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R01 - Financial Services, Regulation and Ethics > Chapter 2C - Protection and Protection Products > Flashcards

Chapter 2C - Protection and Protection Products Flashcards

1
Q

What are some of the most important factors in influencing individual protection needs?

A
  • age
  • dependents
  • income
  • financial liabilities
  • employment status
  • existing cover
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2
Q

What age category sees clients with the greatest need for protection products?

A

mid 20s to 40s

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3
Q

What specific planning might be needed towards the end of a clients’ life?

A

Inheritance tax planning

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4
Q

What grows in correlation with the number of dependents on a source of income?

A

The need for protection

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5
Q

True or False: Dependents only refers to children.

A

False; dependents could also be elderly, sick or disabled, or those who choose to stay at home to raise a family

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6
Q

When might protection needs for dependent children need to be reviewed?

A
  • birth
  • adoption
  • “acquisition” if remarriage brings extra children
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7
Q

In mid-life, how can dependencies change?

A
  • divorce and death could lead to single parent families
  • remarriage could lead to two families of children
  • some couple may have children in later life
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8
Q

How does income factor into needs of protection?

A
  • determines affordability

- determines what must be replaced

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9
Q

What two methods are used to estimate the required level of death cover?

A
  • 10x(income-benefits and cost savings upon death)

- examination of lifetime cashflow

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10
Q

How would you calculate the required level of Ill Health cover?

A
  • usually a % of current earnings
  • usual limits are 50 - 75% (less if high earner)
  • lower % avoids moral hazard of getting more income than in work, as IH not subject to income tax and NI
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11
Q

How would you guard against inflation on protection policies?

A

Index-linked policies, specify options for increase

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12
Q

What balance needs to be made for protection cover?

A

Disposable income and need for protection

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13
Q

What is the threshold for Inheritance Tax (IHT)?

A

£325,000

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14
Q

Above the threshold, what rate is Inheritance Tax paid at?

A

40%

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15
Q

What would a whole of life last survivor policy be used to cover?

A

The Inheritance Tax payable on an estate, without selling a large asset, like a family home

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16
Q

Why should you consider a clients’ employment status when calculating cover?

A
  • company employees may have workplace cover
  • retired or unemployed will likely be reliant on State or existing policies
  • business owners are responsible for employer and employee side
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17
Q

What variety of issues could a business owner need to consider?

A
  • life assurance and income protection for their own needs
  • private medical cover to minimise lost working time
  • key person insurance or partnership protection, to protect the company and any beneficiaries in the event of death
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18
Q

Failure to account for existing cover may breach what?

A

The FCA’s suitable advice rules

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19
Q

What might provide existing cover?

A
  • existing insurances
  • lump-sum benefits from private pensions
  • an employer sick pay or death benefit
  • State benefits
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20
Q

In a three stage life cycle, what are the three stages?

A
  • the vulnerable years (early marriage or long-term relationship)
  • the relaxed years (40s)
  • the anxious years (50s and beyond)
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21
Q

What factors are of concern to those in the Vulnerable Years?

A
  • lower income, sometimes only one income
  • higher need for protection
  • low disposable income
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22
Q

What factors will affect those in the Relaxed Years?

A
  • pension savings come to the fore
  • disposable income increased
  • children become financially independent
  • increased protection needs to cover higher earnings
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23
Q

What factors will affect those in the Anxious Years?

A
  • income likely peaking
  • mortgage close to paid off
  • children financially independent
  • more disposable income
  • little time to make up pension shortfall
  • inheritance tax planning required
  • protection costs increase and may be unavailable
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24
Q

What are some potential effects of divorce on the life cycle?

A
  • financial adjustments to allow for single parents to cope
  • new liabilities such as maintenance
  • reduced pension post divorce
  • further complications if remarriage
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25
Q

Define Term Assurance as a life assurance policy

A
  • covers a set period
  • premiums set based on period and age
  • if client dies in the period, the policy pays out for the remainder
  • no survival value, no savings; if period expires, the policy ends without payout
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26
Q

What different kinds of life assurance policy are there?

