READ THROUGH 4.4.6 AGAIN . Chapter 4 - (8 MARKS) Life Assurance Flashcards
What are policyholders of insurance contracts also known as?
The policy holder
The assured
The proposer
They apply for the insurance and in the vast majority of cases pay the premiums (not always tho)
They can also be the same person as the life assured but this is also not the case in every situation. For example, for business protection
What is Terminal illness benefit?
It is a rider benefit, mainly used with life assurance policies
It can never be taken out as a separate policy
Enables the life assurance cover to be paid ‘in advance of death’ rather than only once death has occurred. In other words, if the life assured is diagnosed with an incurable disease and has less than 12 months to live, the life assurance cover will pay out because of this benefit. If they didn’t have the benefit the policy would not pay out.
Think of it as being an “accelerated death benefit”
What happens after Terminal Illness benefit is used?
What happens if they survive? Do they need to pay back the benefit?
What is the latest time that the benefit can be added to the policy.
Once payment has been made, the life assurance policy will cease.
If the individual does not die within 12 months, no refund will be required.
It cannot be added in the last 18 months of any policy with a term.
What are the positives/negatives of the rider benefit ‘Terminal Illness benefit’ ?
Positives:
The benefits can be used for any purpose so the life assured has a chance to do anything they want, like tick off experiences from their bucket list.
Negatives:
The individual may be too ill to actually make use of the benefits
What are the tax liabilities, if any, of the rider benefit “Terminal Illness Benefit”
The payment from this benefit is income tax-free.
It is also free from IHT but will then form part of the estate of the deceased, so may increase the IHT liability on their death.
A life assurance policy can be set up in several different ways. This could be on an own-life basis, life of another, joint-life first or second (survivor) death. Let’s look at each of these one by one.
Tell own life/single life
When is it typically used and what are the benefits are this arrangement
Give an example
Own life/single life:
Where the assured/policy holder and life assured are the same person.
It is mainly used for ‘personal protection’ needs ( in other words, it is mainly used to provide financial wellbeing to a person’s dependents by paying off personal debts, providing an income etc- which are all personal stuff and NOT business stuff )
For example: it will be commonly used where a couple have different requirements and wish to meet those needs. In this case, a suitable trust would be used, with the cover in trust for the benefit of the survivor.
Real life example:
John and Jane are a couple: Each takes out an own-life policy.
John: Takes out a policy worth $500,000.
Jane: Takes out a policy worth $300,000.
(John and Jane have different needs. John may be the main breadwinner so a increased benefits is needed for Jane if he dies. Likewise, Jane may be a homemaker so John will need to pay for the care for their children to continue work. Because this is not as detrimental for the couple, when compared to John’s lost income, the couple chose that John should have a higher sum assured upon his death.
John’s policy: Placed in a trust for Jane’s benefit.
Jane’s policy: Placed in a trust for John’s benefit.
Scenario:
John passes away: The $500,000 from John’s policy goes directly into the trust set up for Jane. Jane can access this money according to the terms specified in the trust deed, helping her manage financially after John’s death.
John and Jane’s Trust Setup:
John: Takes out a life assurance policy
Trust Deed: John establishes a trust deed, specifying that the policy payout is to be managed by the trustees for the benefit of Jane and their children.
Trustees: John appoints Jane and a trusted family friend as trustees.
Beneficiaries: Jane and their two children are named as the beneficiaries.
Instructions: The trust deed might state that upon John’s death, $X should be paid directly to Jane, $X should be used to pay off the mortgage, and the remaining $X should be held and distributed to the children upon reaching certain milestones (e.g., college tuition) and be used for their care.
By placing it in trust outside from the estate
What are the benefits of placing a life assurance policy in trust
A single life assurance policy in trust is a very common arrangement that couples use
The payout is directed to the trust rather than being paid directly to the estate of the deceased.
This can have several benefits:
Avoiding Probate:
Since the payout goes directly to the trust, it bypasses the probate process, which can be lengthy and complicated.
Tax Efficiency:
The payout may be excluded from the insured’s estate for inheritance tax purposes, potentially reducing the tax burden.
Control:
The settlor can specify how and when the beneficiaries receive the money, providing more control over the distribution.
Protection Against Creditors:
Assets in a trust may be protected from creditors’ claims against the deceased’s estate.
A life assurance policy can be set up in several different ways. This could be on an own-life basis, life of another, joint-life first or second (survivor) death. Let’s look at each of these one by one.
Tell me about life of another
When is it typically used and what are the benefits are this arrangement
Give an example
This is where the assured and life assured are not the same. This is most commonly used in business protection and certain family situations
Example of it being used for business protection:
If Richard Branson dies, Virgin’s profits and share price are likely to suffer, and a replacement would need to be found, which could take time. Virgin ‘the company’ therefore have insurable interest in Richard Branson. A’ life of another’ life assurance policy could be taken out, with Virgin as the policy holder and Richard as the life assured, to cover the decrease in profits on his death.
Example of it being used in a family situation:
A couple have divorced and one ex-spouse pays maintenance to the other, who is mainly responsible for bringing up their children. This ex-spouse would have insurable interest in the one paying maintenance, and could take out a policy as the assured, with the maintenance payer as the life assured…
RECAP:
Life assurance on an ‘own life basis’ is commonly used WHAT?
Life assurance on a ‘life of another’ basis is commonly used for WHAT?
Life assurance on a joint life first death basis is used for WHAT?
Life assurance on a joint life second death basis is used for WHAT?
Life assurance on an ‘own life basis’ is commonly used for personal protection needs
Life assurance on a ‘life of another’ basis is commonly used in business protection and certain family situations
Life assurance on a joint life first death basis is commonly used for family protection needs and is cheaper than a couple taking out two separate own life policies
Life assurance on a joint life second death basis is commonly used to pay off any IHT liabilities on an estate meaning the estate can be released more quickly to the beneficiaries
A life assurance policy can be set up in several different ways. This could be on an own-life basis, life of another, joint-life first or second (survivor) death. Let’s look at each of these one by one.
Tell me about joint-life first death
When is it typically used and what are the benefits of this arrangement
Why might a couple opt for this rather than 2 separate own life policies in their name?
The policy is joint with two people, with one sum assured covering both, and pays out when the first life assured dies.
