Practice Test 11 - Mark & Penny

Question 1

State the additional information an adviser would require to advise Mark and Penny on their aim to ensure they are financially secure in the event of death or
serious illness.

Answer 1

• Affordability/expenditure.
• Smoker status/family health history.
• Any other debts?
• Is Whole of Life plan in trust?
• Any inheritances expected/use of other assets?
• Has Mark completed any nominations?
• Potential costs of school fees.
• Term of cover.
• Wills?

Question 2

State the factors an adviser should take into account when formulating a plan to
pay for their children’s private education costs.

Answer 2

• Cost of fees currently/expected growth in school fees/school fees inflation.
• Duration of fees.
• Expected investment returns.
• Affordability/expenditure/priority.
• Tax efficiency/whose name for tax efficiency/use of allowances.
• Ethical.
• Attitude to risk/Capacity of loss.
• Inheritances expected/family assistance/use of other assets/value of ISA.
• Protection to cover fees.
• Bursaries/scholarships available.

Question 3

Describe the process an adviser should use to determine the risk profile of Mark
and Penny when using a computer‐based model.

Answer 3

• Both;
• to complete a risk profile questionnaire.
• Focuses on timescales/priorities/circumstances/performs separate for each objective.
• Capacity for loss.
• Generates a risk score.
• Score provides an asset allocation.
• Provides further discussion with clients.
• Adviser/client agrees a suitable risk profile.

Question 4

State three benefits and three drawbacks of using each of the following options to repay Mark and Penny’s mortgage:
making increased monthly payments directly into their interest only mortgage.

Answer 4

Benefits
• Could repay early/reduce term /loan is reduced/increased equity.
• Reduces risk/no investment risk.
• Interest savings.

Drawbacks
• Reduces disposable income/lack of liquidity.
• Penalties/restriction on amount.
• No possible investment growth.

Question 5

State three benefits and three drawbacks of using each of the following options to repay Mark and Penny’s mortgage:
continuing to make regular payments into Mark’s stocks and shares ISA to generate a lump sum to repay the mortgage.

Answer 5

Benefits
• Tax free returns.
• Flexibility of contribution/withdrawals.
• Potential for growth/could repay mortgage early.
• Can invest to match attitude to risk.

Drawbacks
• May spend money.
• Shortfall/investment risk/may not repay mortgage.
• ISA allowance not available for other purposes.

Question 6

State three benefits and three drawbacks of using each of the following options to repay Mark and Penny’s mortgage:
increasing pension contributions to generate a lump sum to repay their mortgage.

Answer 6

Benefits
• Potential for growth.
• Tax relief at 20%/40%.
• Tax efficient fund/underlying fund.

Drawbacks
• Only 25% available tax free/high funding level.
• Money can only be drawn from age 55/57.
• Shortfall/investment risk/may not repay mortgage.

Question 7

Recommend and justify a suitable product that meets the family’s protection needs to cover the death of either Mark or Penny, whilst the children are still financially dependent.

Answer 7

• Lifetime allowance/Whole of Life/family income benefit (FIB).
• Joint life first death/2 x single lives.
• To maintain standard of living/repay mortgage/pay for childcare.
• Min £360,000/4 x Marks income.
• Min term 18 years (i.e. suitable term for children’s dependency only).
• To cover children’s dependency.
• To include escalation/indexation.
• To offset effects of inflation.
• Waiver of Premium
• To ensure payments maintained in the event of illness/disability.
• Guaranteed premium.
• Known cost.
• In trust.
• Speedy payment/to be kept out of estate/money passes to intended beneficiaries.

Question 8

Describe how Mark’s unit‐linked whole of life plan operates and why it may
be unsuitable in his circumstances.

Answer 8

• Units are cancelled to pay for cover.
• Premiums are reviewed every 10/5 years.
• Policy has investment element.
• So long as premiums maintained it is guaranteed to pay out.
• At review can keep the premium the same but cover may reduce.
• Maximum/minimum balanced basis.
• Surrender value.
• Expensive.
• Premiums may increase/may become unaffordable/provide poor value.
• Insufficient amount/only on Mark’s life.

Question 9

Identify five benefits of Mark being a member of his employer’s private medical insurance scheme.

Answer 9

Benefits
• Mark’s cover paid for by employer/cheaper than personal policy.
• Quicker treatment/return to work early.
• Choice of hospital/consultant/NHS cash benefit.
• Mark’s family are covered/cheaper than stand alone policies.
• Better underwriting terms/more favourable.