Chapter 4 Flashcards
What are the 3 parties to a life assurance policy?
The assured
The life assured
The life office
What is meant by “the assured”?
The individual couple, or company taking out the policy are known as the assured
This means that they are the policy owners, have applied for the cover by completing an application form and are likely to be paying the premiums required ( but not always)
Other terms used that have the same meaning include policy owner or proposer
What is meant by the life assured?
This is the individual or group of individuals upon whose death the policy will pay out the cash lump sum benefit
The life assured and the assured are usually the same, but this is not always the case such as in business protection needs
What is meant by the life office?
Someone has to assess, accept and charge for the risks involved and this is the role of the life office or insurance company
Using the application form completed by the assured the life office through its underwriting team will assess the risks and decide whether these are acceptable and if so on what terms
What events during a persons life journey may give rise to life assurance requirements?
Buying a property with the help of a mortgage
Loans for car or property purchases
Providing an income on death for your spouse, registered civil partner, and dependents to ensure their financial security
Protecting a business and its liabilities
Covering an inheritance tax liability
What is terminal illness benefit?
Terminal illness benefit allows for life assurance cover to be paid in advance of death if the individual is diagnosed with an incurable disease, where medical opinion is that life expectancy is less than 12 months
How is the terminal illness benefit usually written?
Commonly written as a rider on life policy
This means that it will not be paid in addition to the life cover, but as an accelerated death benefit, i.e., before the individual has died
What happens once the terminal illness benefits has been paid?
Once payment has been made, the policy will cease
If the individual does not die within 12 months, no refund will be required
Is terminal illness benefit available as a separate policy?
This cover is not available as a separate policy
It is commonly available either for no extra charge or a small, additional premium on many life policies
Cannot be added in the last 18 months of any policy with a term
What are the benefits of terminal illness benefit?
Can be used for any purpose, which could mean the chance to take off experiences on a bucket list before death, rather than more conventionally sensible options
It will be available to both the individual and their family to plan in advance how to best provide financial security required
What could be a drawback of the terminal illness benefit?
The individual may be too ill to be able to make any decisions regarding this lump sum payment at the time, so I cannot make the best use of this advance sum of money
How does terminal illness benefit relate to taxation?
Income tax free and inheritance tax free but will form part of the estate of the deceased so may increase inheritance tax liability on their death
What is an own life life assurance policy?
This is where the assured and life assured are one and the same
This is more likely to be used on a policy such as critical illness cover, or a policy that covers both death and critical illness cover
When is an own life basis more common?
More common with personal protection needs
Also known as single life basis
Could be used when a couple have different requirements and wish to meet those needs
What is meant by a life of another life insurance policy?
This is where the assured and life assured are not the same
This is most used in business protection
Give an example of a life of another basis? (Virgin company)
Imagine the company virgin and it’s founder Richard Branson
If Richard died, virgin‘s profit and share price are likely to suffer, and a replacement would need to be found, which could take time
Virgin the company therefore have insurable interest in Richard Branson their founder
A life of another life assurance policy could be taken out, with virgin as the policy assured and Richard as the life assured
Give a life of another life assurance policy example (family)?
Imagine a couple have divorced and one ex spouse pays maintenance to the other, who is mainly responsible for bringing up their children
This ex-spouse would have insurable interest in the one paying maintenance, and could take out a policy as the assured, with the maintenance payer as the life assured
What is a joint life first death policy?
This basis is usually used for family protection policies, to cover a couple where suitable life assurance is required if either were to die, to provide financial support to the survivor
The death benefit is paid out when the first life assured dies
Only one payment of the life cover would be made and then the plan would cease
What is a drawback of a joint life first death policy?
This can cause future problems, as the survivor would have no cover remaining
It is also not as comprehensive as two single life policies but it is often used as the premiums are cheaper
Divorce can also often cause issues
What is a joint life second death life assurance policy?
This basis provides a life assurance payment once both lives assured have died
It is predominantly used for mitigating inheritance tax, which is a tax levied on an estate and certain gifts, usually at 40% rate on death
The estate will not be paid until any tax due is paid, and many beneficiaries do not have the monies to pay the tax
A trust is almost always used, to ensure the life assurance payment passes outside of the estate so that the policy proceeds do not increase an inheritance tax bill by increasing the value of the estate
What is a continuation option with regards to employer sponsored cover?