A
  • level term assurance
  • decreasing term assurance
  • family income benefit policies
  • increasable term assurance
  • convertible term assurance
  • renewable term assurance
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27
Q

Define Level Term Assurance

A

-set premium ensure a set payout over the life of the premium

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28
Q

Define Decreasing Term Assurance

A
  • payout decreases over time, as the client need for funds decreases with loan/mortgage being paid off
  • premium remains the same, but payout reduces so the initial premium will be lower than other policies
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29
Q

Define Family Income Benefit Policies

A
  • type of decreasing term assurance

- on clients death, the provider pays a series of monthly or annual payments rather than one lump sum

30
Q

Define Increasable Term Assurance

A
  • policy increases by a set amount over a set period, or at least offers the option
  • no evidence of continued good health required
  • higher premiums, may also increase with term increases
  • ensures that the policy maintains real value against inflation
31
Q

Define Convertible Term Assurance

A
  • policy can be converted to an Endowment or a Whole of Life policy
  • useful if client requires savings value or longer-term cover
32
Q

Define Renewable Term Assurance

A
  • shorter term (3-5 years) policy that has a guaranteed right to extend without evidence of future good health
  • low initial premium, which will increase with future renewals
33
Q

What is an Endowment policy?

A
  • used to save for a set goal over a longer term, often with death benefits payable
  • not a good vehicle for life assurance as mainly saving-based
  • can be invested in with profit funds or traditional funds
  • surrender values likely to be low to non-existent in the first two years
34
Q

What is a Whole of Life policy?

A
  • designed to provide a substantial level of end of life cover
  • single premium policies available, but generally regular fixed premiums are paid
35
Q

What are the three kinds of Whole of Life policy?

A
  • Non Profit
  • With Profit
  • Flexible
36
Q

Define a Non-Profit Whole of Life policy

A
  • guarantees a fixed payout whether after one day or 30 years
  • may accumulate a surrender value, but this is likely to be relatively low
37
Q

Define a With Profit Whole of Life policy

A
  • guarantees a minimum payout on death
  • increases with annual bonuses though these are not guaranteed
  • once added, they are added to the guaranteed payout
  • can include a final bonus on death which substantially increases payout
  • may accumulate a better surrender value than Non Profit, though still low-to-nil for two years
  • premiums will be significantly higher than non profit
38
Q

Define a Flexible Whole of Life policy

A
  • set minimum and maximum level of cover
  • level can be changed at any time within these parameters
  • regular payment is made and buy units within investment
  • units sold to make up actual value each month
  • most flexible option available
39
Q

How does Sickness and Health Insurance differ from Life Assurance?

A
  • S&H doesn’t pay on death unless as an added extra

- Life Assurance based on mortality (length of someone’s life); S&H based on morbidity (rate of disease or illness

40
Q

What is the main function of Income Protection insurance?

A

-replace lost income when illness or accident prevents work

41
Q

In Income Protection insurance, what is a deferred period? What are the most common examples?

A
  • the period for the client to be out of work before benefits are paid
  • 4, 13, 26, 52 weeks
42
Q

Complete the sentence: The longer the (IP) deferred period the … the premiums

A

Lower

43
Q

When do IP benefits lapse?

A
  • return to work
  • death
  • end of contract
44
Q

What tax advantage do IP policies have?

A

benefits are exempt from Income Tax

45
Q

What is the widely accepted maximum percentage of earnings for IP protection? Why is this restriction imposed?

A
  • 50-60% but occasionally as high as 75%

- to incentivise return to work and avoid the subsequent moral hazard

46
Q

Income Protection (IP) used to be called Permanent Health Insurance (PHI). Define Permanent in this case, and why it still applies.

A

-insurer cannot cancel the policy as long as premiums continue to be paid, even if claims are frequent and long

47
Q

Which ruling meant that differential pricing for insurance for different genders could no longer be permitted?

A

Royal Court of Justice of the European Union, 2011

48
Q

How does Personal Accident and Sickness cover differ from Income Protection insurance?

A
  • may pay a one off lump sum in certain circumstances, alongside regular benefits
  • shorter period covered, shorter deferral period
  • less questions and restrictions
  • regular benefit likely to be fixed rather than % of earnings
  • PA&S can be cancelled at renewal date
  • much more competitive price
49
Q

What effects may the client have if Personal Accident and Sickness cover is cancelled by the insurer?

