Chapter 4 - Life Assurance Flashcards
What is a Whole of Life (WOL) plan?
An insurance policy that pays out a lump sum on death
How does a unit linked WOL work?
A mix of life assurance and investment, initial premiums allocated units and are based on an assumed growth rate, the units are then cancelled every month to pay for the cover, at review points if the investment is not performing as hoped then the assured may have to increase their premiums or reduce the sum assured.
What is term assurance?
An insurance policy that pays out a lump sum if death occurs within a specified term
What types of term assurance are available?
Level
Decreasing
Increasing
Term 100
Name 3 examples of decreasing term assurance
Mortgage protection
Family income benefit
Gift intervivos
Explain Level Term Assurance
An insurance policy that pays out a cash lump sum if death occurs within the specified term and the sum assured stays the same throughout the term
Explain Decreasing Term Assurance
An insurance policy that pays out a cash lump sum if death occurs within the specified term and the sum assured falls each year in a predetermined way
Explain Increasing Term Assurance
An insurance policy that pays out a cash lump sum if death occurs within the specified term and the sum assured increases throughout the term either on a fixed basis or linked to an index
Explain Term 100
An alternative to WOL policy expires at age 100
How does Pension Term Assurance work?
A type of term assurance that enabled the holder to receive tax relief on their premiums.
Example
Income tax at the time was 22% so it enabled an individual to get £100 of premiums for just £78.
What was HMRC’s limit on pension term assurance contributions?
Rules restricted premiums to 10% of pension contributions paid that tax year.
Example
Someone paying £10,000 into a pension can get tax relief on £1,000 of pension term assurance premiums
Are pension term assurance policies still available?
No, no new policies since 2007
Explain the purpose of a relevant life policy
An insurance policy used by employers to provide death in service benefits to employees. Normally arranged and paid for by the employer and written in trust for the beneficiaries chosen by the employee.
What is a Multiplan?
A single policy that can incorporate many types of cover, e.g. life cover, PHI and CIC. Lower charges but can be more complex to set up.
What 5 major things, with respect to the policy, would a financial adviser need to consider before setting up any life assurance plans for a client?
- Why the cover is needed - debts, dependants, IHT
- How the policy needs to be written - own life, life of another, joint life first death, joint life second death
- How much cover is needed - sum assured
- Consider any existing plans - is it already covered, is there any death in service
- Premium basis - guaranteed, reviewable, any investment element
How are life assurance premiums calculated?
Life cover differs to other types of insurance as it is possible through use of mortality tables to accurately predict how many people of a certain age will die in a given year.
All premiums paid by policy holders goes into a common fund. This fund is then used to pay out any claims.
Explain the natural premium system
Mortality tables are used to calculate the premium required to pay out the sum assured for all deaths in that year but will leave no surplus left over. As a result the next year’s premiums will be more expensive as all the lives will be a year older. This pattern will continue with the premiums increasing every year to cover all the pay outs
What was the problem with the natural premium system?
It got to the point where premiums became unaffordable in the later years when they were needed most. Also the fit and healthy lives cancelled policies leaving all the unfit that died earlier increasing the mortality rate
Explain the level premium system
Using a level premium system the premium is higher in the earlier years creating a surplus which can be kept to subsidise the later years.
So in reality the premium is higher than it should be in the early years and less than it should be in the later years. The important point is though it never rises throughout the term.
What is a premium loading?
Additional premium added to subsidise things such as the salaries of the employees, commission, overheads, admin costs, medial underwriting fees. Could also be a safety margin for higher than normal death rate
What is frequency loading?
Premiums are often calculated on an annual basis even though in realty the majority of people pay them monthly.
Monthly premiums can’t just be 1/12 of the annual as the calculations assume that entire premium will be available for investment at the start of the year.
Therefore a loading is applied to monthly premiums to offset this loss
What is a trust?
A legal arrangement to hold assets for the benefit of someone else
Name 4 benefits of using a trust and explain the reasons
- Beneficiaries receive the policy benefits without having to wait for the estate to go through probate; this could save months or even years in some cases. With regards to IHT it saves the executors having to loan the money to pay the IHT.
- While the proceeds will be exempt from IHT in most cases the payments into the trust should be too. This is because they should fall within one of the exemptions – either £3k AGA or the gifts out of normal expenditure.
- Ensures the benefits go to who the settler wishes. May not be the case if a person dies intestate. Also ensures that they go to the right place outside the terms if any will.
- May be better protection against creditors if the settler goes bankrupt
What is a bare/absolute trust and how are they treated for inheritance tax purposes
A bare trust is a simple trust arrangement where the beneficiaries are chosen at outset and can not be changed.
Beneficiaries are entitled to the trust proceeds at 18.
The trust is taxed at the rates of the beneficiary.
