Chapter 4 - Life Assurance Flashcards
Whole Life Assurance - Unit linked WOL - features;
- surrender & prems, mix, flex, preset, increasable and investments
Premiums - based on, how paid for, older, cant cover, burn out
benefit characteristics - max cover plans, standard cover, guaranteed cover
Features;
- usually no surrender value to allow for cheaper premiums
- mix between cover & investment
- flexible structure
- Premiums may cease at a preset age
- sum assured can be increasable and can have other cover attached
- underlying investments
Premiums;
- initial premiums based on assumed investment return
- premium allocated as units and cancelled to pay premium
- premium reviewed more often when older
- if units cant cover premium, premium can be increased or reduce SA
- or can accept that policy will ‘burn out’
Benefit characteristics;
- Max cover plans - prem is fixed for set period and then reviewed and usually higher due to older.
- standard cover - premium doesn’t increase as long as underlying fund meets predetermined rate of investment return.
- guaranteed cover - no investment and guaranteed cover for guaranteed premium.
Term assurance - family income, gift inter vivid, return of prem + all examples of what
TA can also be (4)
Family income ben - pays out amount payable until death on death i.e. if 60 payments left sum assured is £60k
Gift inter vivid term assurance - sum assured falls in line with any IHT payable on PETs.
Return of premium TA - pays out on death but premiums returned if alive when policy ends. Premiums higher.
Term assurance can also be - increasing, renewable, convertible and combo.
Relevant Life policies - conditions to be met for RL;
- 75, surrender, prescribed, charity, TI, group and who pays
Conditions to be met for RL;
- sum assured payable if die under age of 75
- cannot have a surrender value
- no sums or other benefits paid other than already prescribed
- any sum assured paid to charity or trust
- some may pay out on terminal illness
- usually in registered group scheme but can get stand alone cover
- usually arranged and paid for by employe on behalf of employee
How Life Policy should be written - own life,
life of another (insurable interest, business, proof),
joint life first death (what is it, price, drawback and separation)
Joint life second death - when good, price, trust
Own life - benefit themselves or write in trust
Life of another- suitable when party has an insurable interest in another.
- can also be used for business assurance to enable their share to be purchased by other owners.
- other than spouse, insurable interest must be proved (not intergenerational)
Joint life first death - for lives of both spouses and policy ceases on first death basis
- cheaper than taking out two separate policies
- drawback that survivor needs to have continuing cover
- can creat issues if couple separate
Joint life second death/last survivor - sum needed after both spouses die (IHT)
- cheaper than first death policies
- should be put under trust
Main factors for choosing policies - (4)
If underestimating how long need cover for can - WOL, convert and renew
How to increase insurance levels (3)
- purpose for being taken out
- if they want some investment element
- budget
- guaranteed or flexible premiums
Some people may underestimate how long they need cover for and;
- can take out WOL to reduce initial cost
- have convertible to WOL option on term assurance policy (re of health)
- add renewability feature so guaranteed to be extended.
Can increase insurance levels by;
- linking policy to index
- sum assured can be increased if certain event takes place (kids etc)
- regular reviews
Calculation of premiums - mortality tables used why
Level premium system - explanation and why replaced natural
Mortality tables can be used to predict how many claims insurer can expect each year for lives at a given age.
Level Premium System - level premium means premium higher than needed in early years and therefore can draw on this to pay for claims in later years. Works;
- First year - any group there will be few deaths with reserves held for future claims.
- Second year - higher prop needed to pay claims and lower prop into reserves but still increasing
- Following years - claim rates will get higher each year and reserve continue to grow until one years claims matches premiums and nothing goes into reserve. The next years claim will then exceed premiums at which point they will call on reserve. Eventually, one person left in the group and last premium plus reserve should be enough to pay for their sum assured.
This system replaced natural premium system to create a reserve to cover greater risk of claims in later years.
Interest on premiums - pure premium reduction
Premium loading - what is it and what adds to this (7), once policy is in force
Frequent loading - what is it
Pure premium is reduced as premiums paid are invested.
Premium loadings - premium calc’d from mortality and interest factors is net premium and therefore adjustments and loadings must be made to arrive at actual premium. E.g.
- life office employee salary, commission, rent, admin & reg costs and medical fees, safety against mortality rates and profit margin
Cannot load once policy is in force due to lower cost of this.
Frequent loading - charge slightly more in monthly premium in order to cover whole investment for claims.
