or life cover
- prems typically reviewed every 10 years based on notational growth assumption (can sometimes change sum assured/increase prems to compesate)
- tend to attract high charges and prem increases can be significant if investment perf has been insufficient
Maximum cover
- largest amount of protection with little/no investment
- plan review implications since if unit perf is down they might review say premiums must increase to compensate (because each year you are cancelling more poorly performing units to pay for cover)
Standard cover
- balance between units bought for investment and for life assurance
- more balanced between protection and investment
- should be no prem increases as long as units grow at decent rate
Min cover (max investment)
- lowest sum assured
- most of the premium is used t buy units
- unlikely you will have to increase premiums
38
Uses of unit linked whole of life policy
- flexible levels of cover enabling high degree of protek in early years (e.g. dependent children) and more investment/less protection in later life
- used for estate planning for IHT lump sum
- unlikely anyone would opt for min cover option @ outset as likely better ways to invest money if this is the intention
39
Universal life policies
- designed as attempt to provide more flexi unit linked contract
- PH can chose from menu of benefits and change selection from time to time (prems adjusted accordingly)
- non quali for UK tax purposes due to range of options (not limited to death or disability)
typically benefit options include
- death benefit
- critical illness cover
-accidental death
- hospital income cover
- waiver of contribution
- indexation of benefits
40
Whole of life summary
41
Investment bonds
- designed as wrapper to hold series of CIS (usually tho choice is now widening)
- lump sum investment into life assurance prod (so not qualifying and will be tax to pay eventually, tho deferred)
-Tiny amount of life cover - typically pays out 101% of value on death
- subject to income tax not CGT
- up to 5% of initial investment amount can be withdrawn a year on (higher rate= onshore) tax deferred basis (cumulative so after 4.5y can take 25%)
- onshore bonds suffer tax @ 20% internally (not redeemable for non taxpayers)
- offshore bonds = no internal tax
- tax payable on chargeable event
- neither is tax free just tax deferred (onshore HR tax deferred)
- if you do non permissable withdrawal (take >5%), tax @ marginal rate on excess
- mostly written as whole life policies so investment period is open (may be single or joint life)
- joint life benefit = bond can continue throughout lifetime of spouse
- all non quali
- can add children/grandchildren as life assureds to prevent auro encashment on death of holder in time of poor fiscal/market conditions
- can issue in segments and assign to low tax paying individuals
- can issue on capital redemption basis - so only comes to auto end after set term normally 99 years
- have 5% pa tax deferred, cumulative withdrawal facility
42
Unit linked investment bonds
- single prem, unit linked life assurance policy
- non quali since lump sum initial investment
- designed to achieve capital growth from the performance of units in funds usually managed by life assurance providers
- on investment, single prem used to purchase units in one or more internally or externally managed funds
- usually written as whole life with no fixed maturity date
- can be written as single/joint life and may be written in trust
- advisors should aim to use a segmented policy with up to 20 sub policies allowing for efficient withdrawal of income, partial surrenders, and surrenders of indiv segments
- no separate income and capital - withdrawals taken as form of income are achieved by encashing units
43
Distribution bonds
- income and capital kept separately and income paid reflects actual income generation
- any income not paid out is typically reinvested in units
- fund can't have equity content >60% and all income must be capable of being paid to investor (ABI distribution fund sector definition
44
Guaranteed income bonds
- single premium bond
- provides specified income for specified term - usually 1-5y
- income paid monthly/annually + capital returned at maturity
- issued in tranches and returns will be based on market conditions at outset
- Income received is (as usual) treated as a withdrawal of capital
- Chargeable events could therefore occur if the amount being withdrawn exceeds the 5% per annum tax deferred allowance
- Assuming that they are held to maturity, they are relatively low risk but if surrendered early, the investor may receive a value below their investment due to the fact that the underlying structure of investments may be complex and difficult to liquidate
- heavy penalties on early encashment if available
45
Guaranteed growth bonds
- issued in limited issues (or “tranches”) to coincide with current market conditions
- They grow at a fixed rate of “interest” as notified from outset
- term typically 1-5y
- The investor receives a guaranteed return at maturity including the original investment.
