R05 Flashcards
For which events are insurance policies most effective?
Insurance policies are most effective against low frequency, high impact events, e.g., a family home burning down
Is insurance appropriate for high frequency, high impact events?
Insurance for these types of events will be highly expensive or simply unavailable. This type of risk is best ‘managed’ as opposed to insured
What is a common misconception that insurance policyholders have?
A lot of policyholders overestimate the amount/term of their existing cover and don’t appreciate the gap between what they have versus what they need
Give examples of reasons people give for buying insurance
Part of financial planning
Bought with mortgage
Death/illness of close friend
Life event
Persuaded by adviser/salesperson
Provided by employers
Give examples of reasons people give for not buying insurance
Don’t need it
No mortgage or dependents
Employers provides cover
Prefer to use money for other things
Don’t know how to
Too expensive
According to a 2014 report, why are consumers often not willing to use a financial adviser?
A lack of trust in the adviser
Consumers highlighted concerns about whether the service was unbiased and whether it was good value for money in terms of commission or fees
Name the main drivers of sales of life insurance products
On an individual level, the demand for life assurance is driven by the income, age and life stage of the person
The overall demand for life assurance is driven by affordability, the housing market and income per capita
What is the ‘protection gap’, and what is the current estimate in the UK?
Describes the difference between the amount of cover needed compared with what people actually have, i.e., it is ‘the shortfall in the amount of cover necessary to maintain the current living standards of dependents’
Resources needed – cover already in place = protection gap
Why does a buoyant housing market lead to increased sales of protection policies?
An increase in the amount of house purchases increases demand for mortgage protection via life and critical illness packages
By contrast, increased renters leads to lower protection needs
What is the difference between morbidity and mortality?
Morbidity is defined as the relative incidence of a particular illness, whereas mortality is concerned with life expectancy (death)
How might improved longevity and mortality create protection issues?
This has the effect of creating an ageing population
Creates concerns over the cost of longevity (pensions and long-term care), usually plans have ended when mortgage paid off and close to retirement, but retirement is becoming more flexible and lasting longer
Can insurers offer different premium rates for males and females?
Since 2012, insurers are no longer able to charge different premiums depending on gender
For which events are insurance policies most effective?
Insurance policies are most effective against low frequency, high impact events, e.g., a family home burning down
Is insurance appropriate for high frequency, high impact events?
Insurance for these types of events will be highly expensive or simply unavailable. This type of risk is best ‘managed’ as opposed to insured
What is a common misconception that insurance policyholders have?
A lot of policyholders overestimate the amount/term of their existing cover and don’t appreciate the gap between what they have versus what they need
Give examples of reasons people give for buying insurance
Part of financial planning
Bought with mortgage
Death/illness of close friend
Life event
Persuaded by adviser/salesperson
Provided by employers
Give examples of reasons people give for not buying insurance
Don’t need it need
No mortgage or dependents
Employers provides cover
Prefer to use money for other things
Don’t know how to
Too expensive
According to a 2014 report, why are consumers often not willing to use a financial adviser?
A lack of trust in the adviser
Consumers highlighted concerns about whether the service was unbiased and whether it was good value for money in terms of commission or fees
What is a preferred life policy?
These types of policies offer better rates to applicants who meet strict lifestyle, health and fitness criteria, e.g., are non-smoker and a habitual exerciser
How have trends in underwriting changed the protection market over time?
Improved life expectancy leads to competitive premiums and aggressive underwriting. Life offices are rating more lives and create different groups in their portfolio of insured lives
‘Super-select’ lives pay low premiums and provide a low margin whereas higher premiums are paid by those with health concerns
How has commoditisation changed insurance markets?
Insurance policies are treated like a commodity with many price comparison websites making it easy for consumers to compare policies.
Puts pressure on companies to offer their best possible price.
Why might it be valuable to purchase protection through an adviser?
Advisers can undertake a needs analysis and arrange appropriate features and levels of cover for the client, and if necessary, place the policy in trust.
What is life assurance?
Usually provides a lump sum on the death of life assured
What is income protection insurance (IP)?
Provides a regular income when insured is unable to work through illness or incapacity
What is critical illness cover (CIC)?
Provides a lump sum on diagnosis of critical illness specified in policy
What is long-term care insurance (LTCI)?
Provides cover towards costs of long-term care in old age
What is mortgage payment protection insurance (MPPI)?
Provides regular income to cover mortgage costs if unable to work through illness, accident, incapacity, redundancy or unemployment
What is payment protection insurance (PPI)?
Provides regular income to cover loan or credit card repayments if the insured is unable to work due to illness, accident, redundancy or unemployment
What is personal accident and sickness insurance (PAS)?
Provides a lump sum or regular income if the insured suffers an accident or falls ill
What is accident, sickness and unemployment insurance (ASU)?
Provides a lump sum or regular income if the insured suffers an accident or is unable to work due to sickness, sickness or unemployment
What is private medical insurance (PMI)?
Provides cover towards costs of private medical treatment
What are health cash plans?
Provides small lump sums for some medical treatments on a per day basis for hospital stays
Name some of the main areas of need of protection?
Health, incapacity, accident
Income, mortgage, and other debt
Death
Asset protection
Business protection
Name 2 types of insurance that can help reduce the effects of being off work through accident or illness
Income protection
Accident, sickness and unemployment insurance (ASU)
What might be an appropriate insurance for a single person with no dependents who is buying their first home?
