Chapter 3 - Financial Protection Flashcards
What tool do underwriters use to assess the risk of a customer dying within the term of their policy ?
MORTALITY TABLES show us the average age at which people die 💀
What is LEVEL TERM INSURANCE ?
Pays out a lump sum if the life insured dies during the term of the policy
😵💀⚰️⚱️
Neither income tax nor capital gains tax is payable on the lump sum (set up under a trust = (usually) exempt from inheritance tax)
To protect a debt = sum insured is (usually) the amount owed and term is length of loan💰🔒
What is a precise way to assess the sum insured required ?
Use a life insurance calculator ! 🖥⌨️
HOWEVER,
- Makes assumptions
- Fails to take into account the effect inflation can have 📈📉
What is INCREASING TERM INSURANCE ? 📈🔝
Effects of inflation get worse over longer periods of time ⏳ Sum insured they chose today may not be adequate later in life
SOLUTION ! Increasing term insurance = tax-free lump sum on death of life insured within term BUT sum insured 📈 every year
ANOTHER BENEFIT customers get extra cover without submitting any further evidence of health
LINKED TO INCREASING TERM INSURANCE
What is GUARANTEED INSURABILITY OPTION ?
Some increasing term insurance policies allow the sum insured to increase on life events = additional protection needs:
- Taking out a mortgage 🏡
- Getting married 💍👰🏻🤵🏻
- Having or adopting🤰🏻👶🏻👧🏻🧒🏻
Customer’s premium increases to reflect higher sum insured
What is a FAMILY INCOME BENEFIT (FIB) policy ? 👨👩👧👩👩👧👦👨👨👧👦👩👦👦👨👧👧
Pays out a tax-free income. Paid each year from death 💀 of life insured until policy expires ⏳
Relatively cheap = level of cover they provide decreases over term
What is the difference between a REPAYMENT MORTGAGE and INTEREST-ONLY MORTGAGE ? 🏠
REPAYMENT
Customer’s monthly payment:
- CAPITAL (pays back a small amount of the money borrowed💸)
- INTEREST
End of the mortgage term = paid back the full amount they borrowed (+INTEREST)
INTEREST-ONLY
Monthly payment does not include capital repayment, only interest. End of the mortgage term = must pay back amount originally borrowed. Needs to save up £££ over term
What is the most cost-effective solution to protecting a repayment mortgage ?
MORTGAGE PROTECTION INSURANCE (MPI) is a form of decreasing term insurance:
- Sum insured = amount borrowed
- Reduces each year
- Decreases to nil at end of term
Will pay out a LUMP SUM 💰
Cover decreases, but monthly premium remains the same
How can you protect an interest-only mortgage ?
Amount owed on interest-only remains the same for whole term = MPI not appropriate
SOLUTION ? LEVEL TERM INSURANCE
What protection policy should a customer take out to provide the money needed to pay IHT bill ?
❌TERM INSURANCE = temporary policy. Only pays out on death within specific term (10/20 years, for example)
✅WHOLE OF LIFE = permanent protection. LUMP SUM FREE OF INCOME TAX AND CAPITAL GAINS 😍
Monthly premiums on WOL = £££ than TI
What is an OVER 50s PLAN ? 👵🏻👴🏻
⚰️FUNERAL⚱️ = in excess of £5,000 😪
FUNERAL PLANS AKA OVER 50s PLANS = whole of life policy
NO MEDICAL EVIDENCE REQUIRED 😍
Providers can afford to do this because of low sums insured, and premiums reflect guaranteed payout (charge more £££ 😉)
What is INCOME PROTECTION INSURANCE (IPI) ?
Pays out TAX FREE monthly income when life insured = unable to work due to long-term 🤮🤒 or incapacity
When policy taken out = choose monthly benefit 💸and term 📅
Monthly benefit selected not paid until certain amount of time ⏰ following onset 🤮🤒 AKA DEFERRED PERIOD - length of time a customer would receive 🤮 pay (usually 4, 13, 26, 52 wks; self employed person = no employer 🤮 pay, choose 4 wks
OTHER FEATURES OF IPI
- ‘BACK TO WORK BENEFIT’, top up reduced salary by working part ⏰ or ⬇️ paid job
- Team of experts, advise best way to recover
