Chapter 2 - Financial Protection (part 1)- Life Insurance

Question 1

What did the Retail Distribution Review examine?

Answer 1

Only retail investment products (not protection)

Question 2

What is the principal role of Life Insurance?

Answer 2

Ensuring financial security for dependants on the death of the life insured by providing a lump sum, a regular income, or both.

Question 3

What is Insurable Interest?

Answer 3

A party must be able to demonstrate that they would suffer a financial loss in the event of the death of the insured person

Question 4

How long does Key Person Cover normally pay out for?

Answer 4

Up to 5 years

Question 5

What is the difference between a “shareholder protection agreement” and a “partnership protection agreement”

Answer 5

A shareholder protection agreement is to protect the remaining owners in the event of the death of one of the shareholders in a business. These are generally used by SMALLER PRIVATELY OWNED LIMITED COMPANIES where the owners and the managers are the same people

A partnership protection agreement is broadly similar except that it is used by the PARTNERS IN A PARTNERSHIP OR LLP rather than a limited company

Question 6

What is the purpose of both shareholder and partnership protection?

Answer 6

They are designed to ensure that the remaining owners have the means to buy out this share without disruption to the business or their own personal finances

Question 7

What is a cross (or double) option agreement?

Answer 7

An agreement giving the OPTION to the remaining partners or directors to buy the deceased’s interest from the beneficiaries, and giving the beneficiaries the OPTION to sell their inherited shares. If EITHER party exercises their option, the OTHER party MUST comply.

Question 8

Why should a single option agreement be used for Critical Illness Cover?

Answer 8

This ONLY gives the ill director/partner the option to sell their shares.

Question 9

What type of trust needs to be used for shareholder and partnership protection?

Answer 9

A BUSINESS TRUST (not discretionary nor flexible)

Question 10

What 6 benefits did Unversal Credit replace?

Answer 10

• income-based jobseeker’s allowance
• income-related employment and support allowance (ESA)
• income support
• working tax credit
• child tax credit, and
• housing benefit.

Question 11

What level of saving exempts somebody from Universal Credit?

Answer 11

£16,000 (single or joint)

Question 12

How much Universal Credit is paid?

Answer 12

The amount of universal credit can go down or up depending on what income the claimant gets from working, a pension, other benefits and savings and capital above £6,000.

Question 13

How long is Statutory Materity Pay paid for?

Answer 13

39 weeks

Question 14

How much Statutory Materity Pay is paid?

Answer 14

• 90% of average weekly earnings (before tax) for six weeks
• £156.66 or 90% of average weekly earnings (whichever is lower) for the next 33 weeks.

Question 15

How much does Support for Mortgage Interest (SMI) cover?

Answer 15

It covers ONLY THE INTEREST on the first £200,000 of the mortgage (£100K is pension credit is the reason for the claim)

Question 16

How much Bereavement Support Payments are paid?

Answer 16

Higher rate (with children in education) = £3,500 then 18 x £350 per month
Lower rate = £2,500 then £100 per month

Question 17

How are most joint life insured policies written and what are their uses?

Answer 17

• Joint life first death, paying out on the death of the first life insured – commonly used for family protection needs and for mortgage cover.
• Joint life second death, paying out on the death of the second life insured – commonly used in whole of life insurance policies to meet IHT liabilities.

Question 18

What is increasing term insurance?

Answer 18

Where the sum insured increases – this could be either by a set percentage of say 5% or in line with increases in the rate of inflation

Question 19

What is renewable term insurance?

Answer 19

Enables the life insured to take out further term insurance at ordinary rates, without providing further evidence of their health status

Question 20

What is convertible term insurance?

Answer 20

This type of policy allows the policyholder to convert to a whole of life or endowment policy

Question 21

How much do premiums reduce by in decreasing term insurance?

Answer 21

They DONT - they state the same

Question 22

What level of death cover will be paid for non-profit whole of life?

Answer 22

Guaranteed to pay a fixed sum on the death of the life insured

Question 23

What level of death cover will be paid for with-profit whole of life?

Answer 23

With-profits policies include an investment element. On death, the amount paid out is the guaranteed minimum sum insured, plus any allocated bonuses

Question 24

How are reversionary bonuses paid?

Answer 24

Paid annually and are usually expressed as a percentage of the sum insured.

Question 25

What is a low-cost whole of life policy?

Answer 25

A combination of:

• a with-profits whole of life policy, and
• a decreasing term insurance.

Question 26

In a unit linked whole of life policy, what is the difference between standard, maximum and minumum sum insured?