Income protection – it is essential that income is protected in the event of illness so that committed spending e.g., mortgage payments can continue
Why might a high-earning individual need some form of life cover?
Those with financial dependents, e.g., children or a non-earning spouse, need life cover to replace their income in the event of their death.
This is usually a concern if one partner is a high earner providing most household income.
For 2021, how much is the nil rate band with respect to IHT? And what about the residency nil rate band?
£325,000 NRB
£175,000 RNRB
At what point is the residency nil rate band reduced?
RNRB is withdrawn at a rate of £1 for every £2 the net estate exceeds £2m
Which transfers are classed as potentially exempt transfers (PETs), and what is the IHT treatment?
If an individual makes a lifetime gift to another individual or to an absolute/bare trust or a disabled person’s trust, this is a PET
Free from IHT if the donor survives 7 years from making the gift, otherwise there is a charge of 40% if its value exceeds the available NRB – the recipient pays tax liability
What is a chargeable lifetime transfer (CLT), and what is the IHT treatment?
If an individual makes a lifetime gift to a discretionary or interest in possession trust, this is a CLT
Tax is charged at the lifetime rate of 20% when gift is made if it exceeds the available NRB. On death of the donor within 7 years, further tax might be due
What is the purpose of key person insurance?
It enables a business to continue to function in the event of the owner/key worker being unable to work due to death or illness.
Can take form of life assurance, critical illness or income protection.
Harry pays £400,000 into a discretionary trust in December 2020. How much IHT is due at the time of transfer?
£15,000
What should advisers conduct in order to determine a client’s assets and liabilities?
Advisers should conduct a fact-find so they can meet the regulator’s ‘know your customer requirement’ and establish the appropriate protection needs for each client
What are the 2 main sources of financial protection?
The State – benefits provided are unlikely to be enough to live on - should still be taken into account as may reduce shortfall.
Employer – benefits could be provided such as sick pay, life cover (death in service), CIC, pensions, PMI.
What are 2 positives and negatives of an employer-provided benefit?
Positives: Employers pay some or all of the cost and the employer may negotiate better terms and cheaper premiums.
Negatives: the benefit will cease if the employee leaves and the employer may withdraw or reduce the benefit at any time.
How can State provisions affect private provision of financial protection?
The provision of state benefits may reduce the need for private provision for some people.
For others, the low benefits and strict eligibility criteria highlight the need to make additional private provision.
Explain the difference between a contributory and non-contributory State benefit
A contributory benefit is only paid to those who have made a certain amount of National Insurance contributions (NICs), whereas a non-contributory benefit does not depend on NICs.
What bereavement benefits are currently provided by the State?
Bereavement Support Payment (introduced 2017)
Paid as a lump sum, followed by 18 monthly installments, with higher amounts for those with dependent children. It does not stop if claimant remarries or start cohabiting.
Paid tax free and not included in assessment of benefit income for the purposes of the benefit cap or income-based benefits.
What 3 benefits did the Bereavement Support Payment replace?
The Bereavement Payment
The Bereavement Allowance
The Widowed Parent’s Allowance
What are the main income-related State benefits?
Income Support
Jobseeker’s Allowance (JSA)
Statutory Sick Pay (SSP)
Employment and Support Allowance (ESA)
Who is not normally eligible for income-related benefits?
Unavailable where capital is over £16,000 and are reduced by £1 per week for every £250 of savings over £6,000.
Is inclusive of partner’s income/capital (applies to all means-tested and income-based benefits).
Who qualifies for Income Support?
Must be between 16 and SPA and also; not be in full-time study, have a low income, work less than 16 hours a week and not receiving JSA or ESA.
Also available to a lone parent with a child under 5 and some carers.
Means tested but is not usually taxable (unless claimant is on strike/involved in trade dispute).
What is Jobseeker’s Allowance?
Benefit for those actively seeking employment. Claimants must be between 16 and SPA, not in full-time study and fit/available to work
For how long is contributions-based JSA paid?
Contributions-based JSA is based on NICs record but claimants are entitled to income-based JSA if still unemployed after 6 months and NIC record insufficient.
It is not means tested (but only payable for 6 months).
Both forms of JSA are taxable.
When is Statutory Sick Pay (SSP) used?
Employees who earn enough to pay Class 1 NICs usually receive SSP if unable to work due to sickness for four or more consecutive days.
Not means-tested and is paid by the employer for up to 28 weeks (thereafter claim ESA).
Taxable as income and must also pay Class 1 NICs on the payments.
What is Employment Support Allowance (ESA)?
A benefit paid to people unable to work due to illness or disability and has the aim of returning people to work.
What are the two phases of ESA?
Assessment phase and main phase
Employees enter assessment stage when SSP ceases after 28 weeks, whereas self-employed people enter after 3 days of sickness.
During the 13-week assessment phase of ESA, what must claimants do?
Claimants must complete questionnaire and attend assessment centre, then the work capability assessment splits people into:
Support group (unable to work)
Work-related activity group (must engage with work focused interviews)
What are the main disability-related benefits?
Personal Independence Payment (PIP)
Disability Living Allowance (DLA)
Attendance Allowance
Carer’s Allowance
Describe the Personal Independence Payment (PIP)
Replaced DLA for eligible working people between 16 and SPA.
PIP includes a daily living component and a mobility component.
