MOD 4 - R05 Flashcards
What is the main purpose of life assurance?
To provide benefit if the insured person dies during the term of the policy.
What is WOL assurance?
Long-term insurance policy designed to payout a cash lump-sum on death, whenever that occurs.
A common type of WOL policy is unit-linked, what does this mean?
It means your premiums are invested into investment funds. A portion of the money built up in these funds is used each month to pay for the life cover.
Funeral plans are popular with older people. These are often marketed as over 50s plans. What is the average age of buyers?
65
Funeral plans often offer low SA and premiums together with simplified underwriting. True and False?
True.
For funeral plans, during the first ______ or sometimes ______ months, the full SA is often only payable on accidental death. Premiums are usually returned.
12 or 24 months
For funeral plans, after 12 or 24 months, the full SA is payable regardless of the reason of death. Many have premiums limited to a ____________________,
Particular age (e.g. age 90).
When does Term Assurance (TA) pay out?
When death occurs during the term of the policy.
What are the 4 different types of Term Assurance (TA)?
-Level TA
-Increasing TA
-Term 100
-Decreasing TA
What is Level TA?
The SA is fixed throughout the term.
What is Increasing TA?
The SA increases throughout the term either on a fixed basis (i.e. 5% compound each year) or inline with an index (RPI/AWE).
What is Term 100?
TA policy written to age 100. (Alternative to WOL policy).
What is Decreasing TA?
The SA falls each year in a predetermined way, usually to 0 by the end of the term.
Premiums for Decreasing TA will often be payable for a period slightly __________ than the duration the cover.
Shorter.
What is mortgage protection assurance?
Insured for a SA that reduces each year in line the outstanding repayment mortgage at a specified interest rate (DTA).
What is return of premium TA?
Pays out on the death within term but also returns premiums paid if the life assured survives until the end of the policy term. Premiums are likely to be higher. (DTA)
What is gift intervivos TA?
Where the SA falls inline with IHT payable PETs (DTA).
What is Family Income Benefit (FIB)?
Used to protect a family or young children, The SA is expressed as an amount payable each year (£x) from death until a fixed future point. Payments may be level or increasing. (DTA)
TA may have other features such as:
-increasing or increasable
-renewable
-convertible (i.e. to WOL or endowment or combination or both).
Pension TA - prior to April 2006, it was possible for an individual to benefit from tax relief on TA linked to a pension plan (PTA). The amount of cover was restricted by HMRC’s premium limit of ____% of the personal pension contribution applied to buy retirement benefits.
10%
Providers now offer stand-alone relevant life policies (RPL’s). Who are these good for?
Employers.
For relevant life policies, a capital sum is payable and arises on the death in any circumstance of the insured person. What age does the insured person have to be under?
Under the age of 75.
Do relevant life policies have or be able to acquire a surrender value?
No.
Under relevant life policies, no sums or other benefits may be paid under the policy except those prescribed; and any sums payable or other benefits arising under the policy must be paid to or for, or conferred on, or applied at the the direction of:
1) An individual charity beneficially entitled to them; or
2) A trustee or other person acting in a capacity who will secure that the sums or other benefits are paid to/for in favour of an individual or charity beneficially.
What are multiplans (or menu plans)?
Single policies that can incorporate different types of cover. Multiplans offer the prospect of lower charges, less overlap of cover and greater flexibility than single contracts but can be more complex to set up.
What is the need for life cover?
Life cover may be needed for many reasons, a few are: pay off mortgage, pay off loans, provide an income for surviving spouse, pay for costs of dependent, pay for school fees, funeral costs, IHT liabilities etc.
When assessing life assurance needs, what should you determine?
-Who needs to be insured and whether the policy should be on a joint/single life basis.
-How much cover is needed
-Term of the cover
-Type of benefit needed (e.g. capital or income).
-Who should receive the benefits
-Whether the policy should be in trust & if yes, how it should be arranged.
When is Own Life suitable?