The employee can continue the cover if they leave employment
What kind of life assurance is available through employer cover? How much can be provided?
An employer can provide life cover as part of a pension scheme
Currently up to £1,073,010 could be provided tax-free on death pre-age 75
It has become increasingly common for employers to provide cover through expected group life schemes
What seven conditions must an expected group life scheme include?
Payment of a lump sum benefit on death of the life assured before age 75
Benefits must be calculated in the same way for each individual covered
Only a refund of premiums can be paid if the policy is cancelled
Only sums and benefits can be paid under such a policy
Benefits may only be paid to an individual or charity
Nothing can be paid to a life assured or any connected person, on the death of another life assured
Tax avoidance cannot be the main reason for this insurance
What are the three generic types of life assurance available to customers?
Whole of life
Term assurance
Endowment
What are the two elements for life assurance policies? Explain both
Protection element-designed to be paid out on specific events such as death or critical illness
Investment element-designed to provide funds at a future date for specific events, or to fund long-term protection requirements
What is the use of an investment element in a life assurance policy?
Any investment elements can build up reserves which can help with policy reviews and avoid the need for premium increases
What are the two main assumptions an insurance company makes in pricing premiums
How many of us will die each year
What provided costs will be
What is a whole of life policy?
A whole of life policy is a long-term life assurance policy which pays out a lump sum on death, whenever that may occur, and may build a cash surrender value overtime
Name three different types of whole of life policies
Non-profit
With profits
Low cost
Unit linked
Universal
What is a nonprofit whole of life policy?
In this type of policy, there is a fixed sum assured and a fixed premium
The assured does not participate in any profits of the life office
What is a with profits whole of life policy?
The policy benefits from two types of bonus annual and terminal
Annual bonuses are awarded taking each years life office profits into account
Terminal bonuses look at profits over the whole period the policy has been held for
The payment on death will therefore be the full sum assured plus bonuses.
What happens if a customer stops a with profits whole of life plan early?
A discretionary charge, known as the market value reducer can be applied, to existing policyholders
This charge ensures bonuses paid are fair, bearing in mind the life office’s expectation was that this policy would run for the whole of the assured’s life and not be stopped earlier
What is a low cost life assurance plan?
This is a hybrid plan, which combines a with profit investment base with a decreasing term assurance
With profit bonuses are added to a basic sum assured, that is less than the guaranteed sum assured
The payment on death will be the greater of the guaranteed sum assured or the basic sum assured plus bonuses
What is a unit-linked life assurance plan?
A unit-linked plan is one where premiums by units in a unit-linked fund
Unit units are then cancelled each month to pay for the cost of cover, mainly mortality charges
The payment on death will be the greater of the bid value of units, or the guaranteed sum assured
What is a universal life assurance policy?
A universal policy is unit-linked with added bolt on options, such as critical illness cover, accidental death benefits, and income protection cover
What are the unit-linked whole of life features?
Provide a pre-agreed sum assured, with no end date, so cover is permanent
Can offer a mix between life cover and investment into a unit-linked fund
Units are purchased with premiums, then cancelled for charges such as mortality costs
The first plan review usually takes place after 10 years, and then every five years thereafter
There is a choice of cover types
What are the cover types for a whole of life unit-linked policy?
Maximum cover-where the premium is fixed for the first 5 to 10 years and then, when reviewed, it is likely to have to rise to maintain the current sum assured, or the sum assured will reduce to maintain the premium
Standard cover -premiums paid should be sufficient to maintain the sum assurance for the life of the policy
Guaranteed cover - no real investment but there may be a surrender value
What are the policyholder options at a plan review?
No action required-cover can be maintained for premium paid
Increase premium to maintain cover required
Decrease cover amount if premium increase is not affordable
Do nothing but accept the policy may cease before death occurs
What can a whole of life policy be utilised for?
Family protection
Inheritance tax planning
Funeral planning-over 50s plans
Business protection (less likely)
How can a consumer compare costs on different whole of life providers?
By comparing the reduction in yield percentage
What does term assurance do?
Pays a lump sum series of lump sums (the sums assured) on death within the term
The term is established at outset
Benefits can level or they can decrease or increase overtime
There is usually no investment element
Name five different types of term assurance
Level
Renewable
Convertible
Return of premium
Decreasing
Increasing
Term 100
FIB
Unit linked
Reviewable
What are the reasons for use for level term assurance?