Claimants must have difficulty with ADLs or mobility that has lasted for 3 months and expected to last for 9 more.
It is tax free, not means-tested and not based on NIC record.
What is the purpose of Attendance Allowance and who is eligible?
Payable to those over SPA and have been suffering from a severe disability for a period of 6 months or longer (although not available when in NHS hospital)
It is not taxable, not means-tested and not based on NIC record (plus usually ignored for income support/ JSA claims)
What is Carer’s Allowance?
Benefit for people under SPA caring for someone severely disabled who receives DLA, PIP or Attendance Allowance.
Carer must not have earnings above £132 pw or be in full-time education
Taxable.
What is the main benefit for people responsible for a child under the age of 16?
Child Benefit
Payable if responsible for a child under 16 or under 20 in approved education/training.
What are the characteristics of Child Benefits?
It is non-contributory, is not means-tested and is tax free
A new claim can be back-dated 3 months
Entitlement to Child Benefit is not affected by any other benefits received by the claimant
What is the high-income child benefit charge?
If a claimant or their partner has an adjusted net income in excess of £50,000, there is a tax charge of 1% of the amount of Child Benefit for every £100 in excess of £50,000.
Therefore, if adjusted net income exceeds £60,000 the charge wipes out the benefits.
What is the Working Tax Credit (WTC)?
A top-up payment for workers on low incomes, including those who do not have children.
Payable to over 16’s with children or have a disability while working over 16 hours a week and over 25’s without children working at least 30 hours.
How does the State provide help with housing costs?
Where claimant is renting their home, they can claim housing benefit (means-tested)
Homeowners with a mortgage can seek help through Support for Mortgage Interest (SMI) (means-tested)
What factors determine how much Housing Benefit a claimant can receive?
Age of claimant – single people with no children under 35 receive cost of room in shared house
Location – private sector rent is limited to average cost of cheapest 30% accommodation in area
Level of rent – payments include service charges but not utility bills
Under what circumstances is an individual automatically entitled to Housing Benefit?
If an individual already receives income based JSA/ESA or State pension guarantee credit they will automatically be entitled to Housing Benefit.
However, could be restricted by benefit cap.
What does SMI cover?
It is a means-tested loan to help people pay their mortgage (interest only)
Pays a standardised rate of 2.09% on first £200,000 of mortgage and a 39-week waiting period before claim approved
If in receipt of pension credit, only the first £100,00 of mortgage is covered
Name all the benefits that Universal Credit replaces
Income support
Income-based JSA
Income-based ESA
Housing benefit
Child Tax Credit
Working Tax Credit
Who does the benefit cap apply to?
Applies to those aged 16-64 and is the maximum amount of benefit entitlement per household
How does the new State Pension work?
Now based on an individual’s NI record. Must have 35 years’ NI contributions/credits for full pension entitlement and 10 years to qualify
Benefit is taxable, not means-tested and not affected if in receipt of other benefits
What are the 2 components of State Pension credit?
Guarantee Credit
Savings Credit
What is the difference between whole of life assurance and term assurance?
Whole of life policies pay out a lump sum on death whenever that occurs, whereas term assurance pays out a lump sum on death only if death occurs during the term of the policy
Outline a unit-linked WoL policy and the 3 types of cover possible
Unit linked policies combine life cover and investment
Maximum cover plan – premium guaranteed for initial term then reviewed upwards in line with age
Standard cover – premium set so that it does not need to increase
Guaranteed cover (non-profit) – no investment element, guaranteed level of cover for guaranteed premium, may have surrender value
What are funeral plans?
Plans marketed to over 50’s. Offer low premiums and a low sum assured but requires simplified underwriting
First 12 or 24 months of policy, benefit only payable on accidental death, otherwise premiums returned
Not good value but appeal as they are simple and guarantee acceptance
What are the features of an investment bond?
Single premium, non-qualifying, whole of life policies designed primarily as investments
What are the 3 main types of investment bonds?
Standard unit linked or with-profit bonds
Guaranteed income bonds
Guaranteed growth bonds
What is the difference between increasing and decreasing term assurance?
Increasing term assurance - the sum assured increases during the policy term by either a fixed amount or in-line with inflation
Decreasing term assurance – sum assured falls each year in pre-determined way to £0
Give 3 examples of decreasing term assurance
Mortgage protection assurance – s/a decreases each year in-line with outstanding mortgage value
Family income benefit (FIB) – s/a is expressed as amount payable each year to the family, from death until policy ends
Gift inter vivos– s/a decreased in-line with IHT payable on a potentially exempt transfer (PET)
What is a Term 100 policy?
A type of term assurance policy written to age 100, can be used as alternative to a WoL policy
Often a cheaper alternative, however, must consider the possibility of surviving past 100
What is convertible term assurance?
A term assurance policy can be converted to a WoL policy at any point during the term without the need for further medical evidence
What is a relevant life policy (RLP)?
A type of term assurance bought by employers to pay out death in service benefits to employees’ dependents
RLPs don’t form part of employee’s annual or lifetime pension allowance
What is a joint life second death assurance policy?
Where life cover is provided for both parties, but is used where a lump sum is only needed on death of the second person (e.g., for an IHT liability that may arise on the second death)
When first spouse/CP dies the policy simply continues
Write under trust to avoid IHT
Give an example of a capital need and an income need that life assurance can cover?
