Practice Test 7 - Laurie & Danielle

Question 1

Explain to Laurie and Danielle the potential benefits of receiving and acting on advice from a qualified financial adviser.

Answer 1

• Identify goals/shortfalls/problems/objectives.
• Assess attitude to risk/capacity for loss.
• Budgeting/affordability/cash flow.
• Analyse suitability of existing arrangements/analyse client circumstances.
• Tax planning/use of tax allowances/tax efficiency.
• Benefit from research.
• Receive recommendations/implement a financial plan.
• Ongoing service/reviews.
• Professional/expert knowledge.
• Clarity of explanation/aids customer understanding.
• Regulated advice/consumer protection.

Question 2

State the additional information you would require to advise Laurie and Danielle in respect of their aim to make financial provision for their children’s future university education.

Answer 2

• Amount required/current costs.
• Assumed inflation rate.
• Affordability/budget.
• Inheritances expected/help from grandparents/family.
• Plans to use student loans/bursaries/children to work.
• Funding method/lump sums or regular.
• Capacity for loss.
• Ethical preferences.
• Trustee involvement in bare trust/investment decision making/who are the trustees.
• Amount settled into the trust.
• Entitlement of beneficiaries i.e. their share.
• Underlying investments in the trust/charges.
• Priority of this aim.
• Any more children planned.
• Use of protection products.
• Ownership/control of investments.
• Use of ISAs/JISAs/other tax-free products.

Question 3

Laurie is considering the structure of his business. Outline the benefits of Laurie:
remaining self-employed;

Answer 3

Self-employed
• Profits not in public domain/kept private.
• Simplicity/less administration.
• Lower costs/National Insurance contributions.
• All profits can be used for mortgage lending purposes/pension contributions.

Question 4

Laurie is considering the structure of his business. Outline the benefits of Laurie:
incorporating his business.

Answer 4

Limited Company
• Limited liability/protection from creditors.
• Company benefits could be available, for example private medical insurance, death-in-service.
• Lower tax/National Insurance contributions.
• Flexible remuneration structure/dividends.
• Can adjust income to regain child benefit.
• Increased pension contributions/company can make pension contributions.

Question 5

Comment on the adequacy of Laurie and Danielle’s existing protection arrangements.

Answer 5

• Mortgage protection policy covers mortgage on death.
• Whole of life cover is inappropriate.
• This is a plan used to mitigate Inheritance Tax but they do not appear to have a liability/there is no justification for the level of cover/not in trust/second death basis is inappropriate.
• Laurie is the breadwinner.
• Insufficient life cover for child care costs/income replacement.
• No waiver of premium on existing policies.
• Laurie has/they have no income protection insurance cover/protection against long-term sickness.
• Laurie has/they have no critical illness cover.
• Laurie has/they have no private medical insurance cover.
• State benefit entitlement is unlikely to be sufficient/likely to be minimal.
• Wills appear to be suitable or appropriate.

Question 6

Recommend and justify a suitable policy to protect the family’s standard of living, in the event of Laurie becoming unable to work in the long term due to accident or sickness. Assume Laurie remains self-employed.

Answer 6

• Income protection insurance policy.
• Benefit is tax-free/main breadwinner.
• 50 - 75%/maximum.
• To replace income/maintain standard of living.
• Own occupation.
• Written to age 60, 65 or on retirement.
• To provide widest cover.
• Deferred period of four weeks or shortest possible.
• Due to minimal savings or no other income.
• Indexed benefit.
• To keep pace with inflation.
• Unlimited number of claims can be made/not cancellable by insurer/permanent cover.
• Guaranteed premiums.
• Known cost or affordability.

Question 7

Explain briefly how a debt consolidation loan could help Laurie and Danielle to improve their financial position.

Answer 7

• Lower interest rates.
• Reduced monthly payments/increase disposable income.
• One payment only.
• Easier administration/less paperwork.
• Savings could be used for other financial objectives.

Question 8

State the potential drawbacks that Laurie and Danielle should be made aware of if they apply for a debt consolidation loan.

Answer 8

• Loan may be secured against home.
• May be tempted to run up further debts in the future.
• Fees.
• May pay back more in total or term can be longer.
• May be declined.

Question 9

Comment on the suitability of Laurie and Danielle’s current mortgage repayment strategy.

Answer 9

• Guaranteed repayment of debt if payments maintained.
• Meets attitude to risk.
• Term finished prior to retirement.
• May be penalty to withdraw.
• Known costs for four or five years.
• Full repayment on death.
• No income protection policy or accident, sickness and unemployment cover.
• No cover on critical illness.