Pt 2. Serving the Retail Consumer - Protection

Question 1

What factors are individual needs influenced by?

Answer 1

1. Age
2. Dependents
3. Income
4. Financial liabilities
5. Employment status
6. Existing cover

Question 2

What are protection needs by age?

Answer 2

Mid 20s to 40s - face largest protection needs by having a dependent (partner/children), with family growing so does protection needs - mortgages, death/ill-health, accident/divorce, redundancy etc.

Mid 40s - Investment and pension needs increase as children become independent.

Mid 50s - Investment for retirement income now a priority, but protection still required in case of death/ill-health or accident.

Retirement - concern to maximise income wohtout undue risk, protection focused on health care/ long-term care, IHT may also be needed.

Question 3

What are the protection needs for adult dependents?

Answer 3

• Life protection for elderly or disabled dependent.
• For spouse raising a family, period may vary on depending on desire or need to work again, and ability to obtain employment.

Question 4

When are the protection needs for dependent children?

Answer 4

• Reviewed at birth, adoption or acquisition of children via marriage, but also on premature death of child.
• Differs between children, but some estimate will need to be made at an early age, preferably with flexibility to vary this as necessary.

Question 5

Why may dependancies change?

Answer 5

• A married person may become single due to death or divorce.
• Divorcee or widow may remarry, responsible for 2 families children.
• Couples may have children at an advanced age.

Question 6

How to determine level of death cover?

Answer 6

Estimated by taking multiple of income less any state benefits, pension scheme beenfits and cost savings arising from death to a factor of 10.

Question 7

How to determine level of ill-health cover?

Answer 7

Calculated as a percentage of current earnings less benefits from other sources (state or employer).

Most insurers limit max. ill health benefits between 50% - 70% of earnings to allow fact individual insurance benefits are not subject to income tax and NI – limiting moral hazard of individual getting more income than would by working.

Question 8

How can current income determine extent client can afford to pay protection required?

Answer 8

• Substantial protection needs, but no spare income pay required protection.
• Judgement made as to desirability of paying for protection needs than currenterms of expenditure.
• Insufficient spare income to meet all protection needs, with needs prioritised and choice made accordingly.
• A compromise may need to be made to balance desire to provide long-term protection and cost.

Question 9

What financial liabilities need to be assessed for protection needs?

Answer 9

• Mortgages
• Bank loans
• Credit cards
• Any other loans and hire purchase
• Normal living expenses
• Taxes (e.g. income tax, CGT, IHT)

Regular expenses is deducted from income to ascertain how much spare money is available to pay for protection needs.

Question 10

What is the benefit of whole of life policy written in trust for heirs?

Answer 10

• This policy can be used to pay inheritance tax, and allow property to be kept in tact to avoid loan being taken out of estates assets as security to pay loan, or sell the asset to repay loan.
• Heirs may wish to take out a protection policy to pay it incase they die before it is paid, savings their family and heirs a reduction in IHT and standard of living.

Question 11

Why does an individuals employment status need to be taken into account for protection needs?

Answer 11

• Employees companies are likely to have protection benefits, e.g. provision of ongoing pay in event of ill-health, lump sum beenfit in event of death plus State benefits.
• Unemployed and retired individuals unlikely to be entitled to benefits, except those provided State and policies funded by themselves.

Question 12

Why may business owners have a variety of additional protection issues?

Answer 12

• They are their own employers, so may wish to provide life assurance and income protection for themselves.
• Responsible for creating income for business, own family and dependents so wish to have private medical insurance cover ensure quick treatment of any health issues so can return to work.
• With a number of business protection issues to cover, e.g. key person insurance, allows business to continue to operate in event of death/incapacity, and/or director share purchase or partnership protection to ensure families receive a fair value for business in event of death/incapacity.

Question 13

Why does existing cover need to be accounted for?

Answer 13

• This would be a breach in suitable advice rules if identified.

Provided by:

• existing insurances
• lump-sum benefits from private pension
• an employer (e.g. sick pay or lump-sum death benefits)
• the State (e.g. Bereavement Support Payment, Statutory Sick Pay, Employment & Support Allowance (ESA))

Question 14

What are the 7 stages of a personal finance life cycle model?

Answer 14

1. Childhood
2. Young single
3. Young partnered
4. Starting a family
5. Family with older children
6. Post-family or pre-retirement
7. Retirement

Question 15

What are the 3 retirement categories?

Answer 15

1. Low pension, little capital
2. Relatively low pension, some capital
3. Sufficient pension income, substantial capital.

Question 16

What is term assurance?

Answer 16

This pays a lump sum on death of life assured.

• Ploicy offers life assurance only, with no savings element; so no surrender value if policy is cancelled early.
• Offers cheapest way to purchase life assurance where need for cover to last only for certain length of time.
• The client decides on no. of years for which they require life cover, level of cover, age and selects term of contract quoting premium to be paid monthly or annually.
• Older life assured, longer policy term and higher the premium.

