6 - Meeting Customers' Needs: Protection Flashcards
What are the main underwriting factors in Life Insurance?
1 - Age
2 - Applicants hobbies and pursuits
3 - Health
4 - Lifestyle (drinking/smoking etc)
The above will affect the type, level and cover required as well as the premiums associated with those.
What are the two main factors that influence the terms of cover?
The term of any liabilities to be covered; mortgage, other longer-term debts and capital needs.
The length of cover to be received by the dependents; important to note the age of children and spouse.
What factors should we consider when discussing the level of cover?
1 - Sufficient capital is required to pay off debts such as the mortgage, future school fees and money in the bank - or funds to buy a house if renting.
2 - Sufficient level of income cover, to cover the lost income that will be missing. That should take into account the following
- Level of income required each year to maintain the current standard for the current family.
- The level of annual increase required to keep pace with inflation.
- The length of time the amount should be required.
- An estimate of the rate of return earned on capital over the period*
A scientific approach would be to have the capital enable a return on itself through investment, to allow for the annual increase and to allow for a lower capital amount to be invested - to enable lower premiums.
What types of plan are there for life policies?
Single Life, own benefit:
The policy only covers the holder of the policy which is paid out to the estate on the death of the policyholder. There is no limit to the amount of cover one person can arrange to have on themselves. Self-cover.
Life on another:
A single-life policy cover is taken out by another person (usually the spouse) to be paid to the spouse on that person’s death. The following can take out a policy such as:
A spouse, a creditor (for long term debt), an employer (key employee), partners in business.
Joint Life First Death:
Both parties are covered but only paid out on the first death, the policy then finishes and no further cover is granted to the survivor.
Joint Life Second Death:
Two people covered but only paid out on the second death, to the estate. These are usually used to limit inheritance tax obligations to the surviving children.
What are the key aspects of a Whole-of-Life Assurance?
Cover remains in place for as long as the premiums are paid, but may increase when the person reaches 60-65
The policy pays out only WHEN the person dies, not if (?)
Premiums usually provide an aspect of investment and protection.
Depending on the policy, the amount will either be guaranteed throughout the life, or reviewed at set intervals.
If the policy is terminated on some investment linked plans, then there may be a terminations surrender value. Which will may be smaller than the initial sum given in premiums.
If premiums are stopped, the sum that may have accrued from the investment aspect, may be used to cover missing premiums.
For non-profit whole of life plans, the amount is fixed on the insured amount - it cannot be changed at a later date.
What are the key aspects of With-Profits Whole-of-Life Plans?
The funds are invested with the companies with-profit fund, which is then invested in a range of assets by the fund manager - the fund covers a number of things.
— promises made to policyholders – sums assured and bonuses already declared –
known as ‘liabilities’;
— the expenses of running the fund;
— reserves – some of the funds are allocated to reserves, to cover unexpected events and to allow the manager to declare bonuses in years when fund performance has been poor;
— once the manager has allocated parts of the fund to cover liabilities, expenses and reserves, they are left with the profit, which they can share with policyholders;
— the expenses are not ‘transparent’ in that there are few if any stated expense figures for each individual policy; the manager takes a sum to cover all policies.
The GSA (Guaranteed Sum Assured) is established at the start.
Premiums are fixed and payable for life - some may allow the premiums to stop at a certain time in life.
Each year the company will assess whether the fund is profitable or not. If profitable, then those bonuses are paid in your fund increasing the GSA. If the fund is underperforming, this will not decrease your original GSA.
A terminal bonus will often be added when the policyholder dies. This is not added until the death of the policy holder and is calculated at that time.
It is possible on some policies to borrow again the policy - sometimes up to 90% of the current cash value. Interest will be charged on loan.
There is no maturity to the policy as it is only paid out when the policyholder dies. The plan does build up a cash value which can be declared if the policy is cancelled.
Unit-Linked whole-of-life policies. Key features are?
Usually referred to as flexible.
Each premium buys a unit in the policyholders chosen linked fund. These of course can grow or fall in value over time.
Fees for the management of the funds are taken out by cashing out some of the units in the linked fund of the policy.
Reviews are made every 10 years, to assess the fund growth, management fees and so on, to make sure that the costs of running the fund, any profits/losses on the fund are assessed and whether the premiums have to be increased or decreased accordingly.
The policyholder will select a premium based on the level of cover required; depending on the performance of the fund, the premiums could be in the region of £25 - £80 per month. The lower level may suffer from insufficient funds to keep the cover required and premiums will rise.
The higher the level of life cover, the larger the number of units that will be cashed to pay for the cover. Obviously, the lower the premium is chosen, the lower the number
of units remaining each month. For example, assuming the same level of life cover on both plans, a premium of £80 might buy 80 units, while a premium of £25 will
buy 25 units. If the charge for life cover requires 20 units to be cashed, the lower premium plan will have five units left rather than 60 with the higher premium. This
differential will be repeated each month. Clearly, at the first review, the second plan Protection against the financial consequences of death will have many fewer units to sustain the plan until the next review, and so the
company will almost certainly increase the premiums at that point.
Flexible plans offer the three indicative levels of cover:
Maximum - The maximum that would be guaranteed over that 10 year period up to the 10 year review. The premium will have to be increased to maintain that level of cover.
Minimum cover. Usually set to meet qualifying rules. These allow for a higher level of investment, but they shouldn’t be seen as investment plans. The premium may likely increase on review doe to a low level of cover.