Suitable where the client wishes to benefit themselves (e.g. endowment policy) or to write the policy in trust.
When is Life of Another suitable?
Suitable where the life assured and the insured (or owner) are two different people and the client wishes another person, on whom they have an insurable interest in their life, to benefit.
This may also be used for business assurance to enable a deceased’s interest in a business to be purchased by the surviving business co-owners.
Life of another policies insurable interest have to be proved on anyone other than a _____________or _________________. There is also no automatic insurable interest between generations (child & parent etc.)
Spouse or civil partner
When is joint life first death suitable?
Suitable where there is a need for cover on the lives of both partners/spouses. If one dies, the policy will pay out and then cease.
The cost for joint life first death policies is usually more than insuring one of the insured people but is cheaper than _____________________________.
These policies may be an issue if the couples seperate later or if the survivor needs to have continuing cover as they are a parent etc.
Two seperate policies.
When is joint life second death/joint life last survivor suitable?
Suitable where a lump sum is needed only after both spouses/partners have died (e.g. for an IHT liability that will arise on second death).
These policies are cheaper per £ of cover than joint life, first death policies.
Joint life second death/last survivor policies should usually be effected under trust, why is this?
So that the SA may be free of IHT.
What are capital needs?
Capital needs are for repaying the mortgage and any other loans, emergency funds, specific legacies and IHT among other reasons.
What are income needs?
Income could be needed to support the family or business after death of the breadwinner or homemaker and replace income or services.
What is an example of a short-term capital need?
A short-term capital need might be the repayment of a 5 year loan.
What is an example of a short-term income need?
A short-term income need might be the provision for income to support the children’s education and upbringing which might be of unlimited duration.
What is an example of a long-term income need?
A long-term income need might be income required to support a dependent relative or partner for the rest of their life.
Existing policies may already meet some or all of the need, depending on their term and other features. In some cases, they may have to be replace or ignored if not __________________.
Suitable.
More employers are now arranging life cover using ____________________________ schemes. Benefits under these schemes are not subject to the ______________________.
1) Excepted Group Life (EGL)
2) Lifetime Allowance (LTA)
What are the main factors that determine the choice of insurance?
-The purpose of which the policy is being taken out
-Whether the client wants to have some investment content to the policy
-How much the client is prepared to spend and the desirability of guaranteed or flexible premiums.
One of the problems of having life assurance that only lasts for a specified period is that the best of estimates of when it will no longer be needed may turn out to be wrong (i.e. child may expect to be dependant for longer than expected). What are some ways to approach this problem?
-effect a WOL plan
-add a convertibility feature to a TA policy so it can be converted to a WOL plan regardless of the insured persons health
-add a reviewability feature so the policy can be extended if required.
Combined effect of inflation and earnings increase the amount of cover needed by many individuals. How can this be achieved?
-Linking the SA to an appropriate index or level of increase (RPI/AWE) or fixed annual increase (i.e. 5%pa) or a fixed amount very few years (i.e. 20% every 5 years).
-Selecting a policy that includes a guaranteed insurability option under which the SA can be increased if certain events take place (i.e. marriage, birth/adoption of a child etc.)
-Regularly reviewing the clients need for cover.
If deflation happens in the future, what could happen to index-linked cover?
It could also fall.
What was the natural premium system replaced by and why?
The natural premium system was replaced by the level premium system so the premium remained level throughout the term.
How do they calculate premiums?
The monthly rate is the chance of dying at a specified age. (They use mortality tables to calculate this).
How are natural premiums worked out?
By using mortality tables, the actuary can find out the mortality rate for any given age and by multiplying this rate by the SA, work out the pure (or not) premium for that year. Natural premiums rise each year with age as you are one year closer to death.
What is the level premium system?
The mortality tables show that the risk of death increases with age. If a level premium is charged throughout the duration of the policy, the premium in the early years is higher than is needed to meet the current claims costs.
Effectively, the excess built up in the early years forms a reserve which can be drawn on to meet the higher mortality costs in the later years.