Question 17

What cover does term assurance provide?

Answer 17

• If life assured dies during term, life office pays sum assured under policy.
• If life assured survives until end of policy term, so there is no premiums to office, amd no payment from office in form of maturity or survival value.

Question 18

What is a level term assurance?

Answer 18

This offers a level sum assured in return for a level premium throughout the term of the contract.

Question 19

What is a decreasing term assurance?

Answer 19

• These policies are designed to meet needs of individuals with decreasing liability on death such as those with loans gradually being repaid.
• Individuals with capital and interest repayment mortgage use variation on type of plan, a profile that matches way in which outstanding liability reduces - Mortgage Protection Insurance.
• Amount of loan constantly being reduced by borrower through term, so sum assured under policy also reduces.
• Premium level remains same throughout term of contract.
• Premium for DTA lower than LTA with same initial sum assured as amount of cover reduces overtime.

Question 20

What are family income benefit policies?

Answer 20

• A special form of DTA, whereby on death of life assured, the life office makes a series of regular annual or monthly payments instead of one lump-sum payment.
• For £10,000 benefit per annum over 20 years
• Death in 2 years means pay £10,000 per annum for 18 years.
• Death in 6 years means pay £10,000 per annum, only over 14 years.

Question 21

What is increasable term assurance?

Answer 21

• Provides for sum assured to be increased regularly over term of contract (5%per annum) without evidence life assured is in good health, or offers option for policyholder to make such increases.
• Life office will offer higher premiums, and will increase as sum assured increases.
• Policies ensure life assurance maintains value in real terms against inflation.

Question 22

What is a convertible term assurance?

Answer 22

• Allows policyholder to change term policy into endowment policy or whole of life with up to same sum assured at any time before end of term of original policy.
• Feature used for policy holders need for additional savings (convert to endowment) or LT protection (convert to whole of life).

Question 23

What is a renewable term assurance?

Answer 23

• Allows client to effect term assurance policy for 3-5 years at end of which client has guaranteed right to effect a similar policy for similar term, without providing evidence for good health.
• Short inital terms mean premiums are low, with guaranteed ability to renew means client is not left without life assurance at end of term.
• Premium rates increase with age each time a new policy is taken out under option.

Question 24

What are endowment policies?

Answer 24

Pay a lump sum on death of life assured but policies are primarily savings vehicles

• Option of providing critical illness cover at same level as death benefit at extra cost.
• Usually not suitable as means of providing significant level fo life cover, where clients budget is limited.
• Bulk savings, little relative life cover.
• Low cost endownment products, once used in home purchase have higher life cover, lower savings element.

Question 25

What are whole of life policies?

Answer 25

• Primarily geared to providing substantial level of life cover, with element of investment - balance dependent on policy type.
• Provide cover for lifetime of assured, most holders paying a fixed regular premium for 1 of 3 main types.
• Can be written on joint life last survivior basis, used as protection allowing heirs pay IHT without reducing overall estate.

Question 26

Name 3 types of whole of life policies:

Answer 26

1. Non-profit - guarantees to pay a fixed amount of life cover on death of life insured, but may accumulate a surrender value but likely to be low.
2. With-profit - guarantees to pay minimum level amount of life cover on death of life assured, with amount increasing annually by addition of annual bonus, although not guaranteed.

• Final (terminal) bonus paid on death can increase level of payout substantially.

3. Flexible - the policyholder chooses between a minimum and maximum level of life cover, seelcted at outset changed within limits at any time.

• Every month life office calculates cost of cover for the next month, and deducts charge by cancelling enough policyholder units to pay for it.
• Policy grows in value through unit accumulation, with investment growth depending on how much is being deducted to pay for cover and any other optional benefits.

Question 27

Why are flexible whole of life policies reviewed initially after 10 years, and then every 5 years?

Answer 27

• Level of £20,000 and then deduction from units pay for cost of cover will be very low by selecting minimum cover option - investment element likely to grow faster.
• Level of £300,000 of max. life cover means deduction to meet cost will be high, so policy will not increase in value as quickly.
• If high levels of cover are selected, there may be insufficient units in policy to sustain cover allowing policyholder to:

1. Increase level of regular premium to meet cost of cover.
2. Decrease the level of cover.

Question 28

What is income protection (IP)?

Answer 28

Designed to replace lost income for an individual who due to illness or accidnet is unable to work.

• Benefits do not start unless or until insured is unable to work longer than their deferred period.
• Deferred period range from 4-52 weeks, with lower premiums the longer the deferral period.
• Usually matures when insured is expected to retire.
• Benefits are exempt from income tax, and limited to 50-60% or maybe 75% for some.
• Restrictions provide an incentive for claimants to return to work to prevent after effects from accident/illness to unusally continue.