For IHT purposes a bare trust is a Potentially Exempt Transfer (PET)
What is a discretionary trust and how are they treated for inheritance tax purposes
A bare trust is more flexible trust arrangement where no beneficiaries are chosen at outset and the benefits are eventually paid out at the discretion of trustees.
This allows maximum flexibility and allows provisions for future children/grandchildren etc.
The trust is taxed as an additional rate tax payer.
For IHT purposes a discretionary trust is a Chargeable Lifetime Transfer (CLT)
What can be placed in trust?
- Any life assurance policy not already in trust or assigned to a third party
- Any new policy
- Life assurance as part of a pension scheme
A MWPT can only be used from outset.
What factors would affect the underwriting of a life assurance policy?
Age Health Medical History Occupation and hobbies Lifestyle - drinking and smoking`
What is a moratorium as part of the underwriting process?
A moratorium is effectively a short term ban on pre existing conditions.
A typical example would be that any pre existing conditions from the last 5 years would be excluded for the first 2 years
Name 7 things that could potentially be requested by the life office as part of the underwriting process
- GP report – written report. No medical
- Subject access request (SARs) – a copy of medical records from the GP
- Paramedical – short questionnaire and basic tests (height, weight, blood pressure)
- Medical exam – either by their own GP or nominated by insurer
- Additional health questionnaire – about specific conditions such as diabetes
- Occupation or pursuits questionnaire – flying, skydiving, abseiling etc
- Health screening – such as cotinine test to check non smoker
What are the 2 types of tele underwriting that are becoming more common within life assurance underwriting?
- Big T tele-underwriting – fewer questions on the app form more on the phone
- Little t underwriting – most still on app form but supplementary questions on the phone
This can speed up the process as the underwriter will call at an agreed time and ask the pertinent questions.
If after underwriting the insured is not deemed to be in perfect health what could happen?
A rating can be applied to the policy premium to represent the higher risk to the life office of insuring this life. This is also called a loading or mortality premium
The policy can even be rejected outright if the life office is unwilling to take the risk
What is uberrima fides?
Utmost good faith. Traditionally life offices relied on the individual being honest and disclosing everything on the app form.
What was significant about the Consumer Insurance (disclosure and representations) Act 2012?
This moved things on from utmost good faith and stated if a life office wants to know something they must ask.
In return customers will be honest when applying
What are the 3 categories of non-disclosure a life office will measure a claim by and what are the potential impacts on the customer?
- Reasonable non disclosure – acted honestly but has still not disclosed all facts. Claim paid in full.
- Careless non disclosure – customer failed to take reasonable care and should have realised the info given was incorrect. A partial remedy will likely apply (less than the full sum assured paid out)
- Deliberate non disclosure – customer knew or must have known that the info was incorrect and relevant to the insurer. Insurer can void the contract.
What is terminal illness benefit?
An accelerated death benefit paid if life expectancy is likely to be less than 12 months
When would a terminal illness benefit not pay out?
Doesn’t usually apply in last 18 months of a term assurance policy
What form needs completing if the policy documents have been lost and a claim needs to be made?
Statutory declaration
If a couple with a joint life 1st death policy die and it is not possible to ascertain who died first how is the policy paid out?
It is assumed that the younger life survived the older. So a payment would be made to the estate of the younger
True or False? A life office must inform a customer there is a 2nd hand market if they are surrendering an endowment policy
True
How long does someone generally need to be missing before the can be presumed dead?
7 years
What is needed by the life office in order to be able to pay a claim?
- All premiums to be paid
- The policy document
- Proof of title
- Proof of death – death cert – ORIGINAL
- Proof of age at death
Why is cause of death important?
Its important to consider as it may have been excluded from the contract or if it was relatively soon after starting the policy then there have been some non disclosure
Who will the estate be administered by if someone has left a will and what documentation is required to release the estate?
The executors of the will and the grant of probate
Who will the estate be administered by if someone dies intestate and what documentation is required to release the estate?
The administrators and the letters of administration
What is assignment
Transfer of ownership from one person to another
Explain joint tenancy
Joint tenancy is a way of holding property jointly, where if one party dies their share passes to the survivor
Explain tenants in common
Tenants in common is a way of holding property jointly, where if one party dies their share passes to their estate and is distributed as per the will
Absolute assignment refers to
Assignment that is permanent and can not be reversed
What is the effect of giving notice with regard to assignment?
Its give the assignee the right to make a claim in their own name
What document is used to transfer ownership from one person to another?
Deed of assignment
A mortgage is a type of….
temporary assignment
When a borrower has repaid their mortgage. The lender will re-assign the home to them. This is known as….
…..the equity of redemption
If a customer defaults on their mortgage, with regard to assignment, what is the impact of this?
As a mortgage is a form of temporary assignment, the it never gets re-assigned to the borrower and remains the property of the lender