Interest on premiums - The premiums are invested as soon as they are paid. Under the level premium system the reserve is ______________.
As this continues for the life of the contract, a substantial amount of interest can be expected. Thus, the __________ premium can be reduced somewhat to take account for this fact.
1) Invested
2) Pure
How is premium loadings calculated?
What are the life office expenses?
The premium is calculated from mortality and interest factors, is a net premium and adjustments or loadings will have to be made to arrive at the actual premium chargeable.
The major loading is to cover the life office expenses, these would include:
-salaries of employees
-costs of buildings used
-commission paid to the sellers
-computer, admin and regulatory costs
-medical fees during underwriting
-profit margin
What is frequency loading and how is it calculated?
Premiums are often calculated on a yearly basis, although in practice, most premiums are paid monthly.
If premiums are to be paid more frequently, the life office will impose frequency loading i.e. charge slightly more in total for not paying the entire premium at once.
Example: 4% loading, annual premium £300 and monthly premium would be £26 (300/12 x 1.04 = £26)
Who are trusts ran/managed by?
The Trustees
What do Trusts do?
They create a legal framework to hold assets for third parties (the beneficiaries). The Settlor/policy owner creates these.
What are some of the advantages of using Trusts for life policies?
-The proceeds of a trust may not be subject to IHT.
-Receive the policy proceeds without having to wait for probate, which could take months or even years.
-Settlor’s can ensure that the policy proceeds go to the right beneficiaries outside their terms of their Will (or if no will intestacy rules).
-May be better protection against creditors if the Settlor goes bankrupt.
At one time, trusts would be set up using a simple or absolute trust, such as that prescribed under the _____________________________________________.
Married Women’s Property Act 1882 (MWPA).
What are advantages of Married Women’s Property Trusts (MWPA)?
They are relatively simple and the greatest protection against creditors but lack of flexibility re beneficiaries.
MWPA trusts have limited flexibility re beneficiares… who is this limited to?
Only children and spouse can be beneficiaries.
Can MWPA trusts be put into place during a policy?
No, MWPA trusts can only be put in place from outset of the plan.
Most policies written before _________ used a flexible interest in possession trust.
2006.
Flexible interest in possession trusts have a Settlor(s) of the trust assets, trustees and beneficiaries but, the Settlor specifies a list of potential beneficiaries and nominates 1 or more to have an interest in possession. What does this mean?
This means that if no other action is taken, the beneficiary(ies) will receive the trust proceeds.
‘Modernisation’ of trust law introduced in Finance Act 2006 brought the IHT treatment of new interest in procession trusts broadly in line with ________________ trusts.
Discretionary trusts.
As a result of the new changes, what are more likely to be used, flexible or discretionary trusts and why?
Discretionary trusts as flexible trusts no longer carry any advantages in comparison.
What should you keep in mind when choosing trustees?
-It is sensible to appoint trustees that will likely outlive the Settlor
-Settlor’s in general, should also appoint themselves to try and make sure their wishes are followed at least for as long as they are still alive
-Financial advisers should not normally be appointed as trustees
Where it is needed for the trustees to appoint the right beneficiaries on the Settlor’s death, what should the Settlor leave?
The Settlor should leave a letter providing guidance to the trustees about their wishes after their death.
It is difficult to remove Trustees (unless specified trust giving the Settlor permission to dismiss the Trustees against their wishes) but they may….
They may freely resign.
In most cases, setting up a Trust is simple and most insurers offer their own wordings and forms for the clients legal advisers to consider.
Where the Settlor has complex or unusual requirements, what is the best solution?
To instruct a solicitor to prepare the trust document.
What policies can be written in trust?
-any existing life assurance policy not already in trust or assigned to a third party
-any new policy, unless it is to be assigned to a third party
-any life assurance written as part of a pension scheme (usually under master discretionary trusts)
MWPA TRUSTS CAN ONLY BE USED AT OUTSET!!!!
When a life policy includes CIC, generally what kind of trust would be used?
