Life Assurance

Question 1

How long can a life assurance term be?

Answer 1

From a few months to 40 years or more (for terms that end after age 65, it may be better to take out a whole-of-life policy instead).

Question 2

What happens to the life assurance after the term?

Answer 2

If the life assured survives the term, the cover ceases and there is no return of payments.

Question 3

What is the cash-in value of a life assurance policy?

Answer 3

There is no cash-in value or surrender value at any time.

Question 4

What happens to the policy if premiums are missed or not paid?

Answer 4

If premiums are not paid within a certain period after the due date (normally 30 days), cover ceases and the policy lapses with no value.Most companies will allow reinstatement within 12 months provided all outstanding premiums are paid and evidence of continued good health is provided.

Question 5

How are life assurance premiums paid?

Answer 5

Normally paid monthly or annually, although single premiums (one payment to cover the whole term) are allowed

Question 6

How do life assurance premiums vary?

Answer 6

Premiums are normally level (the same amount each month or year), even if the sum assured varies from year to year.

Question 7

Define Sum assured

Answer 7

The amount that will be paid out under the terms of the policy.

Question 8

Define Life assured

Answer 8

The person whose life is covered by the policy, ie the policy is designed to pay out if this person dies while the policy is in place.

Question 9

What is a level term assurance and what is it suitable for?

Answer 9

• Sum assured remains constant throughout the term.- Premiums are normally paid monthly or annually throughout the term, although single premiums can be made.- Often used when a fixed amount would be needed on death to repay.

Question 10

What is a decreasing term assurance and what is it suitable for?

Answer 10

• Sum assured reduces to nothing over the policy.- Premiums may be payable throughout the term, or may be limited to a shorter period such as two-thirds of the term.- The most common use is to cover the amount outstanding on a repayment mortgage (mortgage protection policy/mortgage protection assurance).

Question 11

What is gift inter vivos cover?

Answer 11

A term assurance policy designed to cover certain inheritance tax liabilities. Gifts inter vivos are gifts made during a person’s lifetime, as opposed to on death.

Question 12

What is a convertible term assurance?

Answer 12

Includes an option to convert the policy into a whole-of-life or endowment assurance, at normal premium rates, without the life assured having to provide evidence of their state of health at time of conversion.Cost is typically an addition of 10%.

Question 13

What rules and restrictions apply to a convertible term assurance?

Answer 13

• Conversion carried out by cancelling the term assurance and issuing a new whole-of-life endowment policy.- Can only be exercised while convertible term assurance is in force.- The sum assured on the new policy cannot exceed the sum assured of the original convertible term assurance.- The premium for the new policy is the current standard premium for the new term and for the life assured’s age at the conversion date.

Question 14

What are increasing term assurances?

Answer 14

Increasing term assurance where the sum assured increases each year by a fixed amount or a percentage of the original sum assured.

Question 15

What are renewable term assurances?

Answer 15

Renewable term assurance includes an option to renew the policy at the end of the initial term for the same sum assured, without the need to provide further medical evidence.

Question 16

What is family income benefit?

Answer 16

Designed to provide replace the lost income on death.Usually, these policies pay a tax-free regular income (monthly or quarterly) from date of death of the life assured until end of the chosen term.Beneficiaries may choose to receive a lump sum payment.

Question 17

What type of assurance does family income benefit generally fall under?

Answer 17

Since, usually, the cover reduces as time passes, this policy can be described as a form of decreasing term assurance.However, policies can be arranged with escalating instalments.

Question 18

What is whole-of-life assurance?

Answer 18

Covers the whole lifetime of assured, whenever death occurs provided policy remains in force.Examples of uses:- Protect dependants against loss of financial support in event of death of breadwinner.- Provide a tax-free legacy.- Cover expenses on death.- Provide funds for the payment of inheritance tax.

Question 19

What is the premium schedule on whole-of-life assurance policies?

Answer 19

• Payable throughout life (ie for the full term of the policy, whatever that turns out to be); or- Limited to a fixed term (eg 20 years) or to a specified age (such as 60 or 65).

Question 20

What are the different investment structures for whole-of-life assurance policies?

Answer 20

Fixed level of life assurance in return for payment of a fixed premium.

Question 21

What are the features of With-profit whole-of-life assurance policies?

Answer 21

Fixed minimum level of cover to which bonuses are added to reflect investment profits.

Question 22

What are the features of Low-cost whole-of-life assurance policies?