Answer 26

• standard sum insured – this is the amount the life office has calculated that it should be able to maintain for the premium
• maximum sum insured – where the initial sum insured is higher than the standard amount, this results in more units having to be cancelled each month to pay for the cover, resulting in fewer units remaining invested
• minimum sum insured – where the initial sum insured is lower than the standard amount. This will result in fewer units having to be cancelled each month to pay for the cover, with more units remaining invested.

Question 27

What type of endownment policy has the cheapest premiums at the start?

Answer 27

Low-start endownment policy

Question 28

What is the difference between “joint-tennants” and “tennants-in-common”?

Answer 28

• Joint tenants - upon the death of one of them, the interest in the policy automatically passes to the survivor
• Tennants in common - each person owns an identifiable share in the policy – when one of them dies, their share does not automatically go to the survivor. Instead, it goes into their estate and is dealt with either through the person’s will or through the laws of intestacy

Question 29

What is the difference between bare, interest in possession and discretionary trusts?

Answer 29

• Bare trusts - the beneficiary has an absolute right to benefit at age 18.
• Interest in possession trusts - the beneficiary has an absolute right to income and is known as the ‘life tenant’. They are said to have a ‘life interest’ in the trust property. Other beneficiaries known as the ‘remaindermen’ are entitled to trust capital.
• Discretionary trusts - no one has an interest in possession and payment of income, and capital is at the discretion of the trustees.

Question 30

What are the IHT implications for lifetime gifts to bare, interest in possession and discretionary trusts?

Answer 30

• Bare trusts - potentially exempt transfers (PETs)
• Interest in possession and discretionary trusts - regarded as a chargeable lifetime transfer (CLT) and is liable to IHT immediately at a rate of 20% if the CLT exceeds the nil rate IHT band

Question 31

Why is a split trust used with combined CIC and Life Cover?

Answer 31

To ensure that the life insured receives any critical illness payment while any death benefit is paid to the trustees and held in trust for the beneficiaries

Question 32

What are the advantages of writing life cover in trusts?

Answer 32

1. It ensures that it is not included in the estate for IHT purposes
2. The sum insured can be paid out without waiting for probate

Question 33

What is an assignment of a policy?

Answer 33

When a policy (usually a life policy) is transferred from one person to another.

Question 34

What is “Free Cover” in regard to an employer based group policy?

Answer 34

Without the requirement for each employee to have a medical examination or to provide medical evidence

Question 35

How much would it cost a company to provide cover of 4 times salary to all employees?

Answer 35

0.25-0.5% of the total payroll

Question 36

What are the qualification rules for qualifying policies?

Answer 36

• The policy term is at least ten years.
• Premiums are payable at least annually.
• Premiums are subject to an annual limit of £3,600.
• The sum insured is not less than 75% of the premiums payable over the term.
• Premiums paid in any one year are not more than twice those paid in any other year.
• Premiums paid in any one year are not more than 1/8 of premiums paid over the term.

Question 37

What level of tax is paid by life policies within the fund?

Answer 37

Life policies pay corporation tax within the fund, which is deemed to satisfy the basic rate of income tax.

Question 38

What is the main benefit of a qualifying policy?

Answer 38

The proceeds are not subject to income tax regardless of the tax status of the policyholder

Question 39

What are the tax implications of non-qualifying policies?

Answer 39

The fund suffers tax equivalent to the basic rate of income tax. Non-taxpayers cannot reclaim this tax; basic-rate taxpayers have no further liability, and higher-rate and additional-rate taxpayers have an additional liability in this tax year of 20% or 25% of the chargeable gain.

Question 40

What are the 5 types of chargeable gains in a policy?

Answer 40

• Death.
• Assignment for money or money’s worth.
• Maturity.
• Excess withdrawals (over a specified limit).
• Surrender.

Question 41

How much can be withdrawn each year from a single premium life insurance bond?

Answer 41

5% of the original investment each year, with no immediate tax liability, for a maximum of 20 years or until 100% of the original investment has been received. THESE ARE NOT TAX FREE BUT TAX DEFERRED

Question 42

What is top-slicing relief?

Answer 42

• It can be used to reduce the tax liability on any excess.
• To calculate this, the excess is divided by the number of complete years that the bond has been held (or since the last chargeable event, if more recent). The amount of the top-slice is added to the policyholder’s taxable income. If any part of the slice falls into the higher-rate tax band (and the additional-rate band, where applicable),
• It is taxable at the difference between higher/additional rate of income tax and the basic rate of income tax that is deemed to have been suffered in the fund. For offshore policies, there is no deduction for basic rate income tax suffered in the fund.

Question 43

What are the relevant interest rates for Support for Mortgage Interest?

Answer 43

standard interest rate used to calculate the benefit is currently 2.09% regardless of whether the actual mortgage interest rate is higher

SMI benefit is paid in the form of a loan to the homeowner. The interest rate is variable, but will not change more than twice a year, and the current rate is 3.03%