Trusts and life assurance - advantages;
- probate, IHT & PETs, distribution and creditors
Life+CIC pol and trusts
Trust have these main advantages;
- beneficiaries receive proceeds without wait for probate to be granted
- may not be subject to IHT and prems paid fall into PETs as long as regular gifts do not affect donors standard of living and gifts total £3k in a year.
- can ensure benefits are distributed as per wishes of settlor
- better protection against creditors if going bankrupt.
A life policy that contains CIC would have a split trust so that sufferer of illness can get funds whilst ben can get sum assured on death.
Underwriting Process- short term pols can apply what and what is this and applicable to what
- larger schemes and underwriting
Underwriter evidence includes (7)
Tele underwriting;
- Big T TU & Little T U what are they and why beneficial
- Short term policies may apply moratorium whereby no full medical underwriting but exclude pre-existing conditions during the past 5 years for 2years. Also applicable for group CIC
- Larger schemes can have no or min underwriting.
Underwriter evidence includes;
- GP report, DSARs (request information), paramedical (short q + tests), medical examination, additional health q, occupation/hobbies q and health screening.
Tele underwriting;
Big T TU - few questions asked on app and asked on phone instead
Little T U - supplementary qs asked on app
As underwriter can select questions when calling, can be quicker than full app. IF additional medical info required, paid by insurer.
Offering terms - extra mortality rating - add cost expressed as what
- age rating - how does it rate
Long term pols and WOP/increases in SA
- how are terms offered and innocent misrepresentation
- provider questions
Extra mortality rating - add cost expressed as % increase in risk prem
Age rating - treats holder as if x age
- long term policies may not offer waiver of premium or option to increase rates without evidence of health.
- terms offered on utmost good faith (customer must be honest)
- FOS say insurer should pay in the event of innocent misrepresentation and this made statutory by Consumer Insurance Act 2012. Onus now on provider to ask the right q’s but client must answer truthfully.
Consumer Insurance Act 2012 - infringement and nature of it;
Reasonable, careless and deliberate/reckless
- Insurers asking for medical info
- insurers agent and recklessness
Minor infringement no longer invalidates contract but depends on nature of non-disclosure;
- Reasonable - acted honest & reasonably but failed to disclose material facts. Claim paid in full
- Careless - failed to take reasonable care and should have realised incorrect information given. Proportional remedy applied.
- Deliberate/reckless - incorrect info therefore void.
Insurers must only ask for appropriate medical info when claim made and cant trawl through history.
If person acting reckless is insurers agent, they are still bound to contract.
Insurance Act 2015 - intro’d changes to what and remedies for (3). Employers and representation. remedies
Intro’d changes to the duty of disclosure in commercial insurance contracts and remedies for fraudulent claims, non disclosure and misrepresentation. Employers have duty to make fair representation of risk when taking out group policy.
Must apply proportionate remedies unless reckless or deliberate.
Terminal Illness Benefit;
- availability, when free, when paid, when cant be applied, split trust, income tax
- Not available as separate policy and goes with Life cover.
- can be offered free for large sum assured or small extra premium
- means that sum assured is payable if life office is satisfied they have less than 12 months to live.
- wont apply in last 12-18 months of contract
- a split trust may be appropriate as bens would receive all but this could give rise to IHT
- no income tax liability
Assignments - what is it and types (4)
What is giving notice
Absolute assignment - what is it
Transfer of ownership from one person to another. Types include absolute, by way of mortgage, by operation and to trustees.
Giving notice means assignee informs life office of their assignment to the policy/proceeds.
Absolute assignment - complete transfer of the policy through sale or gift.
Assignment - mortgages - type of, absolute and once paid, equity of redemption, life office loan
Conditions found in mortgages of life policies;
- covenant and premiums, covenant and valid, arrears, surrender
Claims under mortgage policies;
- claim subject to
- Mortgage is a type of assignment in connection with a loan.
- not an absolute assignment as once paid the lender must assign the property to the buyer.
- equity of redemption - distinguishes a mortgage from an absolute assignment.
- life office can give loan on security on one of its own policies.
Conditions commonly found in mortgages of life policies include;
- covenant by the mortgagors to pay the premiums as they fall due
- covenant by the mortgagors that the policy is valid and if becomes void, then they will effect a new policy and mortgage to that lender.
- power for lender to pay premium in arrears and add it to principal of the loan
- power for lender to surrender the policy to the life office.
Claims under mortgage policies;
- pay claim to the borrower subject to proof of title
