Chapter 2 - Financial Protection (Part 2) - Income Protection

Question 1

What is income protection?

Answer 1

A long-term policy and is designed to pay a regular income in the event of illness or incapacity

Question 2

What are activies of daily living?

Answer 2

An analysis of a number of defined functions, such as dressing and undressing, washing, eating, climbing stairs, shopping and cooking

Question 3

How much benefits are paid under income protection policies?

Answer 3

A percentage of the policyholder’s earnings prior to their incapacity - the limit is usually around 50–60% of gross earnings

Question 4

What are the 3 different types of income protection premiums?

Answer 4

• Reviewable premiums – a reviewable premium may start off relatively low, but is reviewed regularly. In some cases, the premium is reviewed every year, or every five years, to take into account changing circumstances.
• Renewable premiums – these are short-term policies with guaranteed renewal, at which point the premiums are reviewed in line with current rates and the policyholder’s age.
• Guaranteed premiums – guaranteed premiums are more expensive than the previous options but they are fixed for the life of the policy, which may be as long as 25 years or the maximum term offered by the insurer; these premiums, therefore, offer security.

Question 5

What are the common exclusion sof income benefit policies?

Answer 5

• misuse of drugs or alcohol
• self-inflicted injury
• participating in a war
• normal pregnancy and childbirth
• infection due to, or caused by, AIDS and HIV (with some exceptions)
• engaging in hazardous sports and pastimes
• criminal acts committed by the policyholder, and
• failure to follow medical advice.

Question 6

What are the tax treatment benefits and premiums in single/group income protection policies?

Answer 6

1. Benefits are free of income tax.
2. If someone receives income protection payments through their employer (ie, via a group income protection policy), then these are usually taxable as earned income.
3. Group Income Protection Premiums are corporation tax deductable and are NOT treated as benefits in kind.

Question 7

What is Critical Illness Cover (CIC)?

Answer 7

A policy designed to pay a tax-free lump sum upon the diagnosis of a specified critical illness

Question 8

What is the CIC survival period?

Answer 8

The period a person must survive after the diagnosis of a critical illness - normally 14-30 days

Question 9

What is the tax treatment of premiums under group CIC?

Answer 9

Ff the premium is paid by the employer, it will be treated as a benefit in kind and taxed on the employee.

Question 10

What are the typical CIC exclusions?

Answer 10

• aviation
• criminal acts committed by the life insured
• drug abuse
• failure to follow medical advice
• hazardous sports and pastimes
• living abroad
• self-inflicted injury, and
• war and civil commotion.

Question 11

What is “Guranteed Insurability”?

Answer 11

Where a policyholder can increase the cover on the occurrence of certain specified events – for example, marriage or civil partnership, or having a child – without providing further medical evidence

Usually restricted to a percentage of the existing cover with premiums increasing accordingly

Question 12

As what level of capital will a person need to pay for their own “Long-Term Care Planning” in the UK?

Answer 12

Over £23,250 (Capital of less than £14,250 is disregarded and if between these amounts the level of contribution is calculated at £1 for every £250 of capital)

Question 13

What is a “Personal Expenses Allowance”?

Answer 13

The PEA is the minimum amount of income allowance that individuals are allowed to keep when in social care to pay for:

• personal items
• newspapers
• treats, and
• toiletries.

Question 14

What is Immediate Care Long-Term Care Insurance?

Answer 14

Where a lump sum is used to purchase a polocy which pays a regular income until death; this income pays for the care provision, and is tax-free if it is paid direct to the care home.

Question 15

Who do lasting and enduring powers of attorney need to be registered with?

Answer 15

The Office of Public Guardian

Question 16

What are the two types of deputy who can make decisions on an impaired persons behalf?

Answer 16

1. Property and Financial Affairs Deputy
2. Personal Welfare Deputy

Question 17

What are the two types of Lasting Power of Attorney?

Answer 17

• a property and financial affairs LPA
• a health and welfare LPA.

Question 18

What are the two types of Equity Release Scheme?

Answer 18

• lifetime mortgages - a loan secured against the home, repayable on death or when home is sold
• home reversion plans - part or all of the home is sold at less than market value in return for a tax free sum or regular income

Question 19

What is the maximum the FOS can award?

Answer 19

£415,000

Question 20

What are the conpensation limits to the following firms as part of the Financial Services Compensation Scheme - investment firms, banks/building societies, general insurance and life insurance?

Answer 20

Investment firm or home finance firm - 100% up to £85,000

Bank, building society or credit union - 100% up to £85,000 (joint account holders 2x £85K)

General insurance - 90% of the claim with no upper limit

Long-term insurance (life insurance, pensions and annuities) - 100% of the claim with no upper limit

Question 21

What are the 3 different types of Private Medical Insurance plans?

Answer 21

• budget - lower cost, higher xs & more limits
• standard
• comprehensive.

Question 22

What are Hospital Plans?

Answer 22

These policies are designed to provide a tax-free cash benefit if the policyholder needs treatment either as a hospital inpatient or outpatient

Question 23

What is Payment Protection Insurance?

Answer 23

A type of accident, sickness and unemployment insurance designed to protect monthly repayments on a mortgage, loan or overdraft if a client is unable to work for any of those reasons.

Question 24

How is somebody’s estate shared if they died intestate?

Answer 24

Spouse/civil partner – a lawful spouse or civil partner will inherit the deceased’s personal possessions, plus assets worth up to £270,000.

If the estate, excluding personal possessions, exceeds £270,000 in value then the spouse will receive the following:

• the first £270,000 absolutely, and
• a half of the remainder.

The other half of the remainder will be shared equally between the deceased’s surviving children, or their own offspring if the child predeceased them. Where there are no surviving children or descendants thereof, the whole estate will go to the spouse.

This DOES NOT INCLUDE unwedded or cohabiting partners, sometimes referred to as the deceased’s ‘common law’ spouse. STEP-CHILDREN EXCLUDED

Question 25

What is the normal non chargeable IHT annual gift allowance?

Answer 25

£3,000 (can be carried back 1 year = £6K)

Question 26

What are the IHT allowance for gifts to individuals?

Answer 26

Unlimited number of individuals to be made gifts up to £250 per annum apiece

Question 27

What are the IHT allowance for gifts on marriage?

Answer 27

To the value of up to £5,000 if coming from a parent, £2,500 from a grandparent or great-grandparent and £1,000 from any other party, will be considered immediately exempt

Question 28

What two methods can be used to calculate the amount of key persons cover required?

Answer 28

• Multiple of salary – this is simply the key person’s salary multiplied by an agreed factor which could be as high as ten times.
• Proportion of profits – this is often termed a more ‘scientific’ approach as the formula takes into account the key person’s salary, the annual profits and the number of years it would take to replace that key person. The formula is:

(Salary x previous year’s profit x number of years to replace them) / Total salary bill