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AF4 March 2025 > Life Assurance Based Investments > Flashcards

Life Assurance Based Investments Flashcards

1
Q

Explain a With-Profits Policy

A
  1. Both regular and single premium contracts
  2. Written on Unitised basis
  3. Annual bonuses added to value of policy (if declared) - at rate actuary believes represents long-term returns of fund
  4. Final bonuses paid on maturity/surrender - represent capital growth of fund
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2
Q

Explain what a Market Value Reduction is

A
  1. To protect investors remaining in with-profits funds
  2. Reduces amount payable on surrender
  3. Prevents value leaving fund exceeding value of underlying assets
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3
Q

Explain 2 types of unitised with-profits policy

A
  1. Premiums buy units in unitised with-profits fund
  2. Unit price guaranteed not to fall
  3. 2 pricing systems:
    • Fixed-price system - unit price never changes - when bonus is added extra units added to the policy
    • Variable pricing system - unit price increased by bonuses
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4
Q

Explain Conventional with-profits policies

A
  1. Initial sum assured, increased by bonuses
  2. bonuses declared as % of sum assured
  3. Less common than unitised
  4. hard to work out current value
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5
Q

Advantage of With profits policies

A
  1. Provide exposure to equity markets whilst being suitable for risk adverse investors
  2. Bonuses not directly linked to performance due to use of reserves
  3. Generally outstrip inflation
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6
Q

Disadvantages of With profits policies

A
  1. Difficult to understand
  2. Returns based on subjective view of long term returns
  3. Inflexible and may produce poor returns on early surrender / times when MVR is in place.
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7
Q

Explain Closed With-Profit Funds

A
  1. Closed to new business
  2. Most hold high proportion of FI investments - restricts ability to pay future bonuses
  3. Investors consider options as those leaving with no MVR will be taking more than their fair share of the fund.
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8
Q

Explain unit linked funds

A
  1. Value of Life assurance policy can be based on performance of units in life company funds
  2. Can be internal funds or funds of another institution
  3. Value of policy is value of the units held
  4. After purchase worth less than premium paid due to bid-offer spread
  5. Returns based on performance and timing of buying in and cashing out (Pound cost averaging)
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9
Q

Explain Pound Cost Averaging

A
  1. Only for regular premium contracts
  2. Yield depends on bid price when cashing in
  3. If unit prices low when buying this is good as more units purchased
  4. Best if prices rise just before sale - as higher value per unit
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10
Q

Explain a Conventional With-Profits Endowment Savings Plan

A
  1. 10 year term to be qualifying
  2. Level premiums
  3. Premiums purchase guaranteed sum assured payable at maturity/death
  4. Annual and Final bonuses added to sum assured
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11
Q

Explain Low Cost Endowment Savings Plan

A
  1. Basic sum assured - bonuses calc’d on this - lower than death sum assured
  2. At maturity pays basic sum assured + bonuses
  3. Premiums start low and increase over the term
  4. Premium never more than double the initial premium due to qualification rules
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12
Q

Explain Unit Linked Savings Plans

A
  1. Premiums buy units in a unit-linked fund
  2. Most popular is Maximum Investment Plan - annual cap on contributions £3,600
  3. Some deduct charges for expenses and life cover from premium
  4. Some cancel units to pay expenses and life cover on monthly basis
  5. Can be endowment (rolling 10 years) or whole of life
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13
Q

Early encashment of regular premium savings policies

A
  1. Best returns if held till maturity
  2. Usually no return in first year
  3. Usually a penalty for early surrender
  4. May be able to sell with-profits policy
  5. Final bonus usually only on maturity/death and not surrender.
  6. Can increase flexibility via segmentation
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14
Q

What is an investment bond

A
  1. A single premium life assurance policy
  2. Most are whole-of -life
  3. Primarily investment with nominal cover e.g 101% of fund
  4. Written on single or joint life basis
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15
Q

What are the main types of bond?

