Knowledge Gaps - Protection-Life Insurance Flashcards
List 3 types of state protection benefits
Universal Credit
Statutory Sick pay
Personal Independence Payment
Attendance ALlowance
Child Benefit
Carer’s Allowance
Bereavement Support Payment
What is Universal credit and who is it for?
A state benefit for those who are looking for work or on low incomes
What is the Personal Independence Payment (PIP)?
A payment to people under state pension age who need help with key activities needed for every day life (mobility, preparing food, going to the toilet)
What is Attendance Allowance?
The same as PIP but replaces it for those over State pension age
Is the PIP & Attendance Allowance means tested?
No
What is the child benefit?
Payment to parents/ responsible adults for kids under 16
What is the Carer’s Allowance?
A weekly benefit for those who spend at least 35 hours + caring for an individual in receipt of PIP
What is the bereavement support payment?
A lump sum & monthly income after paid for death of a spouse
What is the amount of the bereavement support payment based on?
Age, NICs & nature of death
Whilst state benefits are meant to act as an income replacement, why should people take out private protection plans and not rely on the state?
Usually state amount will not cover anywhere near enough needed
What is a benefit in kind and how is it taxable?
Benefit which someone receives through employment which has a monetary value - taxed as non-savings income in traditional way
What is the purpose of life assurance?
To pay out a lump sum on death of the policyholder
What are the two types of life assurance?
Whole of Life assurance
Term assurance
What does the surrender value mean with regards to a flexible whole of life policy?
An amount which needs to be paid if the policyholder chooses to end a flexible whole of life policy
What is a whole of life policy?
A life assurance policy to cover someone’s whole life whenever they die, no set term
How will a whole of life assurance policy pay out on death?
As a lump sum
What are the 3 ways a whole of life policy can be structured?
Non-profit policies
With profit policies
Unit linked policies
What is a non-profit whole of life policy?
Policy to pay out a set sum whenever the assured dies, doesn’t increase or decrease
What type of contract is a funeral plan and who is it designed for?
whole of life policy, designed for those 50+
Why do funeral plans appeal to many people who just want to pay for their funeral?
- Low sum assured
- Guaranteed acceptance for plan regardless of medical history
- sImple to set up
How is a with profit life assurance policy strucrured?
Guaranteed to pay a minimum level on death, but could do up with investment growth
What is the basic sum assured with regards to with profit policies?
The minimum amount of life cover guranteed to be paid on death
What are reversionary bonuses?
bonuses in a with profit policy which increases the amount assured in the policy
Can revesionary bonuses be taken away once added?
No
What determines the level of the reversionary bonuses?
The underyling performance of the life company
In With profit policies, what is smoothing?
When the life company holds back the bonuses in a good year, so it can be paid when the company has a bad year
How much is the final or terminal bonus added on death?
a % of original sum assured and accrued bonuses
how will the surrender value of a with profit policy compare to that of a non profit policy?
usually will be higher but not at the start
How do premiums compare between with profit policies and non profit policies?
With profit policies are much higher
When can life companies apply a Market Value Reduction? (MVR)
When individuals take the surrender value from a with profit policy - usually done during times of market uncertainty
why do life companies take a market value reduction if a policyholder withdraws their policy?
To mitigate the effect the outgoing policy has on the existing pooled investment pot
Why has there been a decline in the number of with profit policies being taken out?
Poor stock market performance meant bonuses weren’t paid - people couldn’t repay mortgages
What is a flexible whole of life policy and how is it also known?
A policy with a mix of life cover and investment. Premiums buy units in a fund and the policy’s value depends on the performance of the underlying investments.
Also known as unit linked whole of life plans
What is a benefit of the flexible structure of unit linked policies when it comes to altering the amount of cover?
Policyholders can get a lot of cover for a low cost, or they can put more emphasis on savings
What is the benefit of paying a regular premium in to a unit linked policy?
Pound cost averaging
What are the three types of cover for whole of life plans?
Maximum cover
Standard cover
Guaranteed cover
How does a maximum cover whole of life plan work?
Cover is fixed for a set period, then revised to a new and higher level when the set period ends and the policyholder is older
How does a standard cover whole of life plan work?
Set premium and no need for it to raise over the person’s lifetime, has investment element built in
How does a guaranteed cover whole of life plan work?
guaranteed cover for life in return for guaranteed premiums, no investment element
What type of payment does a term assurance policy pay out on death?
A cash lump sum
In an increasing term assurance policy, how does the sum assured rise over time?
Either fixed % or in line with RPI / earnings
What is a Term 100 policy?
A term assurance policy written to 100, used as an alternative to a whole of life policy
What is decreasing term assurance?
Where the sum assured falls each year to zero by the end of the term
What are 2 examples of decreasing term assurance?
Mortgage protection
Gift inter vivos term assurance
Family Income Benefit (FIB)
What is Gift inter vivos term assurance?
A decreasing term assurance policy where sum assured falls in line with IHT liability payable on lifetime gifts
What is a family income benefit policy?