Capital needs – repaying mortgage, debts, emergency fund and any IHT liability
Income needs – support family or business after death of breadwinner
Each of these can be viewed as short and long term needs
Why would using a death-in-service benefit such as life assurance to repay a mortgage on death be a risk?
The death-in-service cover is likely to be lost if employee leaves voluntarily or otherwise
What are some of the main factors that determine the choice of insurance?
Purpose of policy
Whether investment is required
What can client afford to spend/is able to spend
The desirability of guaranteed or flexible premiums
How is the level premium system used to calculate premiums?
Level premium is charged throughout duration of policy, this is more than is needed at a younger age but builds a reserve to be drawn on in older age
Meaning that claims made at an early date are subsidised by policies where a claim is made at a later date or not at all
What system did the level premium system replace?
Natural premium system
Why are premium loadings added to actual premiums?
Designed to cover life office expenses, e.g., salaries of employees, rent costs of offices and administrations costs
Also account for higher than expected mortality, building a safety margin within the reserve
When do life offices impose frequency loading?
If premiums are paid more frequently than once a year, frequency loading is added
What are the 3 parties to a trust?
The settlor who sets up the trust
The trustees who manage the trust assets
The beneficiaries who benefit from the trust
What are the advantages of writing a life policy in trust?
Do not have to wait for probate
Proceeds may not be subject to IHT (in addition, premiums likely to fall into an IHT exemption)
Benefits of the policy are distributed as per wishes of settlor without need of a will
Better protection against creditors if settlor becomes bankrupt
Outline an absolute/bare trust
The beneficiary has an absolute right to the income and capital held in trust and the trustees have no discretion in the handling of trust assets
Beneficiaries are stated upfront and cannot be changed
Gifts into absolute trusts are PETs
Outline an interest in possession trust
The settlor specifies a list of beneficiaries/ potential beneficiaries and nominates one or more of them to have an interest in possession
If no other action is taken, these beneficiaries will receive the trust proceeds
Gifts into interest in possession trusts are CLTs
Outline a discretionary trust
Where trustees have the power of appointment to choose beneficiaries from a class/es of potential beneficiaries
Gifts into discretionary trusts are CLTs
Is it recommended for advisers to be appointed as trustees to a client’s trust?
Financial advisers should not be trustees to a trust whereby the settlor is a client due to the conflicts of interest that may become present
What can be used if a life policy contains CIC, but the owner wants the policy in trust?
If a life policy contains CIC, a split trust could be used
This enables the settlor to benefit from CIC payment, but any life payment will be administered to beneficiaries via the trust
What policies can be written in trust?
Existing life assurance policies
Any new policy unless it’s assigned to a third party
Any life assurance written as part of pension scheme
What details are usually included in an application needed for medical underwriting?
Personal details including age
Current state of health
Medical history
Occupation and any hazardous pursuits
Lifestyle
What is moratorium underwriting?
Short term policies may apply moratorium basis instead of full medical underwriting
This excludes pre-existing medical conditions during past 5 years for 2 years
What evidence might an underwriter require from applicants, in addition to information on their application?
GP report
Data subject access requests (DSARs)
Paramedical
Medical examination
Additional health questionnaire
Occupation or pursuits questionnaire
Health screening
What is the difference between a medical examination and a health screening?
A medical examination is performed by GP or insurer’s GP
Health screening in ‘non-evasive’ tests such as saliva swabs or urine tests. These types of tests are often cheaper and don’t require a GP
What is the difference between ‘big T tele-underwriting’ and ‘little t underwriting’?
Big T – few questions on application form, most questions asked on phone
Little t – most questions on application form with a few supplementary questions asked over the phone
Tele-underwriting leads to shorter applications, faster underwriting and less non-disclosure
Who does GDPR apply to?
Controllers and processors
Controller says how and why personal data is processed and the processor acts on the controller’s behalf
What was the purpose of the Data Protection Act 2018?
Outlines how GDPR applies in the UK
List the 6 data protection principles under GDPR
Personal data should be:
Processed lawfully, fairly and transparently
Collected for specified, explicit and legitimate purposes
Adequate, relevant and limited to what’s necessary
Accurate and kept up to date
Kept in a way that only allows identification of data subject for as long as necessary
Securely processed
What are the GDPR rules regarding consent?
Must be freely given by the data subject via a specific, informed and unambiguous indication of the individual’s wishes
Need positive opt in, consent cannot be inferred from silence, pre ticked boxes or inactivity
How long does a life office have to respond to a data subject access request (DSAR)?
Under GDPR, individuals have the right to access their personal data
Generally, organisations have one month but can be up to two months in some circumstances
What is usually the main difference between long-term and short-term life policies?
Full medical underwriting is usually found in longer-term policies therefore higher premiums being charged
Whereas short-term policies usually simply exclude pre-existing conditions
What was the purpose of the Consumer Insurance (Disclosure and Representations) Act 2012?
It removed the duty on consumers to disclose any facts that a prudent underwriter would consider material, and replaces this with a duty to take reasonable care not to make a misrepresentation
If insurer wants to know something they now must ask
What did the Insurance Act 2015 introduce?
Outlined changes to the duty of disclosure in commercial insurance contracts and insurers’ remedies for fraudulent claims
What is a terminal illness benefit (TIB) and what types of policies is it added to?