A
  1. Guaranteed income Bond
  2. high income bond
  3. Guaranteed growth bond
  4. unit-linked bond
  5. distribution bond
  6. Guaranteed/protected equity bond
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16
Q

Explain Guaranteed income bond

A
  1. Single premium
  2. Guaranteed income each year
  3. Income payable annually in arrears
  4. Typical term of 5 years
  5. Capital returned on maturity
17
Q

Explain High income bond

A
  1. Based on packages of derivatives
  2. High level of income but no guarantee of return of capital
  3. Capital depends on performance of index
  4. If index meets pre-determined performance, capital returned in full
18
Q

Explain Guaranteed Growth Bond

A
  1. Pay no income
  2. Single premium paid for guaranteed capital sum at end of term
  3. Investments held normally gilts
19
Q

Explain Unit Linked Bonds

A
  1. 5% Deferred allowance available
  2. Whole of life policy
  3. Purchase units in a Fund
  4. Can be cashed in at any time
20
Q

Explain Distribution Bonds

A
  1. Similar to unit linked bond but distinguish between capital and income
  2. Invest in Special Distribution Fund - pays out natural income
  3. Income can be taken but no impact on units
  4. 5% Deferred allowance available
  5. Association of British Insurers (ABI) says they must have
    • Max 60% equities
    • Min 50% in sterling assets
    • yield of at least 110% of FTSE All share
21
Q

Explain Guaranteed/Protected Equity Bonds

A
  1. unit linked bonds with guarantees
  2. Fixed-term, single life
  3. Guaranteed Equity - Original capital + % growth in index
  4. Protected Equity - investors select quarterly guaranteed level of protection (95%-100% of capital) - protected vs. falls
22
Q

Why are Bond good for investments as trustees

A
  1. Wide variety of funds
  2. No taxable income
  3. Underlying fund pays corp tax, lower than trustee tax
  4. Policies can be assigned to beneficiaries - no income tax on transfer
  5. 5% deferred allowance
23
Q

Tax on Chargeable Gains

A
  1. Chargeable event on:
    • withdrawing more than 5% per year
    • Full encashment
    • death of life assured
  2. If settlor alive and uk resident - taxed as their income w/ Top slicing
  3. If settlor dead or resident outside uk and one trustee uk resident - taxable on trustees w/ no top slicing
  4. If trustee not uk resident - taxable on beneficiary w/ no top slicing
24
Q

How are offshore bonds taxed

A
  1. No tax in the fund - gross roll-up
  2. Chargeable event on encashment
  3. Charged to income tax
  4. gain multiplied by:
    No.days holder uk resident / no. days policy has run
  5. Top slicing allowed
25
Q

Explain Personal Portfolio Bonds

A
  1. Own portfolio wrapped in a bond
  2. Only offshore providers
  3. Deemed gain of 15% pa if onshore - taxed on this
  4. No top slicing allowed
26
Q

Explain Friendly Society Policies

A
  1. FSP have complete exemption from Tax - gross roll-up
  2. max premium is £270 p.a. or £300 p.a if monthly/quarterly
  3. Most unit-linked plans - 10 year savings plans
27
Q

How are life assurance funds taxed

A
  1. Dividend exempt
  2. all other income taxed at 20%
  3. Gains on corp bonds and gilts exempt
  4. Gains on other assets taxed at 20% after indexation allowance
  5. Can deduct expenses from unfranked income
28
Q

How does a life assurance policy become Qualifying

A
  1. Term 10+ years
  2. Regular premiums (at least annual)
  3. min. level of cover is 75% of premiums
  4. Premiums in 1 year not double any other year
  5. no premium >1/8 of total premiums
  6. Annual premium limit £3,600
29
Q

How are qualifying life assurance policies taxed

A
  1. surrender within first 10 years
  2. Or 3/4 of the term is sooner
  3. Tax payable if surrender value>premiums paid
  4. Tax at marginal rate less basic rate
  5. No tax on maturity or after 10 years
30
Q

How are Non-Qualifying life assurance policies taxed?

A

Tax payable if:
1. Chargeable event occurs
2. Chargeable gain arises
3. gain, added to income, means higher or additional rate tax

Top slicing allowed

31
Q

What is a chargeable event for Non-qualifying life assurance policies?

A
  1. Death
  2. Maturity
  3. Surrender/Final encashment
  4. assignment
32
Q

Explain segmentation

A
  1. Taking out cluster of smaller bonda rather than one large bond eg. Rather than £100 premium - 4 policies with £25 premium
  2. More flexibility
33
Q

What is the process for buyer and seller of second hand life assurance policy?

A
  1. seller - execute deed of assignment
  2. buyer - serve notice on life office to receive payments
  3. buyer - pay future premiums
  4. buyer - inform life office if life assured dies (stay in touch)
34
Q

Tax on seller of second hand life policy

A
  1. Qualifying after 10 years - no tax
  2. Qualifying before 10 years (or 3/4) and non-qualifying policies - chargeable gain = proceeds less premiums paid

AF4 March 2025 (25 decks)

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