This is commonly used for family protection policies, to cover a couple where a certain life assurance sum is required if either were to die, to provide financial support to the survivor (perhaps to pay off a mortgage)
After the benefit is paid, the plan would cease. This means the survivor will have no cover remaining which could result in future problems for dependants (one of the downsides)
A couple may opt for this rather than 2 separate own life policies in their name because it is cheaper in terms of premium. However the cover will be less comprehensive in this arrangement
Divorce or separation may also cause issues.
A life assurance policy can be set up in several different ways. This could be on an own-life basis, life of another, joint-life first or second (survivor) death. Let’s look at each of these one by one.
Tell me about joint-life Second death
When is it typically used and what are the benefits of this arrangement
Is it cheaper or more expensive than a joint life first death policy?
This provides a life assurance payment once both lives assured have died. (This would be little use if the aim of the plan is ‘family protection’)
Therefore it is mainly used for mitigating inheritance Tax (IHT)
Remember, an estate will not be released until any tax due is paid, and many beneficiaries do not have the monies to pay the tax. Therefore, they find themselves in a ‘catch 22’ situation. This type of policy pays the tax, therefore resolving this issue and enabling the estate to be more valuable for the beneficiaries
This type of policy is cheaper, in terms of premiums, than a joint life 1st death basis.
A trust is almost always used, to ensure the life assurance payment passes outside of the estate ensuring that the policy proceeds do not increase an IHT bill by increasing the value of the estate.
Recap:
Life assurance policies can be taken out for a variety of reasons such as to provide monies for oneself, protect a spouse, partner, and dependants, or to mitigate taxes such as IHT.
Some employer-sponsored life policies have what is known as a continuation option
What is this?
This means that the employee can continue the cover if they leave employment
It moves from an employer sponsored plan to an individual (private plan) without the need for further underwriting
This obvs should be taken into account when assessing protection needs
Joe has an employer-sponsored policy with a continuation option. He is leaving his employer to become self-employed. If he utilises this continuation option, it means that…
a) his policy premiums will decrease.
b) his policy premiums will increase.
c) his policy will continue as an employer sponsored one.
d) his policy will continue as a private one.
D
If the continuation option is used, it will change from an employer sponsored policy into a private policy
Employer cover
An employer can provide life cover as part of a pension scheme. Currently up to £1,073,100 could be provided tax-free on death pre age 75. This known as the lifetime allowance (LTA).
What type of scheme can employers provide so that the cover is not limited by the LTA?
It has become increasingly common for employers to provide cover through excepted group life (EGL) schemes. Such cover is not limited by the LTA
A customer may wish to take the state benefits they receive into account when assessing their protection needs, to keep costs down
What are the disadvantages of doing this?
Eligibility criteria may change, and the customer may not receive the benefit in the future.
Levels of state cover can be reduced, leaving customers with a shortfall.
LOOK AT ACTIVITY 4.1 ON CHAPTER 4 UNDER LIFE COVER NEEDS AND COMPLETE
(I DONT HAVE BRAINSCAPE PREMIUM SO CANNOT COPY ACROSS THE IMAGE
SUMMARY
There are three parties to a life assured policy: the assured or owner, the life assured on whose death payment will be made, and the life office.
The life office will assess the risk, determine whether they will accept the risk and calculate how much to charge for the cover.
Terminal illness benefit pays out a death benefit when the life assured is still alive, albeit with life expectancy of less than 12 months.
A continuation option allows an employee to continue employer-sponsored cover as a personal policy.
Policies can be established in different ways: single or joint life, own life, or life of another.
Single/OWN LIFE and joint life first-death basis tends to be used for family protection needs.
Joint life second-death cover is used for IHT mitigation.
Life of another is most commonly used with business protection policies.
What is whole of life assurance?
A whole of life policy is a long-term life assurance policy
It pays out a cash lump sum on death, whenever that may occur, and
may build up a cash surrender value over time.
There are several different types of whole of life policy including:
Non-profit:
Fixed sum assured and a fixed premium. The assured does not ‘participate’ in any profits of the life office.
With-profits (or called full with-profits):
Same as above but also benefits from 2 types of bonus; annual (also known as ‘reversionary’), and terminal. The payment on death will therefore be the full sum assured plus bonuses. If the customer stops their plan early, a discretionary charge, known as a Market Value Reducer (MVR) can be applied, to protect existing policyholders.
Low-cost:
A hybrid plan. Combines a with-profit investment base with decreasing term assurance.
With-profit bonuses are added to a basic sum assured, that is less than the guaranteed sum assured.
The sum assured is the larger of the guaranteed sum assured or the basic sum assured plus bonuses.
This means that the amount of life cover needed to ‘bridge the gap’ up to the guaranteed sum assured, which is provided via term assurance, decreases over time as more bonuses are added to the basic sum assured. This arrangement makes premiums cheaper than a full with-profit policy
Unit-linked
A unit-linked plan is one where premiums buy units in a unit-linked fund. Units are then cancelled each month to pay for the costs of cover. The payment on death will be the greater of the bid value of units (the amount that the units will be bought back for), or the guaranteed sum assured. This value build-up will depend on many factors and is unlikely to ever be a large amount, as the policy main aim is protection.
Universal
A universal policy is unit-linked with added bolt on options, such as critical illness cover, accidental death benefit, and income protection cover. These are just a few of the additional options available. The units are cashed in to purchase the additional cover
With profit policies offer 2 types of bonuses.
Terminal bonuses
Reversionary bonuses (also known as annual bonuses)
What is the difference between the two
If a policyholder of a with profits policy cancels their policy early a Market Value Reducer may be applied. What is this?
Annual bonuses are awarded taking each year’s life office profits into account.
Terminal bonuses look at profits over the whole period the policy has been held for.
The payment on death of with profit policies will be the full sum assured plus bonuses.
If a policyholder of a with profits policy cancels their policy early Market Value Reducer (MVR) can be applied. This is a discretionary charge that aims to protect existing policyholders. This charge ensures bonuses being paid out are fair, bearing in mind the life office expectation was that this policy would run for the whole of the assured(s) life and not be stopped earlier. Remember, bonuses are based on the life offices profits. if people cancel their policy the profits will be affected. if they didnt add this charge it would mean other policy holders bonuses are affected, which is unfair
What are Unit-linked whole of life policies ?
