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