Known payment on death during policy term
Fixed premium and sum assured
Unpaid premiums lead to policy lapse
Used with IO mortgages
What are the reasons for use for renewable term assurance?
Renewable option on policy expiry date, usually before age 65
No health evidence required when exercising the option-guaranteed insurability
Premium is likely to increase when option exercised, due to being older
Used by individuals concerned about their health and insurability
What are the reasons for use for convertible term assurance?
Level term with a convertibility option during, or at the end of, the current term so benefits from guaranteed insurability
Option to convert whole of life or endowment policy
Premiums will be calculated at conversion-likely to increase
Is used by individuals concerned about their health and insurability
What are the reasons for use for return of premium?
Has the standard term assurance policy terms, but in addition, repays the premiums paid if the life assured survives to maturity
More expensive premiums as a result
Technically a combination of term assurance and endowment
What are the reasons for use for decreasing term assurance?
Fix premium
Sum assured decreases each year
Can have a shorter premium payment term compared to policy term
Often used as mortgage protection assurance with repayment mortgages
What are the reasons for use for increasing time assurance?
Annual cover increased by set percentage, or index-linked
No new health evidence required-guaranteed insurability
Premiums increase annually due to age
Used by individuals wanting their cover to keep in pace with inflation to maintain buying power
What are the reasons for use for term 100 policies?
Written to age 100 as an alternative to whole of life policy potentially less expensive
Greater longevity could cause problems
What are the reasons for use for family income benefit?
Cover a set term, but the sum assured is paid in annual tax-free instalments that commence on the death of the life assured, rather than a lump sum
Payments can be level or increasing
Regular payments, made monthly quarterly or annually
What are the reasons for use for unit linked term assurance?
Can offer a mix between life cover and investment into unit-linked fund
Units are purchased with premiums, then cancelled for charges such as mortality costs
Any investment value can help with plan reviews and avoid future premium increases
What are the reasons for use for reviewable term assurance?
Virtually all policies are reviewable as there is a lot of provided guesswork going on
Frequency of reviews depends on term of policy
Provider will review two main areas-how many claims have been paid out and what their costs have actually been
What was pension term assurance?
This type of policy offered customers the ability to take out life assurance as part of pension planning, and receive tax relief on premiums, making costs less expensive
In 2006 the government introduced new legislation around simplifying the pension markets which allowed individuals to contribute premiums of £3600 a year and provide death benefits of up to £1.8 million on death pre-retirement
How has the amount of death benefits on death pre-retirement changed?
Originally £1.8 million
Decreased several times
Replaced by the lump sum death benefit allowance
Removed with effect from 2024/25 tax year
What happened to pension term assurance after April 2006?
Pension term assurance taken out prior to 14th December 2006 retained premium tax relief as long as no changes were made to policy’s cover level or term
Abolished future pension term assurance except for employer plans
No tax relief on pension term assurance taken out on or after 14th of December 2006 or policies put on risk after 1st August 2007
What are endowment?
Endowments are policies that provide a combination of life cover benefits, if death occurs during the term, or a potential investment return at the end of the term if the policyholder survives
Premiums are invested monthly into funds selected by the policyholder
How were endowment traditionally used?
Traditionally used with interest only mortgages
Borrower pays interest to lender and endowment premium to insurer, in the hopes that at the end of the term there will be sufficient investment value to repay the mortgage
Name four additional types of life assurance outside of term, whole of life, and endowment
Funeral plans
Multi plan
Bonds
Relevant life policies
What are funeral plans?
These plans offer a low sum assured and premiums, guaranteed acceptance and simplified underwriting
Usually little or no payout if death occurs in first two years
Appeal to individuals just requiring a lump sum to cover funeral costs
What is a multi plan policy?
These policies are generally set up on a single life basis and can include different types of cover in addition to life assurance such as critical illness cover income protection and unemployment cover
Also known as universal life plans
How are bonds different (opposite) to most life policies?
For most life policies the protection element is greater than the investment element
A bond is the opposite
It is much more of an investment with a far smaller protection element
What is the technical term for an investment bond?
What is the life cover element usually?
Single premium, non-qualifying whole of life plan
Life cover element is usually 101% of the bid value of any units-return of funds plus extra one percent
What kind of tax can an investment gain made on a bond be subject to?
Income tax
What are the two unique features a bond has in relation to income tax?