How does this policy offer flexibility to policy holders?
When do the reviews of this policy take place?
Policyholder options at plan review could be WHAT?
Provides a pre-agreed sum assured, with no end date, so cover is permanent.
Can offer a mix between life cover and investment into a unit-linked fund, chosen by the customer in line with their risk attitude. The policy holder can opt for higher cover (by selling more units) or higher investment (by doing the opposite)
Units are purchased with premiums, then cancelled for charges such as mortality costs.
The first plan review usually takes place after 10 years, and then every five years thereafter.
There is a choice of cover types from:
Maximum cover:
Where units are cashed in for protection. They are cashed in at a rate where cover can be provided for 5-10 years. After this time, premiums will need to increase to keep the same sum assured OR the sum assured will need to reduce to maintain the same premium.
NO INVESTMENT VALUE IS BULIT UP.
Standard cover:
Where the premiums paid should be sufficient to maintain the sum assured for the life of the policy, if the insurer’s assumptions prove to be correct. A SMALL INVESTMENT VALUE MAY BE BULIT OVER THE LONG/MEDIUM TERM
Guaranteed cover:
Where there is no real investment but there may be a surrender value.
Policyholder options at plan review could be 1 of 4 main options:
No action: Because cover can be maintained for the premium paid.
Increase premiums: To maintain cover required.
Decrease cover amount: If premium increase is not affordable upon review
Do nothing and accept the policy may cease before death occurs.
What can whole of life policies be used for?
Family protection
IHT tax planning on an estate
Funeral planning by older customer (often marketed as ‘funeral plans’)
How can a consumer compare costs on different Whole Of Life providers and why is this difficult to do?
Different insurers have different ways of charging for their policies. Some may have up-front fees; others may apply exit charges which makes it difficult to compare costs
The best way to compare charges for the purchaser is through ‘reduction in yield (RIY)’. This is found on a policy illustration and shows the annual reduction in any possible investment element, due to plan charges.
If Policy X has a 1.4% RIY and Policy Y 1.6%, Policy Y must have higher charges, as this will potentially reduce any investment value by the highest percentage.
Policy X is on a standard cover basis and has a 1.4% RIY
Policy Y is on a maximum cover basis and has a 1.2% RIY
Firstly, how can you tell what type of policy this is referring to and given the above can you say for certain that policy Y will have greater future investment value given its lower RIY
This is referring to Unit-linked whole of life policies
I know this because of the ‘maximum cover’ and ‘standard cover’ part. And ik this because of the RIY figure. RIY is what is used to calculated the true value of a WOL policy. A higher RIY means the annual reduction in the investment is higher due to higher plan charges, which then means less value for the consumer
In this case you cannot say that Policy Y will have greater future investment even-though its RIY figure is lower. This is because Policy X is on a standard cover basis and therefore can build a higher investment element overtime (Maximum cover policies build no investment element) so therefore Policy X may have a higher future investment element.
NOTE: If both polices were on the same basis in terms of cover types, perhaps both being maximum cover, then you could reliably say that RIY Y will have a higher investment element and therefore is better value.
EXAM TIPS: READ QUESTIONS CAREFULLY SO YOU DONT AUTOMATICALLY THINK ONE POLICY IS BETTER VALUE THAN THE OTHER
exam: Questions in the R05 exam are often scenarios, based around the different types of financial protection policies available. You must select the most appropriate policy for the given need.
What is term assurance?
Pays a lump sum or series of lump sums (the sum assured) on death within the term.
The term is established at outset
Benefits can be level, or they can decrease or increase over time.
There is usually no investment element.
What is Term 100 insurance
A form of term assurance that lasts until the life assured reaches 100years old
It is an alternative to whole of life assurance. Obvs it can cause issues if the person exceeds 100years old
QUESTION
Tell me about Level Term Assurance
Tell me about Renewable and Convertible Term Assurance
Tell me about ‘Return of Premium’ term assurance
Tell me about ‘decreasing term assurance’
Tell me about increasing term assurance
Tell me about Term 100 term assurance
Tell me about Family Income benefit (A type of term assurance)
Tell me about unit linked term assurance
Tell me about reviewable term assurance
Term assurance can be taken out via a pension plan
Tell me about this
Known as Pension Term Assurance (PTA)
This type of policy offered customers the ability to take out life assurance as part of pension planning, and IN THE PAST received tax relief on premiums, making costs less expensive.
Now it is commonly offered through an employer where the life assurance benefit provided is known as ‘death in service’
Individuals could also have pension term assurance linked to their own personal pension policy…
NOW
Private PTAs taken out prior to 14th December 2006 retain premium tax relief
Private PTA taken out on or after 14th December 2006 do NOT retain premium tax relief
(read 4.2.3 to find out why)
THIS DOES NOT APPLY TO EMPLOYER SCHEMES. EMPLOYER SCHEMES STILL RECEIVE TAX RELIEF
FOR CONTEXT: Advisers should check with a client’s policy provider to confirm the details on a case-by-case basis as whether they receive tax relief or not is an important factor
What are endowments?
Endowments are policies that provide a combination of life cover benefits, if death occurs during the term, plus a potential investment return at the end of the term.
Premiums are invested monthly into funds selected by the policyholder. These could be with-profit or unit-linked funds
Endowments were traditionally used in line with interest-only mortgages.
Summary
There are a number of lessor known types of insurance policy outside of the more typical policies like term assurance, WOL and endowments
For example:
funeral plans, multiplans, bonds and relevant life policies.
Tell me about Funeral Plans. What must be considered regarding these plans?
Funeral plans (marketed as ‘over 50 plans’):
For those only wanting a lump sum to to cover funeral costs
Low sum assured and premiums and guaranteed acceptance as it has simplified underwriting (or none).
If death occurs in the first 2 years there is no pay out but premiums are refunded
There are a number of lessor known types of insurance policy outside of the more typical policies like term assurance, WOL and endowments
For example:
funeral plans, multiplans, bonds and relevant life policies.
Tell me about ‘Multiplans’
What are they also known as?
Also known as ‘universal’ life plans.
Normally set up on a single life basis and can include different types of cover in addition to life assurance, such as critical illness cover, income protection and unemployment cover.
Have lower charges and less chance of cover overlap but can be more complex to set up.