An additional benefit added to term or WoL policies
Pays out when life assured diagnosed with terminal illness and has a life expectancy of less than 12 months
Not available as a separate policy and is not paid in addition to sum assured
Is a terminal illness payment a chargeable event?
No income tax or CGT liability on payment but will be part of estate if not written under trust and the money has not been spent by the time of death
What is meant by assignment of a life policy?
The transfer of ownership from one person to another
Assignments can be temporary or permanent
Types include: absolute (sale or gift), mortgage, bankruptcy and to trustees
What is the difference between a joint tenancy and a tenancy in common?
Under a joint tenancy, if one of the joint tenants dies, their interest passes automatically to the surviving tenant
Under a tenancy in common arrangement, the death of a tenant results in their share passing to their estate and can therefore be distributed as per their will
What 3 forms can non-disclosure take? And what is the outcome for each on the policyholder?
Reasonable – claim still paid in full
Carless – a proportionate remedy is applied
Deliberate – insurer can void the policy from inception
What act regulates the assignment of life policies?
Policies of Assurance Act 1867
Act allows assignee to sue in their own name to receive policy proceeds, therefore do not need to involve the assignor
Does acknowledgement of an assignment confirm proof of title?
Life office must acknowledge receipt of notice, but this does not confirm proof of title – only the deed itself does this
What is meant by constructive notice with regard to assigning a life policy?
This occurs where the assurer might have reason to suspect that assignment has taken place even though no express or implied notice has been given
For example, where A is paying the premiums on B’s policy
How is the assignment of a life policy achieved?
The life policy must be assigned in writing – deed of assignment is usual method; however, it can also be done by exchange of letters with proof of payment
If there was a claim on a mortgaged policy, who would the life office pay?
The mortgagee
What are the 2 types of claim on a life policy?
Maturity and death claims
Explain the process of a maturity claim
Life office contacts policyholder to remind them of the maturity date, state the amount payable, list the requirements for payment (e.g., proof of title) and enclose relevant form of discharge
If policy under trust – all trustees must sign discharge form, if any trustees have died, their death certificate is required
Explain the process of a death claim
When a life office is informed about the death of a policyholder, the life office will search for the policy, obtain date of death and confirm the amount payable
Under the Presumption of Death Act 2013, how long must someone have been missing to apply to the court for an order presuming death?
7 years
If a life policy is lost, what can life office ask the claimant to execute?
Statutory declaration
Claimant must state how it was lost and confirm it has not been assigned or charged
Claim can then be paid if the claimant signs an indemnity against any losses the life office makes by paying out without seeing the policy document
What does the FCA require life offices do if a policyholder wishes to surrender a policy?
To make sure that endowment policyholders who are made aware of the other options available, e.g., the customer could sell the policy on the traded market instead of surrendering
What happens when a policy is ‘paid-up’?
Alternative option to surrendering policy
Client pays no further premiums, and the contract remains in force for a lower sum assured
This is only available on policies with an underlying value – ‘pure’ protection contracts therefore do not qualify
Gains from what type of policies are taxable?
Gains from a ‘qualifying’ policy are never taxable
Gains from ‘non-qualifying’ are potentially subject to higher and additional rates of income tax
Offshore policies could be fully taxable
What is the annual premium limit for qualifying life policies?
For policies taken out from 6th April 2013, the £3,600 rule applies
What are the main types of qualifying policies?
Temporary insurance exceeding 10 years
Temporary insurance less than 10 years
Whole life
Endowment
What are the main conditions of a qualifying life policy?
Premiums must be payable regularly
Minimum 10-year term
Total premiums payable in any one year must not exceed twice the total premiums in any other year or 1/8 of the total premiums payable over the whole term
Maximum premium of £3,600 per annum
Sum assured on death must not be less than 75% of total premiums payable
What is the 75% rule?
Relates to the minimum required life cover
The capital sum on death must be not less than 75% of the premiums that would be payable if death were to occur on the life assured’s 75th birthday
How does the 75% rule apply differently to joint life first and second death policies?
It is the 75th birthday for the older life under a joint life first death policy
It is the 75th birthday for the younger life under a joint life second death policy
What are the maximum premiums under friendly society plans?
Maximum monthly premium of £25 or an annual maximum of £270
The premiums count towards annual £3,600 allowance
How if the life fund of a UK insurer taxed?
The fund suffers tax equivalent to 20% on both income and capital gains within the fund (UK dividends and overseas dividends are exempt from tax)
As a result, basic rate tax is deemed to have been paid within the fund therefore basic rate taxpayer has no further liability, but a non-taxpayer cannot reclaim the tax
What is the main advantage of opting for an offshore life fund?
Funds usually established in countries with little or no tax on the income and gains of underlying fund allowing fund to benefit from gross roll-up
However, tax is due on the full amount of the gain (no 20% tax credit within fund)
What are restricted relief qualifying policies (RRQPs)?
A qualifying policy that will not have full tax relief when a chargeable event occurs
What are the chargeable events of a non-qualifying policy?
Death
Maturity
Full encashment and some partial surrenders
Assignment for money or money’s worth
Is an assignment into trust a chargeable event?
No – if no consideration if received
What is the main type of non-qualifying insurance policy?
Investment/ insurance bond
These are single premium (lump sum investments)
What’s the main reason why a qualifying policy becomes non-qualifying?
It is cancelled within the lesser of 10 years or ¾ of the term
What is the 5% withdrawal rule on an investment bond?
