Protection Flashcards
Why is insurance vital to wealth management?
Whlist most of wealth management is concerned with the accumulation of wealth, the loss of wealth is a very real issue that insurance / assurance addresses.
What are the main aims of life assurance?
1) Pay off debts (e.g. mortgages)
2) Coverings final / large costs (e.g. hospital bills, care costs & funerals)
3) Ensuring a certain standard of living
4) Assisting with paying IHT bills
What is a life office?
The firm who undertake the risk of insuring
Who is the proposer?
The person who applies for the policy
What is the sum assured?
The guarenteed amount to be paid on a valid claim
Who is the life assured?
The person whos life is covered by the policy
Who is the assured?
The person who contracts the life office to take out the policy
What is an insurable interest?
The interest that the assured has in the life assured
in theory anyone can take a policy out on anyone else so long as they have an insurable interest
What is a single life policy?
Pays out on the death of one person
What is a joint life policy
2 life assureds - pays out either on first death or second death
depends on policy type
What is loading?
protection
Charging higher premiums
What factors cause loading?
1) Age
2) Health
3) Occupation
What is insurance?
The transfer of risk from one individual to a group of individuals
What types of risks are unlikely to be insured
and what types of risks are insurance more focused on?
Won’t insure: High Impact & HIgh Frequency
Insurance is designed for: Low Frequency & HIgh Impact
What 5 areas did the Insurance Act 2015 aim to make more fair?
1) Duty of Disclosure
2) Test of Materiality
3) Remedies for Breach
4) Warranties & Conditions
5) Fraudulent Claims
What is duty of disclosure?
Insurance Act 2015
The insured no longer has a duty to provide ALL information - they must just not make a misrepresentation
What is test of materiality?
Insurance Act 2015
A test to see if the average person would realise information should be disclosed to an insurer
if an average person doesn’t realise then it is not material information
What is remedies for breach?
Insurance Act 2015
Rather than a breach writing the policy to 0 - it may only slightly reduce it now
depends on the breach
What is warranties and conditions?
Insurance Act 2015
A breach no longer voids the contract, instead it is suspended until the breach is remedied
What is fraudulent claims?
Insurance Act 2015
If a fraudulent claim is found - there are now statutory remedies for the insurer
Despite the Insurance Act 2015 - what two areas remain unfair?
1) Intermediaries Status
2) Insured’s Knowledge
Why is an intermediaries status still unfair?
A broker is seen as the agent of the insured - if the broker makes a mistake it will negatively affect the policy holder despite it not being their fault
Why is insured’s knowledge unfair?
If there is a breach, it may be unreasonable still, for instance technical knowledge was required that the insured did not have.
What are the most common attitude’s to protection insurance?
1) Think they don’t need it (when they do)
2) Overestimate the cover you have
3) Concerned insurance will not pay out
What are the 3 main drivers of life assurance sales?
1) Affordability
2) Dependants
3) Age (more likely to buy as you get older)
What are the 3 main types of life assurance policy?
1) Term Assurance
2) Whole of Life Assurance
3) Endowment Assurance
What is term assurance?
Policy only pays out if death of the life assured occurs during insurable term
What variations of term assurance are there?
1) Increasing
2) Decreasing
3) Level
4) Family Income Benefit
5) Renewable
6) Convertible
What is increasing / decreasing term assurance?
The sum assured decreases or increases throughout the life of the policy
What are the uses of level term assurance?
1) Interest only mortgage (liablity stays the same as capital is not being paid down)
2) Family Protection (if breadwinner dies - pays out)
What is renewable term assurance?
Term can be renewed (usually up until 65)
Without the need for health evidence
What happens to premiums when a term assurance is renewed
tend to increase to due older age
What is the main use of renewable term assurance?
1) Key person protection
May be key to a business now, but less so in future
What is decreasing term assurance, how do the premiums work?
The sum assured decreases over the life of the policy
Premiums do not decrease but are lower than comparable level assurance premiums
What is the primary use for decreasing term assurance
what is a special use for it
Primary use is for debt such as a mortgage where the liability is decreasing
A special form of decreasing term assurance is available to those who receive a PET that exceeds the NRB (due to the taper relief available over 7yrs)
“gift inter-vivos”
What is increasing term assurance and what is its main use?