5% of the original investment can be withdrawn tax deferred
Top slicing can be used to reduce income tax liability
What is a relevant life policy?
These are policies that generally provide a lump sum payment on death, under the requirements of the income tax act 2003
Must satisfy certain: payment of a lump sum benefit on death of the life assured under 75, no facility to build up surrender value and policy payments must be made to an individual, registered charity or trustee
Usually provided by an employer for employees through group life assurance policies
What are the two main sections from the FCA handbook that are related to protection policies?
Insurance conduct of business source book (ICOBs)
Conduct of business source book (COBS)
Which policies fall under ICOBS?
No investment element
Pure protection policies, i.e. most term assurance
Which policies fall under COBS?
Has an investment element-eg unit linked ,with profit endowment
What is indexation with regards to life policies?
This is where the sum assured is linked to an index such as the RPI or the CPI
Sum assured increases annually as do premiums
Could also fall-deflation
Sum assured increased without need for underwriting
What are guaranteed insurability options?
Sum assured can be increased if certain events occur to the life assured
This could be getting married, having kids, moving jobs, etc
Increases usually restricted to a maximum monetary amount
Not underwritten at time of increase, but premium is likely to increase
How can the sum assured be increased outside of preplanned options?
Some assured can be increased ad hoc
Prompted by reviewing personal circumstances and needs with a financial advisor
Likely to require underwriting
What is meant by guaranteed premiums or standard cover?
Higher premium paid from the start, but should be able to continue at that level throughout the policy term whilst maintaining the level of cover
What is meant by reviewable premiums or maximum cover?
Client pays lower premiums initially, but at the first plan review first with a couple options
Pay same premiums but reduce cover
Increase premiums to maintain the same level of cover
What is meant by waiver of premium?
This is where the premium is insured against the risk of the assured of being ill or disabled
In such an event premiums must be paid for first six months-deferred period
But then premiums will be waived by the provider whilst the cover continues
Which type of protection is always subject to COBS rules?
Long-term care protection
What is the definition of underwriting?
The process of evaluating the risks of insuring a particular person and using this information to set a premium price for the risk being undertaken
What is meant by continuing previous medical exclusions?
Known as CPME
Underwriter applies the same terms as previously given on a form of policy
Common when cover is transferred from one provider to another
What are other risk assessment tools are available for an underwriter after the application stage? Name 4
GP report
Data subject access request
Paramedical
Tele underwriting interview
Medical
Health questionnaire
Health screening
What is a GP report? Why is this useful in the underwriting process?
Written report from applicants own general practitioner
Relatively inexpensive option that does not involve the applicants time
Underwriter can review this report for any additional risks
What is a data subject access request? Why is this useful in the underwriting process? Why is this currently under review?
The applicant request a copy of the own medical records, which are then sent to the insurer
Requested by applicant themselves and saves on cost
More detail than a GP report
Currently under review due to data protection issues
What is a paramedical? Why is this useful in the underwriting process?
Short medical questionnaire plus some basic tests such as measuring height and weight
Undertaken by a nurse a lower cost than using a GP
What is a tele underwriting interview? What are the two types? What are the benefits?
Underwriter or nurse driven telephone interview involving additional medical questions
Big T - process used instead of medical questions on the application form
Little T - questions in addition to medical questions on the application form
Shorter application forms, faster underwriting, less non-disclosure and lower costs
What is a medical? Why is this useful in the underwriting process?
Examination which includes measuring height and weight, taking blood pressure readings and blood sample
Carried out by applicants own GP or doctor provided by insurer
To check risks involved and ensure premiums charged are for risks
What is a health screening? How is this useful for the underwriting process?
Non invasive test such as saliva swabs or urine test carried out by a nurse, pharmacist, or other non-GP individual
Provides underwriters with information about the applicant in a cheaper fashion than in other ways
What rules are the storage and processing of data governed by?
Data protection act 2018
GDPR
Law enforcement directive
What is the law enforcement directive?
Piece of EU legislation that sits parallel to GDPR
For whole of life and term assurance policies where there is perceived additional risk what options does an underwriter have available to them? Name three and briefly describe.
Applying a premium loading - an extra charge is applied to the premium usually
expressed as a cost per thousand pounds of cover
Giving an extra mortality rating - a higher premium is charged by way of a certain percentage increase being applied
Giving an age rating - nationally making the life assured a certain number of years older
Including a policy debt - an initial amount that will be deducted from any claim payment
Postponing a policy - for example till after birth
Declining a policy - too many risks underwriter may decline
Which policies are more strenuously underwritten and why?