There are a number of lessor known types of insurance policy outside of the more typical policies like term assurance, WOL and endowments
For example:
funeral plans, multiplans, bonds and relevant life policies.
Tell me about ‘bonds’
They are single premium, non-qualifying whole of life plans with low protection but high investment value.
The life cover element is usually 101% of the bid value of any units – so, it is ‘return of fund’ plus an extra 1% (so very low protection)
Any investment gain is potentially subject to income tax (not CGT even though it is a ‘gain’)
There are a number of lessor known types of insurance policy outside of the more typical policies like term assurance, WOL and endowments
For example:
funeral plans, multiplans, bonds and relevant life policies.
Tell me about ‘relevant life policies.’
These are policies that generally provide a lump sum payment on death, under the requirements of the Income Tax Act 2003. Policies must satisfy certain criteria, which include: SEE IMAGE
They are provided by an employer for employees through group life assurance policies.
Premiums are paid by the employer and paid out to beneficiaries via a trust arrangement.
Flash card 1/2
Continued on another flash card
Flashcard 2/2
The Financial Conduct Authority rules are contained within the handbook.
There are two main sections that include rules which affect protection policies
What are the sections and what is contained under each?
ICOBS = Insurance Conduct Of Business Sourcebook (think, ONLY INSURANCE)
COBS -= Conduct of Business Sourcebook
ICOBS = policies with no investment element, known as pure protection policies. For example, most term assurance plans
COBS = Policies with an investment element. E.G a unit linked or with profit endowment.
QUESTION
ICOBS = contains policies with NO investment element, known as pure protection policies. For example, most term assurance plans
COBS = Contains policies with an investment element. E.G a unit linked or with profit endowment.
Remember: A policy with no surrender value is subject to the Insurance: Conduct of Business Sourcebook rules (ICOBS). Saying this, this does not include Long Term Care protection, which is ALWAYS subject to COBS rules.
SUMMARY
policy purpose
term cover required over
flexibility
the need for increases in future cover levels
monies available to pay premiums, i.e. affordability
view around premiums, i.e. ‘would prefer to pay the
same’ or ‘happy with future potential rises’
investment element required?
Insurance Policies could be taken out for a variety of reasons as seen below.
Read 4.3 for context
Policies can have many included features such as indexation or a guaranteed insurability option
Explain this:
Indexation:
Sum assured increases or decreases inline with an index without the need for underwriting. It means the spending power of the sum assured is kept constant.
Guaranteed Insurability Option:
Sum assured increases inline with certain customer life events such as moving home, having children etc without any underwriting. premiums will increase as a result and it is only available for those ages 18-59
‘WHAT cover’ or ‘WHAT cover’ is where higher premiums are paid from the start, but these should be able to continue at that level throughout the policy term whilst maintaining the level of cover required.
‘WHAT premiums’ or ‘WHAT cover’ is where the client pays lower premiums initially, but after the first plan review the customer is likely to be faced with a couple of options:
‘Guaranteed premiums’ or ‘standard cover’ is where higher premiums are paid from the start, but these should be able to continue at that level throughout the policy term whilst maintaining the level of cover required.
‘Reviewable premiums’ or ‘maximum cover’ is where the client pays lower premiums initially, but after the first plan review the customer is likely to be faced with a couple of options such as Pay the same premiums but reduce the cover or Increase premiums to maintain the same level of cover or do nothing.
Some customers would prefer a set premium that they pay, either for a specified term or the whole of their lives. Others prefer the option of paying less to start with and then, once the policy is reviewed, paying more through premium increases as a result of this review. This is something that must be taken into consideration when recommending a product
To remember this just remember that maximum cover polices are where units are in at a rate where cover can be provided for 5-10 years. After which, premiums will need to increase to keep the same sum assured OR the sum assured will need to reduce to maintain the same premium. NO INVESTMENT VALUE IS BULIT UP.
Standard cover:
Where the premiums paid should be sufficient to maintain the sum assured for the life of the policy (and are therefore ‘guaranteed’
REMEMBER: Both term and whole of life policies offer either a guaranteed or reviewable premium basis.
Whole of life plans offer a choice between standard and maximum cover.
Another feature available regarding premiums is waiver of premium or contribution.
What is this?
Where the premium is insured against the risk of the assured becoming ill or disabled.
Has 6 month deferred period where premiums are paid
Following deferred period, premiums are waived by provider but cover remains
If a policy is written in such a way that it never has a surrender value, what sourcebook will it be subject to?
What is the main exception of this
A policy with no surrender value would be subject to the Insurance: Conduct of Business Sourcebook rules (ICOBS)
This does not include Long Term Care protection, which is ALWAYS subject to COBS rules.
SUMMARY (GOOD ONE TO REMEMBER)
What actually is underwriting in relation insurance?
‘the process of evaluating the risks of insuring a particular person and using this information to set a premium price for the risk being undertaken’
For life assurance, the first step is completion of an application form by the potential policy assured
policy assured = policy holder = proposer
Application forms ask for a variety of information, depending on the type of plan being assessed. What would they typically include?
All common sense but remember one is that any hazardous activities will likely be included, such as scuba diving
There are a variety of underwriting terms that we need to be aware of:
Moratorium
Simplified underwriting
Full medical underwriting
Pre-existing conditions exclusion
free cover
Continuing previous medical exclusions
Tell me what each underwriting term means
Moratorium:
Any pre-existing conditions that the life assured has suffered from in the 5 years before the application, will not be covered under the new policy for the first 2 years. (This is more likely to be the version in your R05 exam)
Or that less underwriting is carried out at application stage, and more when a claim is made.
Both definitions can be used in the same policy, such as Private Medical Insurance
Simplified Underwriting:
Means there is little, or no, underwriting carried out on the policy. For example, because it is an employer sponsored
Free cover:
where no underwriting is required
Full medical underwriting:
Just means the policy has in-depth underwriting
For Higher-risk policies such as CIC.
Pre-existing conditions exclusion:
Where the provider states, in advance, that they will not pay out for any previous conditions the life assured may have suffered from in the last five years for he entire term of the policy. It is most common with private medical insurance policies
Continuing previous medical exclusions:
This is also known as CPME.