Sum assured increases over time - the purpose is to offset the effects of inflation
How can the uplift of an increasing term assurance policy be calculated / based on?
inflation indexes (e.g. CPI/RPI)
Policy can renew every 5yrs with an increase in sum assured
What is a guaranteed insurability option
A type of increasing term assurance where sum assured greatly increases as life events happen
e.g. marriage or birth of child
What is the main difference between a term assurance policy & endownments + whole of life
There is not an investment element to term assurance policies
What is convertible term assurance?
A term assurance policy which can be converted into:
1) Whole of Life Assurance
2) Endowment Policies
When is convertible term assurance most commonly used?
When the need for whole life cover is there but cannot be afforded at present
What happens to premiums when a convertible term assurance is converted and why?
Increase due to the investment element
What is family income benefit?
Term assurance that pays out as a TAX FREE regular income as opposed to a lump sum
on a death within the term
What two forms can family income benefit come in?
Level or increasing
Who do beneficaries tend to be for Family Income Benefit?
Vulnerable clients
or young people
When is family income benefit most useful?
When need for protection is high but affordability is limited
What is endowment assurance?
Combines elements of protection insurance with elements of investment
Why did endowment assurance get a bad name?
Sold as protection for interest only mortgages - despite the fact that sum assured could decrease and not cover mortgage liability
still sold, but usually without the “endowment name” due to the bad rep it has
What are the 5 main types of endowment policies?
1) non-profit
2) with profit
3) low cost
4) low start
5) unit linked
What is a non-profit full endowment?
Guarentees fixed sum (no more no less)
usually monthly premiums
usually 10-25yr term
not used often as they are expensive
What is a with profit full endowment?
Guarentees a fixed amount with the added benefit of bonuses added reguarly and on death
Bonuses are linked to investment performane but sum assured is fixed
bonuses are not guarenteed (called market value adjustments MVA)
What are with profit endowment bonuses called?
MVAs - Market Value Adjustments
What is a low cost endowment
Has two sums assured
1) Death Benefit
2) Endowment sum assured (lower than death benefit)
bonuses added to endowment sum assured based on investment performance
What is paid on maturity of a low cost endowment
Endowment sum assured + any bonuses
Why did low cost endowments cause problems for mortgage cover?
Often surrendered early due to moving house - the endowment sum assured did not cover the mortgage
they were often heavily reliant on the terminal bonus to cover the full cost needed
What is the key selling point of a low cost endowment
Cheaper than a full endowment
What is a low start endowment
The initial premiums are lower - allowing for a greater ability to invest/save
Premiums increase over time (usually after 5-10yrs)
part of premium is invested for MVAs
Who are
What is the major difference between term assurance and endowments?
Endowments pay out on maturity however term assurance does not pay of the policy matures.
Why are premiums more expensive on endowments than term assurance
Endowments guarantee a payout without the policy holder dying
What is whole of life assurance?
A life assurance policy that does not have a term
So long as premiums are paid - the life assured is covered for life
As whole of life assurance is guarenteed to pay out, what does this mean?
assuming premiums are paid
Premiums are higher than level term assurance
What is a non-profit whole of life policy
How do the premiums work?
Guarenteed sum assured (usually relatively small)
no investment / bonus
Premiums are level
What caveat do non-profit whole of life policies usually come with?
must hold the policy for at least 2 years before it will pay out
What is a with profit whole of life policy?
Whole life assurance policy with sum assured + bonus linked to investment performance of life office
What types of bonuses are added to with profit whole of life policies?
Regular Annual Bonuses
Terminal Bonus
What is a terminal bonus?
A bonus that is paid during the claim phase of a policy
What is makes the bonuses in with-profit whole of life policies attractive?
Once added to the sum assured cannot be removed (under most circumstances)
mostly cannot be removed
Under what circumstance can a bonus be removed from a with profit whole of life policy?
If the policy holder attempts to surrender their bond early (particuarly during a time of market downturn)
This is called an MVR (Market Value Reducer)
Why are MVRs applied?
As bonuses are paid from surplus - this surplus decreases during market decline
Cashing out is unfair to the rest of the policy holders in the fund
some life offices have MVR limits or MVR free windows
What is a low cost whole of life policy?
Combines whole life coverage with a decreasing term assurance
How does a low cost whole of life policy work
Guarenteed sum assured that grows with bonuses
Decreasing term which falls over time
How do low cost whole of life policies compare to others
Premiums are lower
due to decerasing term + reliance on investment perforance + small surrender value
surrender value based only on with profits element