It is possible to withdraw 5% of the original investment without incurring an immediate tax charge – this can be done each year
If a bond is written under trust, who is taxed on any gain if the settlor is dead, and trustees are not UK resident?
A UK beneficiary who is receiving a benefit under the trust
What tax is usually payable on maturity of a qualifying secondhand policy?
Capital gains tax
How will an insurer treat a claim where there has been a reckless misrepresentation of a material fact?
The insurer has the option to void the policy from inception
When is there an IHT liability on an estate?
IHT on death is normally payable at 40% on the amount over the deceased’s available nil rate band
When does the 36% rate of IHT apply?
If the deceased bequests at least 10% of their net estate to a registered charity
Net estate = taxable estate after deducting NRB but before taking charity donation into account
What exemptions are available for IHT purposes?
Transfers between legal spouses/civil partners
Gifts to charities
Gifts in consideration of marriage
Annual exemption of £3,000
Small gift exemption of £250
Gifts out of normal expenditure
When does lifetime IHT become payable on a CLT and who pays the tax?
Tax may be immediately payable on a CLT if the total of CLTs in a 7-year period exceeds the current NRB. Donor or recipient can pay the tax:
Recipient pays – charge 20% on excess of NRB
Donor pays – charge 25% on excess over NRB
What size of wedding gift is exempt from IHT?
£5,000 from each parent
£2,500 from each grandparent
£1,000 from anyone else
What are the intestacy rules where a deceased leaves a spouse but no children?
Spouse inherits everything
What are the intestacy rules where a deceased leaves a spouse and children?
The spouse inherits jointly held property, personal chattels, the first £270,000 of any excess and half of the amount over this – children inherit the balance
What is a deed of variation?
When a person inherits property through a will or intestacy, they can vary the terms of the will or the intestacy by executing a deed of variation –allows beneficiaries to change the distribution of the estate
Must be signed by all parties adversely affected
What can income protection (IP) also be known as?
Permanent health insurance (PHI) – because IP is a permanent policy and does not need renewing each year. The insurer cannot cancel the policy or increase premiums, even if more than one claim is made, as long as premiums are maintained
What is the purpose of IP?
It is a long-term policy that pays out a regular monthly income when the insured is unable to work because of a long-term illness or incapacity
Who can take out an IP policy and when do they typically cease?
An individual can take out policy anytime between 18-60 and they tend to end around planned retirement date
What are the standard deferred periods for an IP policy?
Most common deferred period are 4,13,26,52 weeks
Typically plans with a shorter deferred period are more expensive
What is the typical benefit level of IP as a percentage of ‘pre-claim’ income?
Usually 50-60% for individual policies
Up to 75% for group policies
How does a ‘back to day one’ IP policy work?
The policy does not pay a benefit until a specified period, e.g., 2 weeks of continuous sickness, has elapsed, but when the policy does pay out it is backdated to the first day of illness
Generally used by self-employed
What are the 3 typical definitions of incapacity used by insurers?
Own occupation – policy pays out if individual can’t perform their current role
Suited occupation – policy pays out if individual can’t perform a similar role
Any occupation – policy pays out if individual can’t perform any role/occupation
Some insurers include a rehabilitation or proportionate benefit clause in their policies, what does mean?
Rehabilitation benefit – proportionately reduced benefit that aims to make up the difference due to less hours or different job
Proportionate benefit – similar to above but provides reduced benefit equivalent to reduction in earnings compared to 12 months prior to incapacity
Why might an individual want an increasable IP policy?
To offset inflation risk
What does a waiver of premiums (WOP) allow the insured to do?
It covers the payment of premiums
If the policyholder of an IP plan suffers an accident or becomes ill and as a result is not working – the insurance company waives the premiums at the level, they were being paid
Why is a group IP benefit usually limited to around 75% of earnings?
To encourage the claimant to return to work speedily
What is the underwriter of IP policies mainly concerned with?
Concerned with morbidity – as they are looking at the chances of being too ill to work as opposed to the chances of dying
Chances of becoming ill significantly higher than the chance of dying
Name the main factors that affect premium rates?
Age
Health
Smoking status
Occupation
Hobbies/ pursuits
Deferred period
Can premiums charged for IP be based on gender?
Since December 2012, premiums cannot be based on gender
What are the 4 occupation classes that rates can be based on for IP?
Class 1 – managerial, executive, administrative and professional workers
Class 2 – shop workers, skilled light manual workers in non-hazardous jobs, catering
Class 3 – skilled workers in non-hazardous manual jobs
Class 4 – skilled workers in hazardous jobs
Which premiums tend to be more expensive – guaranteed or reviewable?
Guaranteed – premiums remain constant throughout life of contract
Reviewable – insurer increases premiums based on the insurer’s claim history
Guaranteed premiums tend to be significantly higher (certain policyholders like the certainty set premiums)
Benefits are only payable if the claimant was within areas known as?
Free limits
If the insurance expects a claimant to never recover from their incapacity, what can they offer?
A commuted lump sum instead of paying the benefit on a regular basis
Why does group IP usually have a deferral period of 26 weeks?
To match the Statutory Sick Pay Period of 28 weeks
Are benefit payments under IP liable to tax?
Individual IP policies pay benefits free of tax
Benefits from a group IP schemes are subject to income tax and NICs under the PAYE system. This type of policy is not a benefit-in-kind for the employee
What is critical illness cover (CIC)?