Where an underwriter applies the same terms as previously given on a former policy. This is common where cover is being transferred from one provider to another.
question
An underwriter has several additional risk assessment tools at his or her disposal, such a:
GP report
data subject access request
paramedical
tele underwriting interview
medical
supplementary questionnaires such as health, occupational or leisure pursuits
health screening
Tell me about each
NOTE: Additional tests are usually paid for by the insurer.
Requests for data are made via: (the name has changed)
How quickly must any request be actioned?
Data Subject Access Requests (DSAR)
Previously known as Subject Access Requests (SAR’s)
Must be actioned within 1 month
Only administration costs can be levied
QUESTION
What is the Law Enforcement Directive (LED)?
An EU legislation that sits parallel to the GDPR. It covers rules relating to the processing of data by data controllers for law enforcement purposes.
It protects citizen’s rights to data protection whenever personal data is used by criminal law enforcement authorities for law enforcement purposes.
After an application has been made, what happens next?
Once an underwriter has assessed an application, a decision must be reached regarding the terms that will be offered to the applicant.
An underwriter may require a ‘second opinion’ from a senior underwriter or chief medical officer (CMO) before coming to any decision if it is a complex case
Once a decision has been reached, either standard or special terms will be offered.
IMPORTANT FLASHCARD
Once an underwriter has assessed an application, a decision must be reached regarding the terms that will be offered to the applicant.
For whole of life and term assurance policies where there is perceived higher risk, an underwriter has several options. Outline and explain each:
1) Apply a ‘premium loading’ -
Where the underwriter adds an extra charge to the premium
2) Apply an ‘extra mortality rating’ -
Where the premiums are increased by a certain percentage.
3) giving an ‘age rating’ or ‘loading’
where the life assured is deemed older than they actually are. For example, a 40 year old applicant may be given a 10 year + age rating, so is classed as a 50year old.
4) adding a ‘policy debt’
Where an amount is deducted from any claim payment. This ‘debt’ reduces over a period of 5 years. Effectively the sum assured is lower for first 5 years of policy.
5) postponing a policy -
Where a policy is postponed until a certain event occurs such as an operation being carried out.
6) declining the policy -
If risks are too high
What is this an example of?
If an applicant is given a ‘loading’ or ‘age rating’ it means the insurer deems them to be a higher age than they actually are
Income protection insurance and critical illness cover pose the biggest risks to an insurer, so are likely to be more strenuously underwritten.
Decreasing term assurance and gift inter vivos policies offer decreasing cover, so the risk to the insurer will reduce over time. These are therefore less intensely underwritten.
True or false
True
What are the main aspects of contract law?
REMEMBER: One common misconception is that a company’s advert, glossy prospectus brochure, or enquiry form in a newspaper is the ‘offer’. This is not the case. These are all termed ‘an invitation to treat’.
The first actual offer in a financial services contract is the completion of the proposal form which will be considered and formally acknowledged at a later date by an acceptance letter. This acceptance letter is by law a counter-offer with the proposer accepting by paying the first premium, or by signing a direct debit.
question
What is Utmost Good Faith?
Utmost good faith’ relates to the principle that both parties to the contract, the assured and the life office, are in possession of all the information they need to enter a contract.
They must both disclose all material facts and take reasonable care not to make a misrepresentation.
Utmost good faith’ relates to the principle that both parties to the contract, the assured and the life office, are in possession of all the information they need to enter a contract.
They must both disclose all material facts and take reasonable care not to make a misrepresentation.
What are ‘material facts’ ?
Material facts are any that would or may be relevant to the contract.
For the APPLICANT:
The applicant (assured) must answer the application form and any other questions honestly, truthfully, and completely. This is their ‘duty of disclosure’.
FOR THE INSURER:
The insurer (life office) must disclose all the key details about the policy, what it does and does not cover and what the terms are in much the same way.
What does it mean if an insurance policy has been ‘placed on risk’
The policy has started. ie, the point at which the insurer assumes the liability for potential claims under the policy.
When a policy is placed on risk, it means that the insurance coverage becomes active and the insurer is now responsible for covering any claims that occur within the scope of the policy from that moment forward.
Once a policy has been underwritten and placed on risk (started), if the life office feels that the principle of ‘utmost good faith’ is breached by the assured when a subsequent claim is made, this is known as non-disclosure, and can have serious consequences for the individual. This can include non-payment of the claim.
In the past claims were being rejected by a life office, on the basis of non-disclosure, if ANY facts were omitted from the underwriting process, even when they were not necessarily ‘material facts’
This was deemed unfair so it led to some new rules being drafted and agreed by the Association of British Insurers (ABI).
three new categories were introduced. What are they?
1) Reasonable (also known as ‘innocent’)
Where the cust acted reasonably and honestly even though they have not fully disclosed all materials facts. For example, the cust genuinely did not realise that some information about their medical history would be relevant. An example is failing to disclose an earlier minor operation in relation to a cancer claim under a terminal illness benefit policy.
RESULT: Claims will be met in full.
2) Careless
Where the cust didn’t take sufficient care and should have realised that the information given was incomplete. This could be an individual suffering from skin cancer and not disclosing this at application stage, and later claiming on the policy for another form of cancer.
RESULT: Some of the claim will be paid but not all. This is called a proportionate remedy, i.e. a proportion of the claim will be met. The life company will look at what they would have given if all material facts were known to them from the outset.
3) Deliberate or reckless (without care)
Where the cust should have known both that the information they had provided was incomplete and incorrect, and that it would be relevant to the underwriting of the policy.
RESULT: The claim will not be paid.
NOTE: If the non-disclosure resulted from actions of an agent of the insurer: the claim would still be valid!
Context: The bottom line with these new rules is that both parties must still tell the truth in relation to disclosure of material facts, but a minor infringement will not lead to loss of all benefits paid on a claim like it did in the past
What is non disclosure in an insurance contract
Where not all material facts were given at application stage
This could affect any claim depending on the type of non disclosure whether
-Deliberate or reckless (without care),
-Careless
-Reasonable (honest mistake)
What is insurable interest?
This is the principle that the assured must suffer a financial loss, potentially, on the death or disability of the life assured. A financial interest in the life assured must exist.
You cannot simply insure the life of someone you do not know, otherwise all sorts of issues are likely to occur…
Automatic insurable interest, where it does not need to be proven, exists in the following situations (see image)
NOTE: One situation where insurable interest rarely exists is between a parent and their child. Unless, that is, you are the fortunate parent of a child actor, making millions that you manage on their behalf.
