Ensure that their financial protection arrangements are adequate for their needs Flashcards
State the additional information you would require in order to advise Nick and Shirin on their protection needs.
- Smoker status / family history
- Details of the level of term policy they have in place
- Affordability / budget
- How much of a priority this objective is compared to others
- Are they planning on having more children
- Likely age of dependency for children / term of cover
- Any inheritances due
- ATR
- Expression of wish on pension funds
- Any planned changes to income / employment
- How much income would they need and for how long
- CFL
- Any redemption penalty on mortgage
Comment on Nick and Shirin’s protection arrangements and identify any weaknesses should either of them suffer a long-term illness or die prematurely.
If either were to die:
- LTA would pay out (if joint life)
- We do not know if the sum assured is enough to repay the outstanding mortgage or term is sufficient
- Couple have insufficient protection given young children
- Both Have DIS which will pay out 3 x and then 4 x salary
- Either pension fund could be accessed
- If home, deposit and current accounts are held as joint then other would inherit
- remaining assets would be distributed via wills
- no IHT payable on 1st death
- survivor will have access to home
- bereavement support payment at the higher rate would be available due to the age of the children, but would not be sufficient
- No mention that pension and DIS expression of wish is in place
- Where property is left in discretionary trust on second death the RNRB will not be available
If either were unable to work through ill-health:
- No cover for long term illness
- Neither has CIC or IP
- Neither has PMI
- Neither have employer sick pay
- Both entitled to statutory sick pay, less than £100 per week for 28 weeks
- Following this they may be entitled to universal credit
- don’t know outgoings but safe to assume couple’s standard of living would be severely diminished
Justify your recommendations in respect of providing financial security for the family if either Nick or Shirin were to suffer a serious illness or long-term disability
IP for both:
- Pays out tax-free income in event of long term illness or disability
- Index linked - to match inflation
- Deferred period - to fit in with statutory sick pay
- Own occupation - best possible cover
- Guaranteed prem - known costs
- Houseperson’s cover - pays out tax free income
- Waiver of prem - prems carry on if sick
- Term - to selected retirement ages/when Nick is 60
Recommend and justify a suitable protection policy to provide a lump sum in the event of Nick or Shirin suffering a serious illness
Level term, stand alone CIC for both:
- Pays out tax free lump sum for serious illness
- Single life policies x 2 - amounts needed in event of either - extra cover
- Sum assured - sufficient to remodel home etc.
- Term - to retirement/mortgage term
- Guaranteed prem - known cost
- Waiver of prem - maintains policy if ill
Recommend and justify a suitable protection policy to provide an income in the event of Nick or Shirin’s death.
FIB
- Joint second death on high earner - cheaper than single policies and provides more cover
- sum assured replaces lost income
- maintain standard of living
- lump sum which is paid monthly and decreases over time
- index linked - keep pace with inflation
- Waiver of prem - maintains benefit
- Term is to children’s financial independence
- guaranteed prems
- written in trust for speedy payment and no IHT
Explain to Nick and Shirin the state benefits they would be entitled to if they were unable to work through sickness
SSP:
- Both would be eligible for statutory sick pay as earnings are over £123 per week
- SSP is taxable / not means tested
- Pays just under £100 per week
- Benefit only payable for up to 28 weeks
- Paid by employer
Employment and Support Allowance after 28 weeks
- £77 per week during 13 week assessment phase
- From week 14, if assessed as unable to work, benefit is £117.60
- From week 14, if assessed as able to work, benefit is £77
- ESA is taxable / not means tested
Explain how the bereavement support payment may help in the event of either Nick or Shirin’s death
- Initial payment followed by up to 18 monthly payments
- £3,500 and 18 x £350 pm where claimant is pregnant at time of partner’s death or is entitled to receive child benefit
- Standard rate is £2,500 and 18 x £100 pm
- when spouse dies, survivor must be under SPA
- Not means tested
- Deceased must have paid class 1 or class NICs for at least 25 weeks in any one tax year, or death must be related to job-related accident.
- All payments made if claim is made within 3 months of partner’s death
Recommend and justify why Nick and Shirin should keep their existing level term policy
- No other personal life cover in place
- Can be put into trust to provide IHT cover
- No surrender value
- Loss of prem paid
- Replacement cover may be expensive / lower than what they have
- May pay out on terminal illness
- Guaranteed cover if health deteriorates until maturity
- No adviser cost for setting up new policy
- No inconvenience
When considering a review identify 8 key events relevant to Nick and Shirin when this should be conducted
- Change in ATR
- Birth of child / life event
- Change in income
- Change in employment
- Death of one of them
- Changes in health of either
- Separation
- End of the tax year
- legislative changes
- Inheritance received
- Repaying the mortgage
- Review of fund performance
Explain why Nick and Shirin should have regular review meetings with their adviser
- Can react to changes in circumstances, ATR, tax position, legislation changes
- Reinforces client relationship
- Ensures plans are on track
- Check asset allocation/any rebalancing and performance
State the key differences between an income protection insurance policy and a mortgage payment protection insurance policy.
- IP pays an income up to retirement, MPPI max pay out typically 2 years
- IP benefit linked to salary, MPPY typically linked to cost of mortgage
- IP cover accident and sickness, MPPI covers accident sickness and unemployment
- IP deferred period 4 -104 weeks, MPPI 30- 180 days
- IP may pout out multiple claims, MPPI typically won’t renew after claim
- IP greater underwriting, MPPI limited underwriting
- IP expensive, MPPI relatively cheap
Nick and Shirin are considering either IP or ASU to protect their income in the event of being unable to work. State the benefits and drawbacks of using IP rather and ASU.
Benefits:
- cannot be cancelled
- allows for multiple claims
- own occupation
- index linked benefits
- guaranteed premiums
- benefit meets income requirements
Drawbacks:
- expensive
- longer deferred period
- stricter underwriting
- no lump sum
- does not cover unemployment
Explain to Nick and Shirin why their existing employer death-in-service schemes may
not be suitable to meet their long-term protection needs.
- Cover is lost if they change employer.
- Employer may change terms of cover/eligibility.
- Benefits fixed by employer/cannot increase cover/inflexible.
- Insufficient cover/not enough to repay mortgage.
- Only provides cover for death/no critical illness cover/no income protection insurance.
- Reduced benefit if salary sacrifice used/part-time.