- Gains at maturity will be subject to the usual tax rules for this structure of policy and therefore higher rate taxpayers will incur a tax liability from the resulting chargeable event
- Assuming that they are held to maturity, they are relatively low risk but if surrendered early, the investor may receive a value below their investment due to the fact that the underlying structure of investments may be complex and difficult to liquidate
46
Guaranteed equity bonds
- Aim to provide capital growth linked to a stock exchange index with a minimum return at maturity of the capital invested
- OftTerms often 3-5y
- A proportion of the investment say 85% - 95% will be used to provide the guaranteed return by investment in fixed term deposits
- The balance will be invested in derivatives to track the return of the relevant index
- v similar to structured products
- Where “income” is paid on a regular basis, it is usually deducted from the capital return at the end
- These investments give lower risk investors an underlying guarantee but the ability to participate in stock market returns at the same time
- Assuming that they are held to maturity, they are relatively low risk but if surrendered early, the investor may receive a value below their investment due to the fact that the underlying structure of investments may be complex and difficult to liquidate
47
Investment bonds and interest in possession trusts
- income in IIP trusts has to be distributed
- life tenant receives income generated by trust/right to enjoy trust assets and remaindermen receive trust property on their death
- life pols not appropriate for IIP trusts - because they are not income producing assets - so not balancing needs of life tenant and remainderman which trustees have duty to do
-5% withdrawl facility on investment bonds is a return of capital not income and trust law v complicated here
48
tax treatment of investment bonds held in trust
- IBs are non income producing assets so only income tax charge where there is a chargeable event (DAMES)
- if chargeable evnt
49
Reasons for insurance linked investments vs direct investments into CISs
- some tax benefits of holding in life assurance wrapper
- possibility of LT tax deferral
- guaranteed income and growth bonds
- access to direct property hildings rather than property shares commonly found in REITs
- in some insurance based structures switching betwen funds and asset classes can be done at little/no cost and w/out personal tax liability
50
Tax treatment of policies
Can be quali or non quali life insurance policies - quali pols dont give rise to chargeable event gain (unlike non quali pols which do)
Quali
- min term 10y
- regular, consistent premiums (if pol taken out post March 2012)
- pre march 2012 - total premium paid within 12m period must be below 3.6k if pol is modified since 2012
- generally dont give rise to chargeable events unless pol is surrendered or prems cease within first 10y
Non quali = often single prem whole of life
51
Income protection
- AKA permanent health insurance
- designed to pay out an income benefit when person unable to work due to prolonged sickness/incapacity
types of incapacity - own occ, suited occ, any occ, activities of daily living = most expensive to cheapest
- run for set term
- circs under which benefit is payable are clearly defined
- payments cease on holder's return to work or retirement
- prems are quite expensive since the benefit can be paid for a significant period of time
- longer deferment period = cheaper premium - can tie in to commence when employer cover ceases (4weeks to 2y avail)
- benefits paid tax free (if paid for yourself or subject to IT where employer pays prem) and based on assured's post tax earnings
- dont confuse with ASU which is shorter term and covers different things
52
Uses of IP policy
- can benefit baso anyone who is working -consider how fam would continue to pay bills if main income earner were to fall ill
- benefit can be tied in with any sick pay they receive from employer
- may have shorter deferred period for self employed people as no sick pay
- some offer IP for homemakers where illness could lead to greatly increased familial costs if partner who looks after home can no longer do so
53
3 types of premium avail for IP + UW
Reviewable = prem low @ start but will bbe reviewed in future and increase every few years
Renewable = variant of reviewable premiums, prem reviewable whenever policy due for renewal
Guaranteed = tend to be most expensive but prem fixed for life policy which may be up to around 25y
- UW is more stringent than life cover, looks @ morbidity not mortality, increased risk of moral hazard
=- prem affected by age, deferred period, term, smoking, escalation options
54
Conditions for IP policies
- aged between 18-59 @ outset, cover stops @65
- illness/injury is referred to as incapacity and policy defines what constitutes this relative to occupation
- pre existing conditions often excluded
- benefit starts once deferred period finished and stops once indiv no longer meets incapacity definition
- longer deferred period = lower premium
- once claim made - insurer may extend deferred period or even decline current/future claims
exclusions
- alcohol and drug misuse
- criminal acts
-flying (other than as passy in commercial aircraft)
- hazardous sports/pastimes
- AIDS/HIV with some exceptions
- intentional self inflicted injury
- failure to follow medical advice
- pregnancy, childbirth and complications
55
Types of income protection policies
Standard
- payments start @ end of deferred period and continue to recover/NRA/death
- usually 50-60% of pre claim income, 75% for group polciies
Limited term cover
- more modern, may cover ST 1-5y
- can offer lump sum if holder still incapacitated
Day one + back to day 1 cover
- day one = useful for self employed with no sick pay, can be weekly