When must insurable interest be proven?
QUESTION
Jon would need to prove this insurable interest because their relationship doesnt fall under any category that allows automatic insurable interest
Who does not have contractual capacity?
An individual is not classed as having contractual capacity if:
they are aged under 18
they are mentally ill
they are drunk or under the influence of drugs
What are mortality tables?
They show, for each age, the number of deaths and the number of people still alive. Mortality rate is the statistical chance of dying at a given age. Rates are calculated by individuals called actuaries.
Mortality tables give insurers a good indication, based on statistical data over the last few hundred years, of how many deaths are likely to occur year by year in relation to different age groups. These can be used to predict claims with a degree of accuracy.
Context :
SUMMARY
One of the areas that a customer needs the help of a financial adviser when taking out a life assurance policy is whether to use a trust or not. So, let’s move on to look at this area next
What is a trust?
A trust is a legal arrangement where one party, the settlor, makes a gift of assets (e.g., a life policy) and creates a legal structure to hold these assets of behalf of another party, the beneficiaries.
These assets are then looked after by trustees.
Who are the 3 parties to a trust?
Settlor
Original owner of the asset, i.e. the person giving up the asset as a gift, also sometimes called the ‘donor’.
They must be at least 18, and of sound mind.
They select the trustees and decide who the beneficiaries should be.
Trustees
These are the legal owners of the asset held in trust.
They must be at least 18, and of sound mind.
They own the asset temporarily and control the asset for the term of the trust.
They have instruction to pass the asset to the beneficiary in the future.
The trustees will understand settlor wishes and requirements.
The appointment is usually for the life of the trust, but a trustee can resign.
The trustees deal with insurers regarding policy claims.
Beneficiaries
These are the long-term intended recipients of the asset.
They have ‘beneficial or equitable ownership’ of the asset.
They can take action against trustees who do not act in their best interests.
They may not be entitled to trust assets until a certain age, e.g. 18 or 25.
They may only ever be entitled to income rather than the capital outright (known as interest in possession)
FOR CONTEXT: For bare/absolute trusts the beneficiary has IIP because they have a right to the trust assets. Ie, it will be transferred to them at a certain age no matter what. However, beneficiaries in flexible/discretionary do NOT have IIP because they have no right to the assets - the trustee chooses how the assets are distributed.
Can a settlor also be a trustee?
Can a settlor also be a beneficiary?
A settlor can also be a trustee, to retain an element of control over the asset.
A settlor can also be a beneficiary in some cases; however, this is unusual as any tax benefits would be lost (because they are benefiting from the asset)
What are absolute/bare trusts
The trustees hold the trust property on behalf of a beneficiary until a certain time, such as reaching age 18.
When the beneficiary reaches the age of capacity (18) they have an absolute right to the assets of the trust which is why it is called an absolute trust after the beneficiary reaches 18
Transfers into an absolute/bare trust are classed as potentially exempt. ie no inheritance tax is paid upfront, and if the settlor survives for seven years post transfer there will be no IHT liability at all.
It is called a bare trust when the beneficiary is below 18 and it is called an absolute trust when they are older than 18
What is an 18-25 trust?
It is a variation of an absolute/bare trust
It allows the beneficiaries to access trust assets any time between age 18 - 25. Up to age 18, it is treated as a bare trust, from age 18 it is a discretionary trust.
What is a Vulnerable persons trust?
This is a trust created for minor children, or individuals who are either mentally or physically disabled.
It is a type of absolute trust.
What is a Statutory trust?
What type of life policy can this form of trust only be used for
These are created by an act of parliament or statute. They are a form of absolute trust
They have the advantage of being simple and protecting trust assets from creditors but have a disadvantage in that beneficiaries are limited to a spouse and children.
ANSWER : This trust can only be used with single-life policies.
What is an interest in possession trust?
This is a trust where one or more beneficiaries have an ‘interest’ in trust income or capital.
A common example is where a spouse, is left a ‘life interest’ in part of the estate, with the children inheriting these assets on their death.
The children in this example are commonly called the ‘default beneficiaries’ or the ‘remainder men’.
Therefore, both the spouse and children have an interest in possession.
What is a discretionary trust?
This is a power of appointment trust where no one has a specific interest in possession.
Instead there is a list of potential beneficiaries but it is up to the trustees ti distribute it accordingly
Transfers into a Discretionary Trust are classed as chargeable lifetime transfers (CLTs). This means that there could be both an inheritance tax liability upfront (20% rate) plus another 20% on the death of the settlor.
For IHT purposes, transfers into discretionary trusts are treated as what
Same question but for Absolute/Bare trusts
Transfers into an absolute/bare trust are classed as potentially exempt transfers.
Transfers into a Discretionary Trust are classed as chargeable lifetime transfers (CLTs). Means 20% IHT upfront plus another 20% on death of the settlor.
Remember:
Transfers into absolute, statutory, and vulnerable person’s trusts are treated as potentially exempt transfers.
Transfers into interest in possession, and discretionary trusts are treated as chargeable lifetime transfers.
What is probate?
Probate is the legal process by which a death is registered, and an estate is distributed, either in line with a valid will or the laws of intestacy.
Assets that are in trust are not part of the estate, and therefore do not have to wait for this process to be finished which, in certain cases, can take a long time
Are there any disadvantages in using a trust?
Once the trust is set up, the settlor cannot directly access trust assets for their own benefit.
It can be a complex process, and may involve costs and charges if a solicitor is used.
The settlor will need to find individuals willing to act as trustees, which is a responsibility some are not keen on.
Certain trusts (absolute) are difficult to alter, so do not cope well with changing circumstances
Decisions will need to be made, and some people like to avoid these.
summary
Benefits/disadvantages of using trusts
What is Assignment?
Can you have a partial assignment (where ownership doesn’t transfer fully)?
Can an assignment be temporary?
An assignment transfers legal ownership of an insurance policy from one individual(s) to another, using a legal document known as a deed of assignment.
This means that when a policy is assigned, the assured changes, and is no longer the same original assured as when the policy was taken out. The life assured stays the same.
An assignment must be whole, not partial.
An assignment can be temporary or permanent, and can confer an absolute or a limited interest.
assured = policyholder
There are two parties to an assignment:
What are they?