Split trust.
Most policies (individual and small group schemes) are transferred to the medical underwriting process whereby the insured completes an application form. What does this form include?
-Personal details
-Medical History
-Occupation
-Lifestyle
etc.
Some short-term policies may apply a ________________ rather than full medical underwriting.
Alternatively, a short-term policy may simply exclude all pre-exisiting conditions.
Moratorium
What do typical moratoriums exclude?
Pre-existing conditions during the past 5 years.
Along with the info recorded on the application form, an underwriter may also require what?
-GP report or SAR (Subject Access Report)
-Paramedical (short medical q’s with basic tests)
-Medical Examination
-Additional health questionnaire
-Occupation or persuits questionnaire
-Health Screening (i.e. saliva/urine swabs & tests/hair testing).
Tele-underwriting has become increasingly popular, why is this?
It allows shorter application forms, faster underwriting and less non-disclosure.
Based on the info obtained through the application process the underwriter will either apply standard terms or apply ___________ terms.
Sometimes a more complex case may be passed to their ______________________________ (CMO) before making a decision.
1) Special
2) Chief Medical Officer (CMO)
What policies no longer offer WOP or the option to increase cover at standard rates without evidence of health?
Long-term insurance policies.
Under the Consumer Insurance Act 2012, if insurers want to know something, they must ask. In return, consumers must still tell the truth but a minor infringement will ______________________________________.
No longer invalidate the contract.
Insurer’s must only ask for _____________ medical evidence when a claim is being made. They may not ‘traul’ through customers medical records in the hope of uncovering medical ______________________.
1) Appropriate
2) Non-Disclosure
Intermediaries should never be party to non-disclosure. Why is this?
It is a criminal offence and a break of industry rules.
What is Terminal Illness Benefit (TIB)?
TIB is a rider or additional benefit address to a TA or WOL policy. TIB provides the SA payable if the life assured is diagnosed as suffering from an advanced or rapidly progressign, incurable and disabling terminal illness, where in the opinion of the life office, the life expectancy is less than 12 months.
Is TIB available as a seperate policy or does it have to be linked to TA/WOL?
It has to be linked, cannot be seperate.
Is TIB paid in addition to the death benefit of the plan it is linked to?
No
TIB can be added to TA but it will not usually apply in the last _____ months of the contract.
18 months.
If payment for TIB has been made and the life assured lives beyond the expiry date, does the payment have to be returned to the life office?
No.
Is TIB a chargeable event and is there any income tax liability?
TIB payment is not a chargeable event and so there is no income tax liability.
What is policy assignment?
An assignment is a transfer of ownership from one person to another. This happens frequently with life polciies and can be temporary or permenant. It can also confer an absolute or limited interest.
What are the various types of assignment?
-Absolute assignments (these include by way of sale and gift)
-Assignment by way of mortgage
-Assignment by operation (of law on bankruptcy)
-Assignment to trustees
Assignments can be made to a single asignee or joint asignees. If an assignment is made to 2 or more people, attention must be given as to how the joint asignees hold the property:
There are 2 basic types of joint ownership in the English law: Joint Tenancy and Tenancy in Common
What is a joint tenancy?
A joint tenancy is where, if one dies, their interest passes automatically to the survivor (s). On the death of the last survivor, the property passes to their legal personal representatives. Thus property held under a joint tenancy can be disposed of by Will only by the last surviving joint tenant.
What is Tenancy in Common?
Unlike a joint tenancy, on the death of a tenant in common, their interest passes to their estate and can thus be disposed of by Will. This would be rare for a joint life, first death policy to be held under a tenancy in common but it would mean that the SA would be payable partly to the survivor and partly to the estate of the deceased.
Many joint life, first death policies are held under a ________ _______________ by the two lives assured.
Joint Tenancy.
What is the Policies of Assurance Act 1867?
The Act regulates the assignment of life policies. It provides that any person becoming entitled by assignment to a life policy has the legal power to sue in their own name to recover monies payable. Therefore, an assignee can claim against the life office in their own name without involving the assignor.