- back to day one = starts after deferred period but backdated to day one
Investment linked
- most IP = pure protection with no investment linkage
-legacy pols can be unit linked and offer eventual investment returns (subject to COBS)
- Holloway policies = exception, not subject to COBS and have small investment element
Unemployment insurance - some pols offer additional unemployment cover, not permanent
56
Proportionate and rehabilitation benefits
Rehabilitation
- some people return to same job but on reduced hours
- IP policy makes up difference in income during these hours
Proportionate
- return to work to do job payng less money
- IP policy makes up difference
57
Waiver of premium
- popular with IP policies - often auto included
- keeps prems going in case of accident/illness that prevents holder from working
- some over unemployment too
- typically adds 2-5% to cost
58
Accident, sickness and unemployment (ASU) cover
Personal accident pol = generally taken out for annual period and can provide income/lump sum in event of accident
General ASU will also cover forced unemployment
- designed to cover portion of salary if you cant work due to illness, injury or compulsory redundancy
-policies tend to be time limited (usually 12m) and shorter term than IP, also cheaper, less stringently underwritten
- can have lots of exclusions and limitations
- eligibility is assessed at time of claim and may be refused due to pre existing conditions even if they have been disclosed
- can pay TF lump sum for loss of a faculty e.g. an eye
- compulsory redundancy benefit o: often must have pol in place for >6m, some newer pols cover self employed for genuine bis failures
- period between when indiv becomes unable to work and benefits starting may be 30-60 days
standalone ASU = covers stated % of income
59
MPPI and PPI
- mortgage payment protection insurance (MPPI) = covers up to 125% of mortgage costs
- designed to ensure mortgage payments due can continue to be paid if borrower unable due to ASU
- tend to be offered by lending instit + insurance comps
- protection provided on level basis - need to review regularly so that cover reflects changes in rates
- amount payable might not cover full mortgage as it can be reduced to take into account other income
payment protection insurance (PPI) = covers up to 125% of loan costs (e.g. cant afford payments on loans if you are not working)
60
Critical illness cover
- survivors insurance
- designed to pay lump sum on event someone suffers from wide range of critical illnesses
- normally pays out TF lump sum, at which point cover then ceases
- must survive fro 14-30 days following diagnosis typically (for standalone pols)
- standard set of illnesses covered which most insurers have adopted - must be dread
- some significant illnesses may be excluded
- illnesses from certain activities e.g. war not covered
- critical illnesses without death are very common, may force you to give up work or reduce hours
- can be level, increasing or decreasing basis of cover
- can be combined with other pols so indiv is cover whatever happens (e.g. on death)
- can extend cover to provide for total/permanent disability = then covers conditions and circs not included as standard
- exclusions - drugs,m flying not as pass, hazardous pastimes, unreasonable failure to follow medical advice, lviing abroad outside EU for >13 consecutive weeks in 12m
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Tax on critical illness cover
- no tax on benefits
- premiums if paid by employer are taxable benefit in kind
- Combined critical illness and life policies - use of split strust would mean CI benefit form part of estate, death benefit passes to nominated beneficiaries outside of estate
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Business protection insurance uses
Can take many forms - prems depend on amount of cover and ages/gender/occupations/medical histories of those covered
-indemnity cover for claims against bis for faulty work or goods
-cover for loans that have been taken out and secured against an indiv's assets
- any income if the owner unable to work and bis ceases
- payments in event key member dies = covering impacts to profit
- payment in event of death of major SH/partner so remaining can buy out share and estate can distribute funds to fam
- director's insurance = taken out to protect directors from being sued due to undertaking action as part of their job
- prods tend to be highly flexible/customisable
- normally allow life assurance payouts to be made in installments to aid CF and corp tax liabilities
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Key person insurance
Company insuring itself against financial losss it may suffer on death/serious illness of essential employee
- taken out on life of another basis and sum insured paid directly to insurer on death
Reasons for loss
- cost of urgent replacement
- debts called in/restricted credit lines due to decline in innovation
- loss of competitive edge
- increase pressure on remaining workforce
Cover
- life insurance written on life of person crucial to bis
- often includes critical illness cover with terminal illness benefit (terminal cover - life expectancy of <12m
- usually ST renewable policy, under 5y qualifies for corp tax relief
- amount can be determined on loss of profit cal/salary multiple of indiv/length of time to recover/bis loans secured against indiv
- can arrange for payments to be staggered over many years
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SH/partnership protection
- if major SH/partner dies = can have big impact on bis and family
- Beneficiaries acquire shares - could lead to tensions about running company, may not want to run company or have necessary experience, may want cash
- partnership agreement or articles of association will usually require that a cash offer be made to beneficiaries = but where from?