CIC pays a lump sum on diagnosis of a number of specified illnesses, e.g., heart attack
What is the purpose of the ABI Guide to Minimum Standards for Critical Illness Cover?
Sets out standards that insurers must adopt in order for policies to be listed as CIC. Standards include: a common format for the way CIC is described to buyers, use of common generic terms and the use of model wordings
NB. The previous ABI Statement of Best Practice on Critical Illness included a list of core conditions the policies should cover
What is an ‘accelerated payment’ under a combined life and CIC policy?
If CIC is added to a life assurance contract and the individual claims under the CIC policy, it is effectively an accelerated death payment during the lifetime of the individual, instead of the sum assured on death
What type of trust is suited to a combined CIC and life assurance policy?
Split trust
This allows the policyholder to receive any CIC benefit, while the life assurance cover benefit is payable to the beneficiaries
What is the typical survival period for a CIC policy?
14-30 days
CIC policies often come with children cover, what does this mean?
Provides an additional sum assured payable on the diagnosis of a critical illness in the child of the policyholder (subject to survival period)
It is underwriting-free and normally pays out either a set amount or percentage of the sum assured
Outline the life cover buy-back option of a CIC and life assurance policy?
Usually once the policyholder suffers a critical illness the policy pays out and the plan ceases; however, they could have an even greater need for life cover
Buy-back options allow a restricted amount of life cover to be taken out without further medical underwriting
Outline a total permanent disability option of a CIC policy?
Acts as a ‘catch-all’
Although the condition the claimant has is not specified in the policy conditions, the standard of the insured’s life is so poor that they are not able to live a ‘normal life’ again and so the policy pays out
Name 5 of the most commonly covered critical illnesses
Cancer
Kidney failure
Heart attacks
Stroke
Loss of limbs
Major organ transplant
Multiple sclerosis
What is a CIC underwriter concerned with?
Morbidity is primary factor along with medical history and family history
Expenses and investment are less important
When must a CIC claim be submitted and who is responsible for ‘proving’ the claim?
The onus is on the policyholder to prove the claim they should inform the life office ASAP after falling ill
What do life offices have to check once they receive a claim?
That the policy covers the diagnosed illness
That it was not a pre-existing medical condition
That the policyholder has disclosed everything that was relevant to the policy
If a life office discovers that deliberate/reckless misrepresentations were made on the policy, what can they do?
If the customer knew the information was misleading, then the insurer can refuse to pay all claims and can sometimes retain the premiums paid
What typically requires more underwiring – an individual plan or a group plan?
Individual policies
What is the tax treatment of an individual CIC policy?
There is no income tax liability on payment of the sum assured nor is it subject to capital gains tax
If CIC premiums are paid by the employer, is this a taxable benefit?
Yes, the employee is liable to benefit-in-kind tax on the cost of the premiums paid by the employer
For many people, why might IP be a higher priority than CIC?
Typically, IP covers more conditions and replaces the claimant’s income which they are heavily reliant on
How does severity-based cover work for a CIC policy?
A type of plan that normally covers many more illnesses. Pays out a proportion of the sum assured on diagnosis and then adds additional payments when/if the illness progresses
Becoming increasingly common due to advancements in healthcare and medicine
When is long-term care required?
When a person becomes ill or suffers a disability that makes them unable to carry out activities of daily living (ADLs)
Usually caused by aging or chronic medical conditions
When is the NHS responsible for meeting the full costs of care?
NHS responsible for meeting the full cost of care in care homes only for those whose primary need for being in care is health-based
What are 2 main forms of State benefit provided for long-term care?
Attendance Allowance and NHS funded nursing care
With respect to means-testing for long-term care, what is the personal expense allowance (PEA)?
Local authorities perform means-testing to assess the amount of assistance
When assessing the individual’s level of contribution, they must leave them with money to cover some of their own personal expenses, known as PEA (currently £27.19 per week)
Can people transfer assets so they are ignored for the purposes of means-testing?
The deprivation of assets rule aims to stop people from giving away assets in order to qualify for State help
The most important factor to conclude whether deprivation has occurred is the motivation/intention of the individual
What are the different types of long-term care?
Family care
Professional care
Care at home
Care in a care home
Sheltered housing, extra-care housing and close care
What is an immediate needs plan and when is it used?
A long-term care planning vehicle
If an individual is in poor health and needs care ASAP, they can buy a single premium (lump sum) policy that begins paying for care immediately
What is a pre-funded care plan?
A long-term care planning vehicle
Where an individual pays a regular premium or lump sum to purchase future care
What are the 2 main forms of equity release in the UK?
Lifetime mortgages and home reversion plans
What are the 2 interest options under a lifetime mortgage?
Interest only – interest of the mortgage is repaid throughout the lifetime of mortgage and original amount is paid when home is sold upon death
Roll-up – no interest is due while individual remains in the property. However, on death or entry into residential care, interest and lump sum must be repaid
At what age are home reversion plans available?
Only available to individuals over 60
How can an individual meet their own care costs?
Savings and pensions can be built up over time to meet future care costs
Capital assets can also be sold, e.g., property
What is personal accident and sickness insurance (PAS)?
A policy that pays out to replace earnings if policyholder is unable to work due to sickness or an accident. It is a basic form of insurance and most contracts are annual (or shorter)
Available as a standalone policy or as a bolt-on
What are the common areas that PAS policies cover?
