Chapter 2C - Protection and Protection Products Flashcards
What are some of the most important factors in influencing individual protection needs?
- age
- dependents
- income
- financial liabilities
- employment status
- existing cover
What age category sees clients with the greatest need for protection products?
mid 20s to 40s
What specific planning might be needed towards the end of a clients’ life?
Inheritance tax planning
What grows in correlation with the number of dependents on a source of income?
The need for protection
True or False: Dependents only refers to children.
False; dependents could also be elderly, sick or disabled, or those who choose to stay at home to raise a family
When might protection needs for dependent children need to be reviewed?
- birth
- adoption
- “acquisition” if remarriage brings extra children
In mid-life, how can dependencies change?
- 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
How does income factor into needs of protection?
- determines affordability
- determines what must be replaced
What two methods are used to estimate the required level of death cover?
- 10x(income-benefits and cost savings upon death)
- examination of lifetime cashflow
How would you calculate the required level of Ill Health cover?
- 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
How would you guard against inflation on protection policies?
Index-linked policies, specify options for increase
What balance needs to be made for protection cover?
Disposable income and need for protection
What is the threshold for Inheritance Tax (IHT)?
£325,000
Above the threshold, what rate is Inheritance Tax paid at?
40%
What would a whole of life last survivor policy be used to cover?
The Inheritance Tax payable on an estate, without selling a large asset, like a family home
Why should you consider a clients’ employment status when calculating cover?
- 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
What variety of issues could a business owner need to consider?
- 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
Failure to account for existing cover may breach what?
The FCA’s suitable advice rules
What might provide existing cover?
- existing insurances
- lump-sum benefits from private pensions
- an employer sick pay or death benefit
- State benefits
In a three stage life cycle, what are the three stages?
- the vulnerable years (early marriage or long-term relationship)
- the relaxed years (40s)
- the anxious years (50s and beyond)
What factors are of concern to those in the Vulnerable Years?
- lower income, sometimes only one income
- higher need for protection
- low disposable income
What factors will affect those in the Relaxed Years?
- pension savings come to the fore
- disposable income increased
- children become financially independent
- increased protection needs to cover higher earnings
What factors will affect those in the Anxious Years?
- 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
What are some potential effects of divorce on the life cycle?
- financial adjustments to allow for single parents to cope
- new liabilities such as maintenance
- reduced pension post divorce
- further complications if remarriage
Define Term Assurance as a life assurance policy
- 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
What different kinds of life assurance policy are there?
- level term assurance
- decreasing term assurance
- family income benefit policies
- increasable term assurance
- convertible term assurance
- renewable term assurance
Define Level Term Assurance
-set premium ensure a set payout over the life of the premium
Define Decreasing Term Assurance
- 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
Define Family Income Benefit Policies
- type of decreasing term assurance
- on clients death, the provider pays a series of monthly or annual payments rather than one lump sum
Define Increasable Term Assurance
- 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
Define Convertible Term Assurance
- policy can be converted to an Endowment or a Whole of Life policy
- useful if client requires savings value or longer-term cover
Define Renewable Term Assurance
- 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
What is an Endowment policy?
- 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
What is a Whole of Life policy?
- designed to provide a substantial level of end of life cover
- single premium policies available, but generally regular fixed premiums are paid
What are the three kinds of Whole of Life policy?
- Non Profit
- With Profit
- Flexible
Define a Non-Profit Whole of Life policy
- guarantees a fixed payout whether after one day or 30 years
- may accumulate a surrender value, but this is likely to be relatively low
Define a With Profit Whole of Life policy
- 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
Define a Flexible Whole of Life policy
- 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
How does Sickness and Health Insurance differ from Life Assurance?
- 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
What is the main function of Income Protection insurance?
-replace lost income when illness or accident prevents work
In Income Protection insurance, what is a deferred period? What are the most common examples?
- the period for the client to be out of work before benefits are paid
- 4, 13, 26, 52 weeks
Complete the sentence: The longer the (IP) deferred period the … the premiums
Lower
When do IP benefits lapse?
- return to work
- death
- end of contract
What tax advantage do IP policies have?
benefits are exempt from Income Tax
What is the widely accepted maximum percentage of earnings for IP protection? Why is this restriction imposed?
- 50-60% but occasionally as high as 75%
- to incentivise return to work and avoid the subsequent moral hazard
Income Protection (IP) used to be called Permanent Health Insurance (PHI). Define Permanent in this case, and why it still applies.
-insurer cannot cancel the policy as long as premiums continue to be paid, even if claims are frequent and long
Which ruling meant that differential pricing for insurance for different genders could no longer be permitted?
Royal Court of Justice of the European Union, 2011
How does Personal Accident and Sickness cover differ from Income Protection insurance?
- 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
What effects may the client have if Personal Accident and Sickness cover is cancelled by the insurer?
harder to get cover in the future
Accident, Sickness and Unemployment (ASU) cover:
Max Payout period?
Difference to PA&S?
Cost?
- one or two years
- payout if unemployed through no fault of your own
- less than IP still, but higher than PA&S
How does Critical Illness (CI) cover differ from Income Protection (IP)?
- lump sum not income
- pay on diagnosis, even if work can continue
What illnesses are typically always included on a Critical Illness cover?
- heart attack
- stroke
- cancer
- coronary artery surgery
- major organ transplant
- kidney failure/transplant
What illness is traditionally and specifically excluded from Critical Illness (CI) Cover?
AIDS
Why might Critical Illness (CI) cover be required?
- private health care
- alterations to the home (to aid lifestyle)
- purchase of special medical equipment
- income replacement
- repayment of mortgage or loans
How does Reviewable CI cover differ from regular?
- review every 5-10 years based on medical advances
- considerably cheaper
Private Medical Insurance (PMI) can be purchased on which bases?
- 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)
What do Private Medical Insurance (PMI) policies typically exclude?
- 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
If pre-existing conditions are not disclosed on application, what implications might be faced?
policy could be invalidated, stopping claims being paid
Briefly describe Long Term Care Insurance (LTCI)
- covers the foreseeable future (illness or old age)
- covers aid with activities of daily living (ADL), or cost of residential care
What are the two types of Long Term Care Insurance (LTCI)?
- Immediate
- Pre-Funded
Describe how an Immediate Long Term Care Insurance (LTCI) works
- any age
- bought with lump sum
- regular income for rest of life
- cost varies based on inflation-link, age, health.
- may require medical evaluation
Describe how a Pre-Funded Long Term Care Insurance (LTCI) works
- 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
True or False: any Financial Adviser can recommend Long Term Care Insurance
False - extra legislation means that further qualifications are needed to advise on these products
What is the main purpose of Payment Protection Insurance (PPI)?
meet cost of regular payments upon redundancy, usually only on mortgages or loans
True or False: Cover can be purchased for redundancy protection alone
False (generally) - this would attract a high proportion of redundancy-likely clients, selecting against the insurer
What is the maximum payment period for PPI?
One or two years
What causes PPI to be less popular?
restrictions on it and the cost of premiums
Mortgage Payment Protection Insurance (MPPI) is much the same as PPI, but contains UK Finance and ABI benchmarks. What are these?
- 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)
What are the minimum cancellation and amendment notice periods for Mortgage Payment Protection Insurance?
90 days for cancellation; 30 for amendment
True or False: Mortgage Payment Protection Insurance is relatively expensive
True
True or False: Mortgage Payment Protection Insurance also covers mortgage-related policies
True