- if no cash then shares may be sold to outsider :(
- SH protection designed to provide cover to ensure sufficient funds avail to enable purchase to take place
- insuring SHs lives for amount that reflects value of individual holdings
3 options on death
-Double option agreement = where each party has option to sell/buy holding and if one exervises the other must comply (can apply for partnerships)
-must be no binding contract for sale so business relief can still be claimed
Sale and repurchase agreement
- binding contract to buy family out
- not attractive as no longer quali for business relief if there is a binding contract for sale
- share held in treasury or cancelled
Automatic accrual method
- in absence of agreement where shares pass to survivors - life policy can compensate beneficiary for share of bis and remaining partners accrue according to existing holdings then up their own life pols
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Annuities
- lump sum investment with a financial institution that provides a regular, periodic payment to an indiv for specific period of time
- benefit from mortality gain (but risk of early death)
- rate based on prevailing gilt yields and age/health etc
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Types of annuity
Conventional - secured inc in XC for lump sum. Pay guaranteed income for rest of life
Investment linked - income dependent on performance of investments. these have investment risk so less benefit vs drawdown
Deferred - pay regular income @ later date
Guaranteed - income paid for minimum term (paid to estate after death if you die within term)
Escalating - Can be inflation linked or increase @ fixed % for additional cost
Can be joint - where income continues on first death to benefit other holder (doesnt have to be spouse)
Temporary = fixed number of years
Annuity certain = payment guaranteed for a fixed number of years
Advance/arrears (if in arrears with/without proportion) - paid @ begining or end of year. Without proportion wont provide payment if you die half way through month e.g.
Capital protected - if part of lump stum still avail when you die then family receives death benefit
Enhanced - higher rates for particular conditions (smoking, diabetes etc)
Impaired life - for those with serious conditions and higher risk of mortality, often fully UW with medical history etc
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Taxation of annuities
Purchased life annuities = part TF return of capital and part as interest on the income element - because you buy these with your savings
Pension annuities = taxed in full as non savings income (like a salary)
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Advantages and disadvantages of annuities
ADV
- certainty of payment
- low investment risk
- No longevity risk
- lots of options for differing needs
DISADV
- inflexible
- illiquid
- risk of early death
- not inheritable
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Private medical insurance
- cover costs of medical and hospital expenses
- can be personal or provided by employer
- usually doesn't cover chronic or pre existing conditions
- what's covered will be clearly defined
- in UK, main advantage is basically queue jumping.diagnostics, in critical situ like heart attack patients are taken to an NHS hospital
- higher excess = lower prem
standard exclusions
- alk, pregnancy and childbirth, self harm,
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Long term care insurance
Care home fees v expensive (41k care home, 56k nursing home) - not much government support (anyone over 23k assets pays in full)
- gov dont allow for deliberate deprivation
2 main types of insurance
Immediate Care LTCI
- lump sum investment paying regular income until death
- TF if paid directly to home
- acts as TF immediate needs annuity
- underwriting required
- market not v competitive and only 2 real providers
Pre funded LTCI
- regular prem or lump sum premium (lump sum care bond)
- pays out tax free regular sum if care is needed
- dependent on not being able to perform a certain number of activities of daily living
- similar to income protection in that it pays out when you cant do x no. of ADL - often unit linked so risky if units dont grow
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Advising - life and family cover
- life cover
- income protection
- health insurance
- critical illness
- personal accident
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Advising - lifestyle and income
- savings
-investments
- ASU
- unemployment cover
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Client ages and cover reqs
Young family = focus on life, sickness and redundancy cover
30s = mortgage/pension - focus on income protection
40s = mortgage payments reducing (tho recently people on property ladder much longer). Life and mortgage cover less important but sickness cover increasing in importance
50s = mortgage may be paid off, life and redundancy may not be important. sickness important and LT care planning
60s+ redundancy less important. pure life may be less important. clients focused on wealth preservation, IHT liabilities. Health and sickness cover + LTCI
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Life insurance planning process
NEED? GOT? GAP? FILL?
