9: Needs and priorities in protection planning

Question 1

Assessing the amount of financial protection required - General rule

Answer 1

Assess the shortfall in come that would follow if the risk event occurred

*Shortfall can be calculated as the difference between:
* how much protection would actually be needed if the risk event happened;
* how much protection is currently in place (assessment of existing provision). *

Question 2

Assessing existing provision - remember to consider 3 forms of provision:

Answer 2

• Current protection policies
• Benefits provided by employers
• State benefits

Question 3

Assessing the amount of financial protection required - Better rule

Answer 3

Protection needs on death are often based on the breadwinner’s current income because this is what will be lost if death occurs.

Strictly speaking, it may be more effective to base needs on the dependants’ projected expenditure,

Question 4

Assessing the income need in the event of death - Calculating the need - lump sum. List 3 methods

Answer 4

1. Historically method - taking a multiple of breadwinner’s annual salary or projected income shortfall - often multiplying by 5 or 10
2. Multiply the additional annual income required by a factor that takes into account the period over which the income will be required- such as the number of years the youngest child reaches age 18-21, leaves full-time education, or the planned retirement date of the person insured.
3. Agree upon the level of lump sum required to produce the desired income (based on realistic investment returns)

Question 5

Protection needs in the event of illness or disability

Answer 5

• replacement income in respect of the earner;
• income to pay someone to carry out the tasks previously carried out by the person
  who has become ill;
• income to pay for continuing medical attention;
• a lump sum to pay for medical treatment (often in order to obtain the treatment
  more quickly);
• a lump sum to pay for enforced changes to environment (such as adaptations to the
  home) or lifestyle;
• a lump sum to repay debts such as a mortgage.

Question 6

Quantifying a critical illness need - two multipliers

Answer 6

• For a single person with no dependants, a multiple of four times income might be
  used.
• For anyone else, a multiple of six times income might be used.

Question 7

Cost/budgetary considerations when assessing client needs/policies

Aspects that make the policy cheaper

Answer 7

• Joint‑life plans are cheaper than two single‑life plans.
• Protection is cheaper the shorter the term of the plan.
• Mortgage‑related plans can be kept separate from other plans to minimise cost
• Decreasing term assurance is cheaper than level term assurance
• CIC can be arranged as an added benefit within a term assurance
• CIC can also be arranged on a joint‑life basis
• Critical illness policies only covering ‘cover’ illnesses will be cheaper
• Term assurance cheaper than whole-of-life (term makes a big difference)
• Family income benefit plan may be suitable for protecting family finances - which may be cheaper than assurance
• Hospital cash, PMI, and Detal schemes offer cover in a tapered fashion - lower grade schemes = cheaper

Question 8

Other planning considerations - name 7 aspects that should be considered

Answer 8

• IHT
• Use of trusts
• Wills
• Care issues
• Savings/investments
• Moving/working overseas
• Cancelling plans

Question 9

Chosing a policy provider - aspects to consider

Answer 9

1. Does the provider offer the product that covers the clients need?
2. Does the companies underwriting process make them unsuitable due to expense or exclusions?
3. Quality of service that will be provided
4. Investment choice and performance (for non-pure protection policies - unit-linked; do the investment options fall in line with the clients ATR?)
5. Financial strength of company - *based on company’s free asset ratio (FAR).**
6. charges and costs