The assignor: the individual assigning the asset or life policy.
The assignee: the new owner, or the recipient of the assignment.
REMEMBER: An assignment transfers legal ownership from one individual(s) to another and this can be used to transfer ownership of a an insurance policy
An assignment can be temporary or permanent. Give an example of where both are used?
A permanent assignment:
Where the transfer of ownership is permanent and absolute. Example: when individuals sell their insurance policies on the second-hand market to raise cash.
A temporary, limited assignment:
The opposite to above. Used in relation to mortgages and endowment policies.
Context: As the mortgage is a form of loan, the lender requires some form of additional security, and a temporary assignment can be used for this reason. Once the mortgage is repaid at the end of the term, or earlier, the policy is then released from the assignment. This is known as equity of redemption.
Example of a permanent assignment
There are 4 types of assignment. What are they?
The 4 types of assignment are:
Absolute
Mortgage
Operation
Trustees
Tell me about each
Absolute:
An absolute assignment is a complete transfer by through a gift or a sale. The assignor transfers all interests to the assignee(s).
Mortgage:
This is an temporary assignment related to a loan on a property. Once the loan and any associated interest is repaid, the assignment will cease known as equity of redemption. This assignment is usually through a mortgage deed
Operation:
This relates to bankruptcy proceedings where an individual’s assets can be assigned to the Trustee in Bankruptcy
Trustees:
Assets and life policy proceeds can be assigned to trustees. This is carried out in conjunction with a trust that the settlor has created. The most likely situation where this will occur is where a life policy has been taken out after a trust has been set up.
Under what circumstance does a policyholder need to ‘serve notice’ ?
Servicing notice relates to life contracts
It is when a policy is being assigned to a new owner
The assignor must inform the insurer of this change, This act of informing the insurer is called ‘serving notice’.
What are the two parties to a mortgage?
Mortgagor (borrower)
Mortgagee (lender)
SUMMARY OF ASSIGNMENT
Providers can charge for completing an assignment. True or false
False
Providers cannot charge for assigning a policy. However, the assignor may incur fees from solicitors who must write up the assignment deed
What is the Policies of Assurance Act 1867?
This act regulates the assignment of life policies. It established some key rights and principles that apply both to an assignee (the recipient) and an insurer.
These include:
The principle of notice. This allows for a priority of claim over other interests or assignees that have not given notice.
The right to ‘sue’ an insurer for policy proceeds and recover monies owed.
The principle of ensuring insurers pay the correct individual(s)
If this is not the case, they can be held responsible.
To ensure priority claims are upheld over subsequent assignees.
What is the principle of notice?
What is ‘serving notice’?
The principle of notice is where an assignee informs an insurer that they are now the legal owners of a policy. They will need to prove this by providing a valid deed of assignment.
‘Serving a notice’ is what an assignor must do when a policy is being assigned to a new owner. They must inform the insurer (ie serve a notice)
principle of notice = relates to assignee
serving notice = relates to assignor
Notice is where an assignee informs an insurer that they are now the legal owners of a policy.
The insurer must give written confirmation that this notice has been received and interest noted.
An assignee cannot sue an insurer until written notice of the date and assignment has been given. What does ‘sue’ mean in this context?
The term ‘sue’ here means ‘ask for the proceeds to paid’ not ‘sue’ as in take to court for damages etc.
In otherwords, the assignee cannot ask for any proceeds to be paid until written notice of the date and assignment has been given by the insurer
Once notice has been given, the assignee can then claim precedence over all other interests in the policy (possible claimants) that have not given notice
For context: If an insurer makes a payment (to someone else) before such notice is provided, this is classed as a bona fide (legal) payment as how was the company to know that an assignment had taken place?
The ‘priority of notice regulates priority of claim’
What does this mean?
This means that someone may have an interest in a policy but, unless notice has been given, the claim can legally be paid to someone else.
At the point of claim the assignee will have to ‘prove their title’ which means to produce documents that show they are entitled to the policy proceeds. These will include the deed of assignment and the policy documents.
What is a constructive notice?
Where no notice is sent but an insurer assumes an assignment has occurred because policy premiums are being paid by someone else
A constructive notice is not legal proof of assignment, but it may prompt an insurer to begin checking who is entitled to what.
Another example of where an insurer may feel an constructive assignment has occurred could be at the point of claim where the policy document is not produced by the claimant who states that “it has been lost”
What does a policy document prove
When is it issued and what info does it include?
It is evidence that a contract has taken place.
It is issued to the assured once underwriting is complete, and the policy has been accepted and ‘put on risk’ (ie, the insurer will pay any claim going forward)
A policy document contains the details of the contract, including specific information relating to the customer such as the name(s) of the assured and life assured, the term of the policy (if applicable, as it could be a WOL policy), the sum assured, and the premiums etc
It also contains generic information relating to the policy, such as terms and conditions, and any standard exclusions.
What is the policy document issued alongside?
The policy document is issued alongside a cancellation/cooling off notice, which is the customers legal right to change their mind
If a claim is made does the claimant need the policy document with them?
Yes, because it proves their title (ie, that they own the policy and they are entitled to the benefits of the claim)
A claim is made on an insurance policy but the claimant does not have the policy document in order to ‘prove their title’ (ie ownership of policy and entitlement to premiums) . What happens next?
The insurer will follow a set process before payment can be made.
(This process also apply in the case of a surrender or where the policy is being used as security on a loan)
The process is as follows:
STAGE 1: A thorough search
A thorough search must be made by the claimant so they look in any possible area that the document could be. If not found and the insurer is happy it’s a genuine loss, then the insurer will do 1 of 2 things
1 option: Statutory declaration
An insurer will require a statutory declaration to be executed.
This is a written document, created with a solicitor or magistrate, which explains how the policy was lost and to declare that the policy has not been assigned or charged. (IMPORTANT. The insurer does this to protect itself from paying out a claim to the wrong person but not all insurer choose this option).
NOTE: A lost policy document can be deemed to be ‘constructive notice’ because the insurer may feel that the claimant may know that a third party has an interest but wishes to avoid any payments being made to them.