NEED
- identify a need for cover = there almost always will be one
- just becauase need is established doesnt mean it can be addressed, cost is often a major issue
- quantify impact and likelihood of various scenarios and rank in order of importance
GOT?
- review existing arrangements/savings/capital
- need extensive info on client's current protection arrangements
- extend of cover? right product? can cover be extended,?affordabiliy? timescale? risk? charges? encashment penalties? beneficiaries?
GAP
- quantify type and level of protection needed for each of the areas
e.g. lump sum or income or combo
- asses cost of protection
- identify extent and scope of protection client can afford
FILL
- establish plan which will allow some of the needs to be addressed
- plan must be appropriate to needs of client
- compare diff types of policy that would all meet the needs of the client
- consider price? features? charges? tax treatment? suitability to client an objectives?
Almost always advisable to ensure policy is written in trust - ensuring sum doesnt enter the deceased's estate but also helps control distro of funds without money entering survivor's estate
Always ensure clients have written appropriate wills - especially important when they arent married
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Factors to consider when selecting product providers
Financial strength
- capital strength of provider is important, vital to consider
- pols can run for many years, must be sure comp will still be around to pay out
- very capital intensive area of bis to write so comps will pull out of areas if they are struggling financially
Qual of service
- servicing and claims record of provider
- clear and understandable docs and pricing
- claims handling - fair and efficient? good governance?
- no regs that compels comps to fill market following a provider exit - if they went bankrupt may be oler and face higher prems for same level of cover
Investment choice and perf
- where life prod perf depends on investment perf of company's funds
- assess LT perf relative to BM and peers
Availability of tax wrappers
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Solutions put forward by advisor must be
- adequate to meet clients needs -if this is not possible i tmust be accepted that there is a gap or a combo of products is needed
- consistent with client ATR
- as tax efficient as poss
- affordable and realistic to client given level of disposable income
- suitable to client resources, needs and ATR
- produce suitability letter that displays how every rec for product/strat is suitable for client need/resources and ATR
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Key features document
- advise given to clients must be suitable and clients should have info made avail to them to ensure they make informed decision
KFD = describes prod in a way the client can understand
- main features, benefits, risks, and costs
- clear description of aims of prod
- committment client is makings
- risks and description of factors that may have adverse affect on perf
- Q&A on main terms of prod
- info on surrender and early exit
- premiums
- tax info
- exclusions and limitations
-eligibility reqs
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InsurTech
= innovative use of technology to improve and disrupt the insurance industry
- using AI and machine learning to tailor pols to indivs
- automated UW and claims processing
- P2P insurance where those who need similar coverage pool premium
- growing collaborations between insurance giants and insurtech firms
Tractable : London based uses AI to assess vehicle and property damage swiftly, enabling expedited claims processing and identifying salvageable parts
YuLife: London based provides life assurance in an app that encourages PH to take part in healthy activities and earn rewards - uses behavioural science and gamification
Lemonade: NY headquartered, Aviva strat partner - originally specialist rental home insurance for renters, simple. Now offers climate insurance to farmers on blockchain architecture
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Key trends in UK InsurTech amrket
- using AI to automate tasks, enhance risk assessment, deliver personalised customer service, drive operational efficiency
- big data allows companies to gain deeper insights into customers - refinancing pricing and prod development
- wearables tracking health data and facilitating personalised insurance plans tailored to indiv lifestyle and behaviour