What are the two different types of claims?
Maturity and death claims
What is a maturity claim?
When an endowment policy matures, it becomes the subject of a maturity claim. A maturity claim is the claim for which a policyholder/life insured can apply for after surviving the complete policy term.
On every maturity the offices form of discharge must be signed by who?
The person with legal title to the policy. If the policy has been assigned, the relevant DOA(s) will have to be produced.
For a trust policy, any deeds of appointment or retirement of trustees will have to be produced and all of the trustees will have to sign the discharge (if any trustees have died, their death cert will be required).
The office for maturity claims must deal with the person has legal power to sue, even if that person will not ultimately keep all of the payment. What is an example of this?
If the policy is mortgaged, the office must pay the mortgage, even if the amount of debt owed to them is less than the SA. If there is any balance left after the mortgage has been repaid, it is the duty of the mortgage to pay this to the mortgager.
Similarly, if a policy is under trust, the office must get the discharge of the trustees, as legal owners, even though they may pass the money to the beneficiaries.
What are death claims?
Usually initiated by the claimant or solicitors for the estate, who write to inform the office of the death. The life office will then obtain proof of death and then assess validity for the claim.
What will the claimant need to prove for a death claim?
The claimant will need to prove their title and a discharge form to be signed by the claimant. The format of this will be virtually the same as that used for maturity claims.
How is death proved?
Deaths in the UK are proven by an official death certificate. Only original death certificates should be accepted as proof of death. Where death occurs overseas, a death cert should be issued in the country in which death occurred.
What is presumption of death?
It sometimes occurs that a life assured disappears and there is no direct evidence of death. Disappearing is not the same as dying so caution should be used when exercising these claims.
Death may be able to be proved where there is no direct evidence by _______________ evidence.
What is an example of this?
1) Circumstantial evidence
2) Example: If it is alleged that the life assured died when an airliner in which they were a passenger crashed into sea, then proof could be adduced by the airlines written confirmation that the life was a passenger on the flight and that the plane did crash into the sea with the loss of those on board.
It is possible for the claimant to apply to the court for an order presuming death, if the life assured has been absent for ____ years.
7 years.
Note - In cases of disappearance, it is not always necessary to wait 7 years, the circumstances may be enough that the court reasonably finds that the life assured is dead.
Cause of death - Where death has occurred soon after the issue of the policy, the life office should pay heed to the possibility of _________________.
An office will usually only ______________ a claim for non-disclosure if it was deliberate or reckless and is related to the cause of death.
1) Non-Disclosure
2) Repudiate
Proof of title is required before a claim is made. There are two types of grants, what are these:
1) Grant of probate (where a valid will naming executors was left)
2)Grant of letters of administration (where no valid will was left)
How is proof of age proven?
Original birth certificate
Before the Suicide Act 1961, suicide committed voluntarily by a person of sound mind was a _________.
It is contrary to public policy for a person to benefit from their own criminal act and therefore, no legal claim could be made by the estate of a life assured who committed suicide while of sound mind.
1) Crime.
NOTE - This principle does not apply if the life assured commits suicide while lacking capacity.
Life offices prevent a claim from a person who has murdered another person on whose life they hold a policy.
This does not apply where the murderer lacks ___________ ______________.
The above rule also counts for _________________ where the death was an unintended consequence of a deliberate act.
1) Mental Capacity
2) Manslaughter
Lost policies - the loss of a policy document is not crucial as the document is not the contract itself. If it cannot be found, the office will ask the claimant to execute what?
The office will ask the claimant to execute a statutory declaration.
Surrenders & paid up policies - Surrenders are not strictly speaking claims, but the life office must treat them the same as regards to proof of __________.
Title.
If the policy is being surrendered by a mortgage, the countersignature of the mortgager is required, unless the mortgage confirms it is surrendering under its power of ________.
Sale.
Gender Recognition Act 2004 - Does the change of gender effect an existing policy?
No.
