Financial Protection Products and their uses

Question 1

What are customer protection needs?

Answer 1

protection against unpredictable events

Question 2

What unpredictable events can protection policies protect customers from? (3)

Answer 2

death or parent before child grows up
long term ill health
critical illness

Question 3

Why is insurance cheaper for young people?

Answer 3

Based off mortality tables - older a people is, closer they are to death

Question 4

When do customer protection needs arise?

Give examples

Answer 4

Should be before the unpredicatble event occurs

E.g.
- one member of family becomes financially dependent on another
- couple financially interdependent
- child is born/adopted
- debt

Question 5

When does an individuals need for protection start?

Answer 5

When you begin to rely on your own earning to live and not your parents etc

Question 6

What protection needs do businesses have? (2)

Answer 6

need to protect profits of business from death or ill heath of key employees

need to provide benefits to attract and retain employees

Question 7

What are the four main areas of customer needs related to financial protections against death? (4)

Answer 7

1. family protection
2. mortage protection
3. inheritance tax planning
4. funeral planning

Question 8

What is the term most commonly used for family protection?

Answer 8

level term insurance

Question 9

How is the level term insurance paid out?

Answer 9

in a lump sum (known as sum insured) if the life insured dies

Question 10

Is income tax or capital gains tax payble on level term insurance?

Answer 10

No

Question 11

Is inheritance tax payable on level term insurance?

Answer 11

No (usually) - when set up under a trust

Question 12

What is a more accurate way to assess the sum insured requirments?

Answer 12

Use a life insurance calculator

rely on certain assumptions (e.g. £5000 required per child/year, doesnt account for inflation

Question 13

What is the industrys solution to protecting customers against inflation?

Answer 13

increasing term insurance

Question 14

How does increasing term insurance work?

Answer 14

a tax-free lump sum on death of life insured

the sum insured increased every year

Question 15

What is another advantage of increasing term insurance?

Answer 15

enable customers to get extra cover without submitting any more evidence of health

Question 16

What is a guaranteed insurability option?

Answer 16

the sum insured increases substantially on the events that lead to additional protection needs

Question 17

What are examples that a guaranteed insurability option is applicable? (3)

Answer 17

1. taking out a mortage
2. getting married or entering into civil partnership
3. having or adopting child

no need for further evidence of health and customer premium is increased

Question 18

Why should care be taken not to over-insure a customers life?

Answer 18

customer is paying for insurance they dont need - money better meeting other financial needs

Question 19

What is suitable alternative to level term insurance where increasing term insurance is too expensive?

Answer 19

family income benefit (FIB) policy

Question 20

How does a FIB work?

family income benefit

Answer 20

pays out tax-free income to replace the earnings that the life insured woudl have provided to the family had they lived

paid each year from the the death of the life insured until the policy expires

Question 21

What are the advantages of FIB?

family income benefit

Answer 21

1. cheap (cover provided decreases over term of policy (premium remains same))
2. premium slighter cheaper than increasing term insurance
3. provide families with regular income rather than lump sum

Question 22

When the sum insured under an increasing term insurance goes up, does the premium as well?

Answer 22

Yes

Question 23

What are the two ways borrowers can repay their mortage loans? (2)

Answer 23

1. repayment mortgage
2. interest-only mortgage

Question 24

What are the two parts of a customers monthy payment on a repayment mortgage? (2)

Answer 24

1. capital i.e. customer pays back a small amount of money borrowed
2. interest

Question 25

What are the main parts of a customers monthy payment on a interest-only mortgage?

Answer 25

• no capital repayment only interest
• at very end, all money originally borrowed must be repayed
• must save up substantial amount of money over the term to be in position to do this

Question 26

What are the main differences between repayment and interest-only mortgages?

Answer 26

1. monthly payment on repayment = higher (capital + interest)
2. amount owed on repayment decreases over time (interest-only stays the same)
3. sum insured to protect either is different

Question 27

What is the most cost effective solution to protect a repayment mortage?

Answer 27

mortgage protection insurance (MPI)

Question 28

How does MPI work?

mortgage protection insurance

Answer 28

• a decreasing term insurance
• starts at level of amount borrowed and decreases each year still complete at end of mortgage term
• will pay out right amount needed to pay off outstanding mortgage whenever death occurs within term
• premiums stay the same (cheaper than level term insurance)

Question 29

What is the most appropriate protection for an interest-only mortgage?

Answer 29

level term insurance - MPI not suitable as it decreases over time

Question 30

Whats the most appropriate protection for inheritance tax planning?

Answer 30

whole of life policy - monthly premiums more expensive as whole of life policy is certain

Question 31

What are the five main ill-health-related protection needs? (5)

Answer 31

1. income protectioncritical
2. illness protection
3. terminal illness protection
4. long-term care protection
5. private medical insurance

Question 32

What is an appropriate protection for income protection?

Answer 32

income protection insurance (IPI)