Chapter 2 Qs Flashcards
- Colin and Evelyn want a life assurance policy to meet the potential inheritance tax bill on their joint estate of £1,100,000 which they own in equal shares and included the family home. On the first death, they plan to leave their estate to each other and then on the second death to their children. If they were both to die in the current tax year the most efficient policy would be a:
A) Joint life second death policy for £150,000
B) Joint life first death policy for £140,000
C) Joint life first death policy for £32,000
D) Joint life second death policy for £60,000
D) Joint life second death policy for £60,000
Current nil rate band (NRB) for IHT is £325,000 plus a residence NRB of £150,000 (if on the first death). If Colin and Evelyn leave their estate to each other at this point, no IHT is payable.
On the surviving persons death there is (2 x NRB (650,000) plus 2 x RNRB 300,000) so £95,000 is tax free. So IHT (40%) is applied to 150,000 = 60,000
RNRB - transferred between spouses or civil partnership. So £475,000 per person
- How does a family income policy differ from a standard term assurance policy?
A) On death of the life assured a series of payments are made instead of a lump sum
B) The policy has multiple lives assured to cover all family members
C) The aim of the policy is to maintain the family’s lifestyle in the event of the life assured becoming ill
D) It is a government backed policy with tax concessions
A) On death of the life assured a series of payments are made instead of a lump sum
Family Income benefit pays out a series of regular payments, but a standard term assurance policy pays out a lump sum on the death of the life assured.
What is the technical definition of a Mortgage?
A) Assigning security to a lender in exchange for a loan
B) A loan used to purchase a property
C) The security offered in exchange for a loan
D) Borrowing money from a lender for a house purchase
C)The security offered in exchange for a loan
Which of the following statements regarding ‘structured’ and ‘unstructured’ loans is (incorrect)?
A) Structured loans are viewed as lower risk than unstructured
B) Unstructured loans tend to be for larger amounts
C) The interest rate applied to unstructured loans is usually linked to a base rate
D) There is often no collared to back up a structured loans
A) Structured loans are viewed as lower risk than unstructured
An unstructured loan is usually backed up by collateral (e.g a house on a mortgage) and the interest rate is linked to a base rate, but a structured loan does not tend to have any collateral and is therefore considered to be a higher risk to the lender. Structured loans tend to be smaller amounts e.g loans for a car.
Which of the following features is the same under both an income protection policy and a personal accident and sickness insurance policy?
A) Regular benefit is paid in the event of being unable to work due to illness or accident
B) The contract could be cancelled by the insurer on the annual review date
C) A one-off lump sum payment may be payable in the event of permanent disability
D) Underwriting is based on morbidity and the client will have to complete a lengthy series of questions regarding their health and occupation
A) Regular benefit is paid in the event of being unable to work due to illness or accident
(Neither pay out on the death of the insured, but only accident and sickness policy may pay out a lump sum on diagnosis of certain permanent disabilities).
A permanent health assurance policy cannot be cancelled by the insurer, but an accident and sickness policy may not be renewed at the end of the policy year.
- How many qualifying years are needed to receive the full new state pension?
A) 35
B) 36
C) 38
D) 40
A) 35
To receive the full new state pension, an individual myst have 35 qualifying years. A qualifying year is a tax year in which you have paid or been credited with sufficient national insurance contributions.
What are the standard timeframes used when discussing investment objectives?
A) The phrases short, medium and long-term with time frames specific to each client
B) Short-term = up to 5 years, medium term = 5-15 years, long term = 15years+
C) Short-term = 1-2years, medium term = 3-5 years, long term = 5+ years
D) Time frames are attributed to each asset class: cash = short term, fixed interest and property = medium term and equities = long term.
B) Short-term = up to 5 years, medium term = 5-15 years, long term = 15years+
Which of the following would be regarded as an advantage of using a platform?
A) Increased investment returns due to lower taxation
B) The special offers and greatly reduced charges on offer
C) The personal investment manager allocated to each investor
D) The ability to aggregate holdings from several companies on the same system
D) The ability to aggregate holdings from several companies on the same system
Platforms are convenient, but have no effect on tax efficiency or charges
What are the risks associated with investing directly in property?
A) The time needed to buy or sell the property (liquidity)
B) Property is regarded as the most volatile asset class
C) Payment on surrender can be delayed for up to 6 months
D) Most investors are inexperienced in investing in commercial property
A) The time needed to buy or sell the property (liquidity)
One of the main risks of investing directly in property (e.g buy to let) is the money is tied up and to liquidate the money will involve selling the property, which can take a long time.
What is the correct definition of a derivative?
A) A contract stating that one or two of the parties will give the other party the difference between the current value of an asset and its value at a later date
B) The right to buy another type of asset at a higher price within a specified time frame
C) The obligation to sell another type of asset at a higher price within a specified time frame
D) The right or obligation to buy or sell another type of asset at a specified price at a specific time and date in the future
D) The right or obligation to buy or sell another type of asset at a specified price at a specific time and date in the future
- Which of the following situations would not normally give rise to a potential IHT liability?
A) Encashment of an investment bond
B) A lifetime gift of an asset to a child
C) Transferring ownership of an OEIC
D) The early death of a client
A) Encashment of an investment bond
As IHT is tax on the estate of death. Encashment of an investment bond would not be a result of the death of a client.
A lifetime gift to a child or transfer of ownership of an OEIC is a potentially tax exempt transfer, so may give rise if the donor dies within seven years, and the gift exceeds their available NRB.
- How does the use of trusts help mitigate an IHT liability?
A) Trusts ensure that assets are paid in accordance with the donors wishes and thereby avoiding IHT
B) Placing investments in trust can reduce the value of the estate
C) A regular premium life policy in trust allows clients to use their nil rate band
D) Single premium life policies placed in trust are immediately exempt from IHT
B) Placing investments in trust can reduce the value of the estate
The reduction in value of the estate is not always immediately. Regular premiums tend to be exempt from IHT anyway, as they are usually within gift allowances.
Universal credit is paid?
A) Weekly
B) Monthly
C) Every 6 weeks
D) Every 8 weeks
B) Monthly
Universal credit is paid monthly to allow people to budget effectively and to reflect the workplace, as one of the stated aims of moving to universal credit is to encourage people back to work.
SJP 18/19
Terry has various debts, including a mortgage, a credit card, a secured personal loan and a hire purchase finance agreement on his car. When considering how he might reduce his outgoings, he should be aware that:
A) The secured loan cannot be repaid until his mortgage is repaid
B) Debt consolidation may involve increasing the term of his repayments
C) An introductory deal on a credit card is always available
D) A hire purchase agreement cannot be repaid before the end of the term
B) Debt consolidation may involve increasing the term of his repayments 2:2)
A client is considering mortgage payments for both capital and interest and interest-only mortgages. He should be aware that if interest rates stay constant throughout the mortgage term, compared to the capital and interest mortgage, an interest-only mortgage will result in:
A) A lower monthly cost, but a higher overall borrowing cost
B) A higher monthly cost, but a lower overall borrowing cost
C) Both a lower monthly and overall borrowing cost
D) Both a higher monthly and overall borrowing cost
A) A lower monthly cost, but a higher overall borrowing cost (2:2)
A lower monthly cost because you are not paying capital and the interest rates are not increasing, however as you are not reducing mortgage amount, the overall borrowing will be more.