Question 29

What is a permanent health insurance (PHI) policy?

Answer 29

Once an insurer has issued the contract, it cannot cancel it as long as premiums continue to be paid, no matter how many times or how long claims are made.

• Main exception is non-disclosure, insured not release info of pre-exisiting condition.
• Underwriting based on length of morbidity.

Question 30

What are the difference between personal accident and sickness insurance and income protection?

Answer 30

1. In addition to regular benefit PASI may pay a one off lump sum if injury causes reduced standard of living.
2. Period of time for which policy will pay benefits, a max of 1-2 years only, compared to retirement age for IP.
3. Deferred period is likely short for PASI 1-14 days than at least 4 weeks for IP.
4. Likelihood to accept a greater range of occupations under PASI than IP who refuse more dangerous occupations.
5. For PASI, the regular benefit is likely to be a fixed sum, than % of policy earnings for IP.
6. For PASI, the insurers has the right to cancel if claims have been high, unlike IP.

Question 31

What is an ASU?

Answer 31

• Accident, sickness and unemployment cover.
• Annual policy with a maximum payout period of 1-2 years.
• Premiums more expensive than PASI due to unemployment cover, but still less than IP.

Question 32

What is critical illness cover?

Answer 32

This policy will pay a lump sum benefit on diagnosis of one specified list of illnesses or on permanent total disability of insured before age 65.

Every provider will include:

• heart attack
• stroke
• cancer
• surgery for coronary artery disease
• major organ transplant
• kidney failure/transplant
• MS
• paralysis
• blindness

Question 33

What is the difference between CI polices and income protection contracts?

Answer 33

• Pay a lump sum opposed to regular income.
• Payment made on diagnosis for specified illness only, regardless if illness prevents life insured working, but IP only pay benefits if insured is unable to work.
• This can be provided by standalone policies or incorporated in whole life, term or endowment policies.

Question 34

What are the specific uses of CI cover?

Answer 34

• Provision of private health care or treatment, but limited to capital availbale (excluding LT hospital treatment).
• Alterations to insureds home.
• Purchase of special medical equipment to make insureds quality of life more bearable.
• Income replacement.
• Repayment of mortgages and other loans.

Question 35

Why may reviewable critical illness cover be better?

Answer 35

• Considered cheaper than guaranteed ones, reviewed every 5-10 years, based on geenral advances in medical science at the time.
• This is not based on individual circumstances or insured’s health.

Question 36

What is private medical insurance?

Answer 36

This gives insurers a choice in the care they receive, who may pick up the costs of most inpatient treatments, day care surgery, and some extend to outpatient treatments.

• Purchased on a full medical underwiting basis.

Question 37

What will private medical insurance not cover?

Answer 37

1. Treatments clients know they are already going to need at application stage.
2. Pre-existing conditions
3. Treatments for chronic medical conditions
4. Some exclude certain types of treaments such as outpatient treatments, routine treatments, dental care or experimental treatments.
5. Exclude routine pregnancy, HIV, fertility treatment, mental or psychiartic conditions, and elective treatments such as cosmetic surgery.

Question 38

What is long term care insurance (LTCI)?

Answer 38

• To fund older clients receive they care they need to cope with daily activities, such as washing, dressing, or eating.

Question 39

2 types of long term care insurance (LTCI)

Answer 39

1. Immediate care LTCI - bought with lump sum when care is needed, and plan pays out regular income for rest of clients life used to pay for care.

• Cost depends on amount of income wanted, assessed medically to see payment requirements.

2. Pre-funded LTCI - bought in advance at any age in case care is needed in the future, in return for payment of regular or single premium, they will payout a regular sum if needed care in the future.

• Money paid out is tax free.

Question 40

What is payment protection insurance?

Answer 40

A policy that pays benefits if insured person is made redundant usually available inc connection with mortgages and loans.

• Used to meet debts regular monthly payments.
• For those with above likelihood of being made redundant.
• Max. payment period 1-2 years.

Question 41

What is a mortgage payment protection insurance (MPPI)?

Answer 41

• Contain minimum standards laid down by UK Finance and Association of British Insurers (ABI).

All policies:

1. Provide accident, sickness and unemployment cover.
2. Pay out after max. 60 days off work.
3. Cover for no less than 12 months
4. Pay out to self employed who have informed HMRC involuntarily ceased trading, and registered for ESA (Employment & Support Allowance).

• Offer mix and match benefits according to needs.
• Those temp. unemployed can suspend until they return to work.
• Can be cancelled or withdrawn by provider at min. of 90 days notice or amended at 30 days notice.
• Relatively expensive.
• Protect mortgage payments, and cover premiums of mortgage-related policies.