Balanced cover is based on given assumptions on the known prior return on the investment aspect. This allows for a more balanced view, but premiums at the end of term 10 year review may increase.
Whatever the level, the sum assured is guaranteed for those first 10 years.
The policy and cover can be changed during those 10 years.
Unit linked whole-of-life plans can allow premiums to be directed into another fund (redirection) or existing units to another (switched) once or twice a year.
Fees are transparent, so the policyholder knows the costs of maintaining the cover.
There may be options for Guaranteed Insurablitly to allow the policyholder to increase the sum assured without the need for any further medical.
Indexation of benefits the sum assured increases inline with an index, for example, the Retail Prices Index or by an agreed percentage.
Waiver of Premium. (WOP) this is basically an insurance to cover the insurance. Basically, should the policy holder not be able to cover the premiums due to loss of work or illhealth, then the insurance will cover the cost of the premium.
What do universal whole-of-life policies tend to include?
Any or all of the following:
Income protection insurance Critical Illness cover Accidental death Total permanent disability (TPD) Hospital benefits Flexible premiums
These are added at extra cost and are covered by cashing in extra units, thereby raising the cost of the premiums.
What are the uses and benefits of whole-of-life policy?
To protect the dependents against the loss of the main money earner through death.
To provide a tax-free legacy.
To cover costs of death - funeral expenses.
To provide funds for payment of inheritance tax.
What are the main aspects of Unit-Linked whole-of-life policies?
Main features are the fact they are more flexible than other policies.
Each premium buys a unit in a range of unit-linked funds to select from.
Fees for running the policy are taken by cashing in a unit. The funds are clearly stated and there a no surprises.
The plan is designed so that fees are easily covered - with a degree of assumption over the period, with a review usually in 10 years, then at 5 years.
When set up the policyholder decides on the amount of cover they require, with a monthly sum of between £25 to £80. Those starting on a lower premium may find at the review that they have fewer units to cover the assured value and there will be an increase in premiums at the review.
You’re usually given three levels of cover:
Max - your premiums will be set at a level that will most certainly reach the value of the assured value.
Minimum - this is the minimum qualifying requirement to gain the assured value at best case. It is very likely that this level of premium will be increased to cover the lack of units to cover the assured value.
Balanced - A mixture of the two, where there are a good number of units purchased, but with a balanced premium that is not overly excessive, based on balanced assumptions of previous results.
Whichever level is selected the GSA is in place for the first 10 years.
There is a good degree of flexibility in terms of moving unit funds to a different fund, that maybe better performing - this can be done twice a year without charge.
If there are premium shortfalls, these can be taken by cashing in some units to cover the missing premiums. Say due to illness, loss of work etc. Rather than saying have an insurance cover to cover this.
Fees are transparent, there are no hidden fees or surprises. Fees are taken from cashing in units.
Insured value can be increased, within limits, which is built into the premium. So someone going for the higher premiums (Max) could have their assured value increased, which in turn may result in their premiums going up at the 10 year review to cover the new assured value.
Indexation of benefits: allows the assured value to increase in line with the RPI (Retail Price Index). Therefore making sure that the assured value is in line with a key inflation indicator.
Waiver of premium: The option to have an insurance for the insurance. For a small monthy charge, the WOP will cover any missing premiums for the first 3 to 6 months of any claim of illness or loss of work.
Further options allow for:
Income protection Critical Illness cover Accidental death benefit Total permanent disability TPD Hospital benefits and other medical cover Flexibility in premiums
What are the key uses and benefits of a whole-of-life assurance policy?
To provide a lump sum at the death of the assured. Which can be used to:
- provide support to the family to cover lost income
- to provide a tax-free legacy
- to cover death expenses
- provide funds to cover inheritance tax (IHT)
What is Term Assurance?
A set value of cover for a set period of time. Limited in frills and limited flexibility - no cash surrender value.
- benefits only payable upon death.
- premiums either payable monthly or yearly
- covers only a specified time (TERM)
- can be for months or up to 40 years.
- cover ends at the of term, with no value.
- no cash value built in.
- cover ceases if not paid if the assured is still alive at the end of the term policy.
- can be arranged on single life or joint life.
What types of Term Assurance are there?
Level Term - the level of cover stays the same throughout the period covered.
Increasing Term - Premiums will increase in line with the sum assured and no account of the assured health is taken when the increase is made. There will usually be a maximum amount that can be assured.
Renewable Term -
The term can be renewed without the need for a further medical of the assured, usually repeatable until the assure is 65.
The term of the plan will be the same as the original.
The premiums will be based on the assured age, but no further medical qualification is needed.
Some plans allow for an increase, without the need for further medicals.
Convertible Term -
The plan can be converted to a whole-of-life or endowment policy without further medical.
New changes will only need an age reference to determine premiums.
The maximum sum assured will only be the original sum assured in the original policy. Although some do allow increases to allow for weddings, birth, moving house etc.
The conversion is basically cancelling the existing policy and transferring it to the new. An endowment can go beyond the original policy term.
The conversion will normally at 10-15% to the premiums.
What type of Plans are available on Term Assurance?
By using this range of options it is possible to arrange the following types of term policies: level term; increasable term; renewable term; convertible term; renewable convertible term; renewable increasable term; renewable increasable convertible term.
What are the main aspects of Decreasing term Assurance?
DTA’s decrease over time and premiums remain constant throughout and sometimes payable for a limited amount of time.
The amount of cover reduces each year.
The gradual reductions allow for a far cheaper premium than standing level Term assurance.