Death
Permanent disablement
Loss of an eye
Loss of a leg, foot or toe
Loss of an arm, hand, finger or thumb
PAS policies usually have which 2 additional benefits?
Medical expenses
Weekly sickness benefit
What is the tax treatment of group PAS?
If the employer pays the premiums, the payments will be subject to income tax under PAYE and the cost of premium to the employer is an allowable business expense
Private medical insurance (PMI) is largely aimed at what type of conditions?
Acute conditions – those that occur rapidly and it’s usually possible to cure in a relatively short time
Name examples of what PMI can fund
Medical practitioner fees
Investigation
Treatment
Accommodation costs
Why might a customer choose a comprehensive plan over a budget plan?
Comprehensive plans usually have a longer claim period, with higher limits and often a wider choice of hospitals
Extras such as home nursing and private ambulances are included
What affect does a high excess have on the price of premiums for PMI?
Policies that have a high excess have lower premiums
Why does PMI not usually cover chronic long-term illnesses?
They are long-lasting and usually not curable so therefore treatment might not be right, instead long-term care insurance might be more appropriate
If a PMI policy is written on a moratorium basis, what does this mean?
Instead of fully underwriting the policy, a moratorium basis can be used. Meaning that medical conditions the customer has suffered during the previous 5 years before the start of the policy are excluded for a period of 2 years
What are the 3 main types of PMI plans?
Basic plans
Standard plans
Comprehensive plans
Outline the tax treatment of individual PMI policies?
Payments are tax free and there is no tax relief on premiums
Outline the tax treatment of group PMI policies
If employer pays the premiums, this will be classed as a benefit-in-kind for the employee. Premium payments are also subject to employer’s NICs, but the premiums are deductible business expense for corporation tax purposes
Mortgage payment protection insurance pays a monthly benefit if insured is unable to work for what 3 reasons?
Sickness
Accident or disability
Involuntary unemployment
What is the typical deferral period and benefit payment period under MPPI?
Provides a monthly benefit to maintain mortgage payments for up to 12, 18 or 24 months (either linked to mortgage payments, percentage of salary or fixed amount)
Deferred period is typically 30-60 days
What is another common name for accident, sickness and unemployment (ASU) insurance?
Short term income protection (STIP)
What are the similarities and differences between MPPI and ASU?
Similarities: benefits paid for a maximum of 2 years, also a similar deferred period of 30-60 days and have similar exclusions
Differences: the insured benefit is not limited to mortgage payments and a possibility of lump sum benefit for events such as loss of sight
Outline the taxation of ASU
Individual policies – benefit payments are tax free and there is no tax relief on premiums
Group policies – benefits are paid tax free, but the premiums paid by employer are a benefit-in-kind to the employee
Can PPI be sold at the same time as the loan sale to which it relates?
Rules changed in April 2012 which prevent PPI from being sold in the vast majority of cases until the later of seven days after the loan sale, or once a personal illustration has been provided
What is the purpose of protection planning and what is often the starting point for advisers?
Main aim of protection planning is to provide sufficient income to cover client’s needs in the event of death, disability, involuntary unemployment
Create a cash flow statement to provide the basis of what expenditure is required to support the income once held of the insured
Why is a client’s level of capital resources important in protection planning?
It might affect their eligibility for means-tested State benefits
Value and liquidity of capital is important in order to make sure it’s enough/feasible to be used for protection purposes
For which type of protection products is a client’s attitude to risk usually more important?
For any contract that has an investment element, e.g., unit-linked or with-profit life assurance
It is less important for pure protection policies
Why might PMI be a high priority for many individuals?
Allows clients to receive treatment when they need/want it, rather than waiting for treatment under the NHS
Additional benefits such as private hospitals, ambulances and medical centres
Clients who travel overseas regularly
What is the difference between independent and restricted advice?
Independent advice considers the whole market including all products and providers and often requires a number of different quotes from providers – finding the most suitable for the client
Restricted advice is either based on the products provided from a singular provider or a range of providers
What is the free asset ratio of a life office?
A life office’s free asset ratio is its surplus assets over the value of liabilities, expressed as a percentage of total assets
A high free asset ratio is a strength indicator and shows capacity for growth by investing surplus assets in writing new business
What is key person insurance?
A form of business protection, where the company takes out insurance on an employee who is crucial to the profitability of the business e.g., top salesperson
What are the 2 methods of calculating the amount of cover needed under key person insurance?
Multiple of salary
Proportion of profits
What is the tax position for key person insurance?
No specific legislation – depends on the particulars of the plan
The rules for achieving tax relief are usually as follows:
Relief given on most term assurance policies
If tax relief given on premiums, benefits are usually taxed
Tax relief not normally given on premiums of other policies as they are treated as building a capital value e.g., CIC
What is share protection insurance?
Business protection that ensures funds are available for those who wish to buy a deceased shareholder’s share from their estate
What are the 3 main ways that shareholder protection can be arranged?
Buy-and-sell agreement
Cross-option agreement
Automatic accrual
What is a buy-and-sell agreement?
The surviving shareholders must purchase the shares from the deceased’s heirs based on a market valuation
Main disadvantage is that business property relief for IHT purposes is lost
What is a cross-option agreement?
This is not binding unlike a buy-and-sell agreement. The surviving partners have the option (within specified time period) to buy shares from deceased’s heirs
Consequently, business property relief for IHT is not lost