Used to protect a family with young kids where regular payments are needed, sum assured decreass each year with reduction in need
What does it mean when a term assurance policy is increasable?
When the sum assured can be increased throughout the term and within limits
If someone wants to increase the sum assured on an inreasable policy does it have to be subject to medical evidence?
No
What does it mean when a term assurance policy is renewable?
Initial 5 year period, then at the end of the term another 5 years can be started without medical evidence/ underwriting
What will usually happen to the cost of a renewable policy when it is renewed?
It becomes more expensive
What does it mean when a term assurance policy is convertible?
When the policy can be converted to a whole of life poliocy at any time without the need for medical underwriting
What does it mean when a term assurance policy is reviewable?
Where the insurer can review the policy at a certain time for mortality risk, if it’s higher then the premium will rise
Who does the sum payable fall to when an own life policy pays out?
The estate
Why should an own life policy be written in trust?
Because the sum assured falls will form part of the estate for IHT purposes
What is a life of another policy and why would someone take it out?
Insuring someone else’s life, would take one out so another would benefit
What does someone wishing to take out a life of another policy for someone other than a spouse need to prove?
An insurable interest in their life
What does it mean if someone has an insurable interest in another?
When the policyhplder would gain a benefit from the continuted existence of another
Why would a couple take out a joint life first death policy?
Can be cheaper than taking two seperate policies
When would there be a need to write a joint life second death policy in to trust?
because IHT liability only arises on 2nd death if all of the estate has been passed down, means the sum assured can be paid outside of estate
Which is cheaper, a joint life 1st death or joint life 2nd death policy?
Joint life 2nd death
Whart are mortality tables and what are they used for?
The study of mortality over the last 100 years, life companies use them to predict how many claims they can expect to have in the future
What does it mean when a client falls in to a preferred risk class?
The better than average risk for underwriters to underwrite
What does it mean when a client falls in to a rated risk class?
When a cliet would have an above average risk, usually higher premiums
When a client falls in to the declined risk class category, for how long will they have to wait before applying again to the same company?
two years
What will happen to a policy if a client was found to have deliberately made misrepresentations?
It will be void from the inception
What will happen to a claim if a client has misrepresented and was negligible?
A proportionate remedy will apply e.g exclusions are applied retrospectively, or an additional premium payable
What is the a terminal illness benefit?
Paid to the life assured as a lump sum if life expectancy is less than 12 months
What happens if a Terminal illness benefit is paid but the life assured lives beyond the expiry date of the policy?
Life assured doesn;t need to give a refund
In a term assurance policy, when will a terminal illness benefit not usually apply?
In the last 18 months of the contract
What determines whether a policy is qualifying or non-qualifying?
Gains on qualifying policies aren;t taxable, non-qualifying ones could be subject to income tax
What is the minimum term length for a policy to be ‘qualifying’ and how frequently should the premiums be paid?
At least 10 years policy length and premiums payable annually
What is the maximum premium payable for a qualifying life policy?
£3,600 a year
Provide an example of when a qualifying policy would lovse it’s status
- if within ten years, or three-quarters of the term if less, there is an assignment for consideration or a surrender of the policy;
- if, within the same timescale, the policy has been converted to paid up and there is subsequently an assignment, surrender, death of the life assured or maturity; and
- premiums paid are in excess of the £3,600 per year cap on premiums.
In a non-qualifying policy, when would a chargeable event happen?
Death, maturity of the policy, surrender of the policy
When a chargeable event occurs on a non-ualifying policy which tax is it subject to?
Income tax
Once a life office is ready to settle the claim to a claimant, what will the claimaint have to prove to the life office?
Need to prove their title showing they have legal ownership of the money
What will happen if a trustee breraches any of their duties?
They will be personally liable for the breach of trust
What does it mean when a trustee’s liability is joint and several?
If the beneficiaries bring a claim, it can be against one or all of the trustees
why is it not normal practice to appoint financial advisers as trustees?
- Conflicts of interest may be present as the financial adviser could have provided advice on the trust’s assets and could have managed/ distributed the income too
- The trustees have a personal liability to meet shortfalls if the trust has financial difficulties
What is an absolute/ bare trust?
A trust where a defined beneficiary is absolutely entitled to the assets of the trusts
What is an interest in possession trust?
A trust which requires the trustees to pay income from the trust to a beneficiary for their lifetime or for a set period
What is the name of the beneficiary who receives income from an interest in possession trust?
The life tenant
When the life tenant dies in an interest in possession trust, who is then entitled to the capital on their death?
The remainderman
What is a discretionary trust?
A trust where the settlor gives the trustee discretion over who the trust funds pass to and when
What are two advantages to writing a life policy in to a trust?
- Funds can be distriibuted quickly to the beneficiaries
- Proceeds of the policy are not subject to IHT
Why is a life policy written in to a trust not subject to IHT?
The premiums paid in to the policy represent payments in to the trust, if they fall in to the IHT exemptions then they’re free of an IHT charge
What are the two main exemptions from IHT relevant to premiums paid in to a policy under trust?
1) Regular gifts
2) Annual exemption of gifts totalling £3k a year by one donor
