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