Income protection and critical illness cover pose the biggest risk to an insurer so are more strenuously underwritten
What are the three main conditions of financial protection policies with regard to contract law? Explain these
Offer -an offer must exist-the application form completed by the proposer
Accept - the offer must be accepted e.g. the applicant agrees to the terms (this may be done by making the first payment)
Intention - there must be an intention to contract -this is often in the small print
Who is the contract between for a financial protection policy?
Between the proposer (the person applying for the contract) and the insurer
As long as insurable interest exists, the life assured does not have to be one of these parties to contract
What is considered the offer in a financial services contract?
The first offer is the completion of the proposal form, which will then be considered and formally acknowledged by an acceptance letter
The acceptance letter is a counter-offer by law
The proposer accepts by paying the first premium
What is meant by the cooling off period in a financial services contract?
Usually 14 or 30 days that allows the applicant to cancel with any premiums paid being refunded
These rules are contained in the financial service and markets act 2000
What is meant by the term “utmost good faith” with regards to life assurance contracts?
“Utmost good faith” relates to the principle that both parties to the contract, the assured and the life office, are in possession of all the information they need to enter a contract
The applicant must answer the application form and any other questions honestly, truthfully, and completely-this is the duty of disclosure
The insurer must disclose all the key details about the policy, what it does and does not cover and what the terms are
What is meant by “ the fair treatment of customers”?
The fair treatment of customers is a regulator initiative, started by the financial services authority and continued by subsequent regulators
It’s core principles are about fair treatment of all customers, which include rules around transparency and disclosure
What used to be the consequence of non-disclosure and how is this dealt with nowadays?
Claims were rejected by a life office, based on non-disclosure, if any facts were omitted from the underwriting process
However, there was concern that these facts may not always have been material
Now there are three categories-reasonable, careless and deliberate/reckless
What is meant by reasonable/innocent with regards to non-disclosure? What happens in this case?
This is where the customer has acted reasonably and honestly, even though they may not have fully disclosed all material facts
It may be the customer genuinely did not realise that this information would be relevant
An example would be failing to disclose an earlier minor operation in relation to a cancer claim under a terminal illness benefit
The claim will be met in full
What is meant by careless with regards to non-disclosure? What happens in this case?
In this case the customer is deemed not to have taken sufficient care and should have realised the information was incomplete
This could be an individual suffering from skin cancer and not disclosing it at the application stage and later claiming on the policy for another form of cancer
In this case some but not all of the claim will be paid out -proportionate remedy
What is meant by deliberate or careless with regards to non-disclosure and what happens in this case?
This is where the customer should have known both that the information they have provided was incomplete and incorrect and that it would be relevant to the underwriting of the policy
In such cases, the claim will not be paid
What are some new rules for insurers in the new ABI guidelines?
Not trawling through a customer’s medical records in the hope of discovering non-disclosure
Asking solely for appropriate medical evidence when a claim is made
If the non-disclosure resulted from actions of an agent of the insurer, the claim would still be valid
What are the 6 situations where automatic insurable interest exists?
Own life
Life of spouse or RCP
Employer and employee
Partners in a partnership
Creditor and debtor
Mortgagee and mortgager
When is an individual not classed as having contactual capacity
Aged under 18
Mentally ill
Drunk or under the influence
What guarantees that insurers always have enough money to meet claims?
All policyholders pay premiums into a common fund from which all claims are met
What are the 2 ways to calculate premium paid by a customer?
Natural premium system - Risk of death increases as we age, premiums rise as risk of death rises
Level premium system- Policy holders effectively over pay early on and build a reserve in the pool. This means premium increases won’t need to be as steep when people get older and ensures elderly can still afford premiums
Why might longer term policies have lower premiums with regards to interest?
Interest paid on premium invested can be substantial and premium will reduce as a reward
The longer the contract the more interest will be paid on premiums
What loadings are applied to the net premium to get the actual premium?
Loading to cover insurers expenses - employee salaries, underwriting costs etc
Frequency loading - annual payment slightly cheaper than monthly
What is a trust?
A trust is a legal arrangement where one party, the settlor makes a gift of assets and creates a legal structure to hold the assets on behalf of the beneficiaries
The assets are then looked after by the trustees