A

harder to get cover in the future

50
Q

Accident, Sickness and Unemployment (ASU) cover:
Max Payout period?
Difference to PA&S?
Cost?

A
  • one or two years
  • payout if unemployed through no fault of your own
  • less than IP still, but higher than PA&S
51
Q

How does Critical Illness (CI) cover differ from Income Protection (IP)?

A
  • lump sum not income

- pay on diagnosis, even if work can continue

52
Q

What illnesses are typically always included on a Critical Illness cover?

A
  • heart attack
  • stroke
  • cancer
  • coronary artery surgery
  • major organ transplant
  • kidney failure/transplant
53
Q

What illness is traditionally and specifically excluded from Critical Illness (CI) Cover?

A

AIDS

54
Q

Why might Critical Illness (CI) cover be required?

A
  • private health care
  • alterations to the home (to aid lifestyle)
  • purchase of special medical equipment
  • income replacement
  • repayment of mortgage or loans
55
Q

How does Reviewable CI cover differ from regular?

A
  • review every 5-10 years based on medical advances

- considerably cheaper

56
Q

Private Medical Insurance (PMI) can be purchased on which bases?

A
  • full medical underwriting (asked a lot of questions for a personalised cover, conditions decided by insurer)
  • moratorium (no questions asked, anything in the last five years is excluded from cover)
57
Q

What do Private Medical Insurance (PMI) policies typically exclude?

A
  • treatments already known about on application
  • pre-existing conditions
  • treatment for long term conditions
  • routine pregnancy
  • HIV/AIDS
  • fertility treatment
  • mental conditions
  • elective treatments
  • dental care
  • experimental procedures
58
Q

If pre-existing conditions are not disclosed on application, what implications might be faced?

A

policy could be invalidated, stopping claims being paid

59
Q

Briefly describe Long Term Care Insurance (LTCI)

A
  • covers the foreseeable future (illness or old age)

- covers aid with activities of daily living (ADL), or cost of residential care

60
Q

What are the two types of Long Term Care Insurance (LTCI)?

A
  • Immediate

- Pre-Funded

61
Q

Describe how an Immediate Long Term Care Insurance (LTCI) works

A
  • any age
  • bought with lump sum
  • regular income for rest of life
  • cost varies based on inflation-link, age, health.
  • may require medical evaluation
62
Q

Describe how a Pre-Funded Long Term Care Insurance (LTCI) works

A
  • any age
  • regular or single premiums
  • pays a regular sum
  • pays out if not able to perform daily activities, or after mental incapacitation
  • tax free
  • no longer available, but legacy policies still around
63
Q

True or False: any Financial Adviser can recommend Long Term Care Insurance

A

False - extra legislation means that further qualifications are needed to advise on these products

64
Q

What is the main purpose of Payment Protection Insurance (PPI)?

A

meet cost of regular payments upon redundancy, usually only on mortgages or loans

65
Q

True or False: Cover can be purchased for redundancy protection alone

A

False (generally) - this would attract a high proportion of redundancy-likely clients, selecting against the insurer

66
Q

What is the maximum payment period for PPI?

A

One or two years

67
Q

What causes PPI to be less popular?

A

restrictions on it and the cost of premiums

68
Q

Mortgage Payment Protection Insurance (MPPI) is much the same as PPI, but contains UK Finance and ABI benchmarks. What are these?

A
  • provide accident, sickness and unemployment cover
  • pay out after a max of 60 days off work
  • cover no less than 12 months
  • pay out to self-employed if involuntarily ceased trading and registered for Employment and Support Allowance (ESA)
69
Q

What are the minimum cancellation and amendment notice periods for Mortgage Payment Protection Insurance?

A

90 days for cancellation; 30 for amendment

70
Q

True or False: Mortgage Payment Protection Insurance is relatively expensive

A

True

71
Q

True or False: Mortgage Payment Protection Insurance also covers mortgage-related policies

A

True

R01 - Financial Services, Regulation and Ethics (10 decks)

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