Answer 22

Promise a certain level of cover which is provided by the combination of with-profits and a decreasing term assurance. As bonuses are paid to the with-profits element, the decreasing term element reduces.

Question 23

What are the features of Unit-linked whole-of-life assurance policies?

Answer 23

Units issued to the planholder. A minimum level of cover is set at outset which is increased when the value of the units held rises above that amount

Question 24

What are the features of Unitised with-profits whole-of-life assurance policies?

Answer 24

Issues units with a guarantee that unit prices will either never fall below a certain level or will increase by at least a stated minimum amount.

Question 25

What is the tax treatment on whole-of-life assurance policies?

Answer 25

All policies offer the prospect of a surrender value, subject to investment performance.The tax treatment of proceeds under the plan will depend on whether it is classed as ‘qualifying’ or ‘non-qualifying’ under the tax rules applying to life assurance.For qualifying policies there is no further liability to tax.For non-qualifying policies there is the possibility of higher-rate income tax at 20% or additional rate at 25%.

Question 26

What are Flexible whole-of-life policies?

Answer 26

When whole-of-life policies are issued on a unit linked basis, they are generally referred to as ‘flexible whole-of-life’. Their flexibility lies in the fact that they can offer a variable mix between their life cover and investment content.

Question 27

What are Universal whole-of-life assurance policies?

Answer 27

The flexibility of unit-lined whole-of-life assurance is sometimes extended further by adding a range of other benefits and options to the policy. What that is done, the policy is usually referred as a universal whole-of-life assurance.

Question 28

What are endowment policies?

Answer 28

Endowment policies are life-assurance products that combine life assurance and savings.

Question 29

What are Non-profit endowment policies?

Answer 29

A non-profit endowment has a fixed sum assured, which is payable on maturity (ie at the end of the policy term) or on earlier death; premiums are fixed for the term.Because the return is fixed and guaranteed, the policyholder is shielded from losses due to adverse stock market movements.

Question 30

What are Full with-profits endowment policies?

Answer 30

A with-profits endowment has a fixed basic sum assured and a fixed regular premium. The premium is higher than that for a non-profit policy of the same sum assured.The additional premium (sometimes called a bonus loading) entitles the policyholder to share in the profits of the life assurance company.

Question 31

How are Full with-profits endowment profits distributed?

Answer 31

The company distributes its profits among policyholders by declaring bonuses that increase the value of the policy and are payable at the same time and in the same circumstances as the sum assured.

Question 32

What are Reversionary bonuses wrt endowment policies?

Answer 32

These are normally declared each year and, once they have been allocated to a policy, they cannot be removed by the company, provided that the policy is held until the end of the term or earlier death

Question 33

What are Terminal bonuses wrt endowment policies?

Answer 33

These are bonuses that may be added when a death or maturity claim becomes payable. Unlike reversionary bonuses, a terminal bonus does not become part of the policy benefits until the point of a death or maturity claim, thus allowing the company to change the terminal bonus rate

Question 34

What are Low-cost with-profits endowment policies?

Answer 34

A low-cost or minimum-cost endowment overcomes high premiums by having a sum assured that is payable on death, that is made up of two elements:- with-profits; and- decreasing term assurance.

Question 35

What are Unit-linked endowments?

Answer 35

When a premium is paid, the amount of premium (less any deductions for expenses) is applied to the purchase of units in a chosen fund.A pool of units gradually builds up and at the maturity date, the policyholder receives an amount equal to the total value of all units then allocated to the policy.

Question 36

What are the pros and cons of Unit-linked endowments compared to with-profits policies?

Answer 36

Unit-linked policies have the potential to produce higher returns than with-profits policies.Unit-linked policies do not provide any guaranteed minimum return at maturity.

Question 37

What are Unitised with-profits endowments?

Answer 37

As with unit-linking, premiums are used to purchase units in a fund, and the benefits paid out on a claim depend on the number of units allocated and the then-current price of units.

Question 38

What is the difference between Unitised with-profits and Unit-linked endowments?

Answer 38

Unit prices for Unitised with-profits, increase by the addition of bonuses which, like the reversionary bonuses on a with-profits policy, cannot be taken away once they have been added.This means that unit prices cannot fall.

Question 39

What is the main advantage of writing a life assurance policy in trust?

Answer 39

‘Ring-fence’ the proceeds outside the individual’s estate.

Question 40

Which type of whole-of-life policy offers a fixed level of life cover at outset that may be increased by the addition of bonuses?

Answer 40

A with-profits whole-of-life plan has a certain level of life cover at outset which can then be increased as bonuses are added during the term.