2nd option:
Not all insurers will insist on a statutory declaration. Instead, an insurer will require a legal indemnity from the claimant. This protects the insurer against any losses they might incur, as a result of paying out a claim without the presence of a policy document. NOTE: An indemnity cannot insure against further claims by an assignee, its sole purpose is to protect the insurer against any losses.
On occasion, an individual will request a duplicate policy document on the grounds that the original has been lost during the life of a policy. Insurers are very reluctant to issue duplicate policy documents.
Why?
Because of the issues that could occur if the lost one was found, and two policy documents then exist. (2 people could potentially try to claim they own the policy)
This can be overcome in a variety of ways:
Issuing a new policy document which is stamped with the word ‘duplicate’ through it.
Issuing a new policy document but with a different policy number
Summary
Claims on a life policy are made for a variety of reasons. Before any claim is made, the insurer must ensure the claim is valid and that the correct amount is being paid to the correct claimant.
There are two types of claim, those on maturity and those on death.
Why is there a requirement for certain documents such as the policy document for maturity claims
So the claimant can prove their title (ie, they are entitled to the benefits)
Remember: A claim can only be refused if the non disclosed fact related to the death. Ie the insurer cannot refuse a policy if they found out that the the person had a history of knee issues but they died from a heart attack
If the person died because of their knee injury however, then the insurer could potentially refuse due to non discloser
Types of non disclosure and outcome upon claim
Some policies specifically have conditions relating to payments in the event of suicide.
Generally the policy will not pay the sum assured if the individual dies by suicide within the first 12 months of the policy but will do so after
Also many policies will accept a claim if the individual was not of sound mind when they committed suicide (because its not really their choosing if they were not of sound mind) but many policies wont accept a claim if the individual was of sound mind
Claiming death on a policy is not always clear, for example, where proof of death is unknown. What is used in this circumstance?
Presumption of death/circumstantial evidence is used
For example, Individuals disappear or can be involved in accidents, such as plane disasters where no body is ever recovered, such as the Germanwings air crash in March 2015 where an Airbus A320 carrying more than 140 passengers crashed in the French Alps. No bodies were recovered due to the crash circumstances.
In such cases, death may be proven by circumstantial evidence, such as written confirmation from an airline that the life assured was indeed a passenger on a plane that crashed.
Context
Where a ‘presumption of death’ is used but the assured is actually alive and well
What happens if a couple have a joint life policy and they both die at the same time, for example, in a car crash
If a couple die at the same time, say in a car accident, the older life is deemed to have died first, followed by the younger life.
It is common on policy documents to see the term ‘age not admitted’ by the side of an individual’s date of birth.
What does this mean?
This means that age was not formally checked at point of application, and therefore must be verified against the birth certificate at point of claim.
In other words, Age is usually ‘admitted’ by sight of the individual’s birth certificate
JUST remember that someones age is normally proven by their birth certificate
Summary
What is ‘making a policy paid up’?
When is it useful?
Look for the phrase ‘made paid up’ in exam questions. ie, ‘maria has a policy that she has made paid up’
Only available to polices with a surrender value so (pure protection policies do not have this option)
Where premiums stop, sum assured reduces and any life cover continues until the remaining investment value is used up. Policy ceases once investment value is exhausted.
It is useful where premiums are no longer affordable but there is still a need for some life cover. An alternative to removing all cover and leaving the assured unprotected.
Sumamry
A woman who is severely underweight would be classed as what risk, if any, during the underwriting process?
No risk.
Increased risk.
Decreased risk.
Level risk.
Increased risk.
The longer an individual is underweight, the greater the risk of illness and death becomes.
Jake has made a gift of £400,000 to his niece, Sue, who is concerned about a possible inheritance tax liability in relation to the gift. Which of the following policies would best suit Sue’s needs?
Convertible term.
Increasing term.
Renewable term.
Gift inter vivos.
A gift inter vivos policy is a seven-year decreasing term assurance plan, specifically designed to run alongside a gift classed as a PET to cover any potential IHT liabilities.
John has just joined a new company and, as part of his package, receives death in service benefits. This is described as free cover and John has asked you what this means. You would answer that he receives this cover…
with no charges.
with no underwriting.
with no advice.
with no taxation.
with no underwriting.
Free cover is cover, usually through an employer, that is not subject to any underwriting.
For which of the following reasons is a hazardous activity more important in underwriting for income protection insurance (IPI) than life assurance?
Individuals have a higher chance of injury than death.
Insurers have a higher cost base with income protection insurance.
Individuals have a higher chance of death than injury.
Insurers have a higher cost base with life assurance.
Individuals have a higher chance of injury than death.
Jack has set up a trust with a sole trustee and sole beneficiary. Which of the following statements BEST describes their ownership rights?
Legal and equitable.
Legal and rationale.
Equitable and rationale.
Equitable and remedial.
Legal and equitable.
A trustee is the legal owner of a trust’s assets. A beneficiary has equitable or beneficial ownership.
A father wishes to gift £300,000 to his daughter when he retires in seven years’ time. She has applied for life insurance on her father, but this has been declined. Which of the following is the MOST likely reason why?
There is no insurable interest.
The gift is within the father’s nil rate band.
The gift has not been made yet.
The daughter is a minor.
There is no insurable interest.
The most likely reason is that there is no insurable interest. This could be for a number of lower-level reasons, including the gift is within the father’s nil rate band and has not been made yet.
Sally has assigned her policy to her son, Fred. How would such an assignment be taxed, if Sally is a higher rate and Fred a basic rate taxpayer?
No tax as the assignment is not for money/monies worth.
Taxed at 20% on Fred as the recipient and new owner.
Taxed at 40% on Sally as the original owner and assignor.
Taxed equally on Sally and Fred at their marginal rates, on a 50/50 split.
No tax as the assignment is not for money/monies worth.
An assignment must be for money or monies worth to be classed as a chargeable event. Also, a chargeable event must occur for there to be a tax liability on assignment. Therefore, there will be no tax due.
Jackie is considering taking out a new policy and has been told that a moratorium will apply. This is designed to…
avoid successful claims.
avoid valid claims.
avoid successful claims on pre-existing conditions.
avoid valid claims in the first two policy years.
Avoid successful claims on pre-existing conditions.
A moratorium is used during the underwriting process. This means that any pre-existing conditions in the last five years are not covered for the first two years of the policy. This is to avoid successful claims for conditions that already existed at the point the policy was established.
