Topic 11

Question 1

What is term assurance

Answer 1

It is the most basic form of life assurance pure protection for a limited period With no element of investment for this reason it is also the cheapest

Question 2

What are the key features of term assurance

Answer 2

The sum assured is payable only if the death of the life assured occurs within a specified period of time (the term)

The term can be anything from a few months to say 40 years or more

If the life assured survives the term the cover ceases and there’s no return of premiums

There is no cash in value or surrender value at any time

If premiums are not paid within a certain period After the due date (normally 30 days) cover ceases and the policy lapses with no value most companies will allow reinstatement within 12 months provided all outstanding premiums are paid and evidence of continued good health is provided

Premiums are normally paid monthly or annually although single premiums are allowed

Premiums are normally level the same amount each month or year even if the sum assured varies from year to year

Question 3

What is surrender value

Answer 3

There’s sum payable by the insurance company to the policyholder if the policyholder chooses to terminate the policy before the end of the term or before the insured event occurs

Question 4

What is the most common use for a decreasing term assurance policy

Answer 4

To cover the amount outstanding on a repayment mortgage

It is usually known as a mortgage protection policy or mortgage protection assurance

The sum assured is calculated in such a way that is always equal to the amount outstanding on a repayment mortgage of the same term

Question 5

What is ‘gift inter vivos cover’

Answer 5

This is cover is a term assurance policy designed to cover certain inheritance tax liabilities liabilities

These are gifts made during a person’s lifetime as opposed to on death

Therefore these may potentially be deemed as PET’S

Question 6

What is a convertible term assurance

Answer 6

This includes an option to convert the policy into a whole of life or endowment assurance at normal premium rates without the life assured having to provide evidence of their state of health at the time of conversion

This option is normally included only on level term assurance policies but there’s no technical reason why it should not be included on decreasing term assurances and others the cost is in addition of typically around 10% of the premium

Question 7

What rules and restrictions apply to the conversion option of an insurance policy

Answer 7

The conversion is normally carried out by cancelling the term assurance and issuing a new whole of life or endowment policy a new endowment can extend beyond the beyond the end of the original convertible term policy

The option can not only be exercised while the convertible term assurance is in force

The sum assured on the new policy cannot exceed the sum assured of the original convertible term assurance if a higher level of cover is required after conversion the additional sum assured will be subject to normal underwriting

The premium for the new policy is the current standard premium for the new term and for the life assured’s age at the conversion date

Question 8

What is increasing term assurance

Answer 8

This is where the sum assured increases each year by a fixed amount or by a percentage of the original sum assured

Question 9

What is a renewable term assurance policy

Answer 9

This includes an option to renew the policy at the end of the initial term for the same sum assured without the need to provide further medical evidence

The new term is the same length as the initial term and the new policy itself includes a further renewal option however there is a maximum age usually around 65 after which the option is no longer available

The premium for the new policy is based on the life assureds age at the date when the renewal option is exercise

Question 10

What is family income benefit

Answer 10

These policies usually pay a tax free regular income monthly or quarterly from the date of death of the life assured until the end of the chosen term

As an alternative to regular income payments beneficiaries may choose to receive a lump sum payment which is calculated as a discounted value of the outstanding regular instalments due

This policy can be described as a form of decreasing term assurance

Question 11

What is the whole of life assurance

Answer 11

It covers the life assured for the whole of their lifetime it will pay out the amount of life cover in the event of the death of the life assured whenever that death occurs provided that the policy remains in force

Question 12

Name 4 useful uses for a whole of life assurance policy

Answer 12

Protect dependence against loss of financial support in the event of death of a breadwinner

Provide a tax free legacy

Cover expenses on death

Provide funds for the payment of inheritance tax

Question 13

What are the 2 options for premiums on a Whole of life assurance policy

Answer 13

Premiums are payable throughout life for example the full term of the policy whatever that turns out to be

Premiums may be limited to a fixed term for example 20 years or to a specified age such as specified age such as 65

Question 14

Explain about limited premiums on a whole of life assurance policy

Answer 14

The minimum term is normally 10 years

Because whole of life assurance will definitely pay out sooner or pay out sooner or later life companies build-up a reserve to enable them to pay out when the life assured dies life assured dies this enables companies to offer some police to offer surrender values on whole of life policies all of life policies if the client cancels them during their lifetime

These values are generally small in relation to the sum assured

Question 15

Name the 7 types of whole of life assurance policies

Answer 15

Non profit
With profits
Unit linked
Unitized with profits
Low cost
Flexible
Universal

Question 16

Describe nonprofit whole of life assurance policy

Answer 16

Fixed level of life assurance in return for payment of a fixed premium

Question 17

Describe with profits whole of life assurance policy

Answer 17

Fixed minimum level of cover to which bonuses are added to reflect investment profits

Question 18

Describe low cost life assurance policy

Answer 18

Promise a certain level of cover which is provided by the combination of with profits and a decreasing term assurance as bonuses are paid to the wheel bonuses are paid to the with profits element the decreasing term element reduces

Question 19

Describe unit linked Whole of life assurance policies

Answer 19

Units issued to the plan holder a minimum level of cover is set out at outset which is increased when the value of the unit’s held rises above that amount

Question 20

Describe unitized we have profits whole of life assurance policy

Answer 20

Issue units with a guarantee that unit prices will either never fall below a certain level or will increase by at least a stated minimum amount

Question 21

What is a flexible whole of life assurance policy

Answer 21

When whole of life policies are issued on A unit linked basis they are generally referred to as a flexible whole of life

Their flexibility lies in the fact that they can offer a variable mix between their life cover and investment content

Question 22

Briefly describe how a flexible whole of life policy works

Answer 22

The policyholder pays premiums of an amount that they wish to pay or feel that they can afford to pay

The premiums are used by units in the chosen fund or funds and the units are allocated to the policy

The policyholder selects the level of benefits that they wish to have

Question 23

What are the 3 main levels of cover on a flexible whole of a flexible whole of life policy

Answer 23

Maximum cover
Minimum cover
Balanced cover

To calculate the various levels of cover the company makes an assumption about the future growth rate of unit prices

Question 24

How long is the initial life cover guaranteed on a flexible whole of life policy

Answer 24

Normally 10 years

Beyond 10 years the company reserves a right to increase the premiums or to reduce the cover The death benefit is then guaranteed until the next review

Further reviews are usually undertaken at 5 yearly intervals

Question 25

What is universal whole of life assurance

Answer 25

When a rain a range of other benefits and options are added to a policy

These benefits are normally added to a unit linked whole of assurance policy

Question 26

List 9 universal whole of life assurance options

Answer 26

critical illness cover
Income protection insurance
Accidental death benefit
Total and permanent disability cover
Hospital Benefits or other medical cover
Guaranteed insurability
Indexation of benefits
Flexible premiums
Waiver of premium

Question 27

What is waiver of premium

Answer 27

A policy provision that allows the policyholder to suspend paying premiums but retain their policy cover if they are unable to work due to sickness or disability

Question 28

What is an endowment policy

Answer 28

Endowment policies are life assurance products that combine life assurance and savings

Question 29

Describe the difference between an endowment and whole of life assurance policy

Answer 29

The difference between the 2 is that an endowment runs over an agreed term if death occurs during the term life cover is paid out while if the plan runs for the full term and matures an investment value is paid out

Question 30

Describe nonprofit endowment

Answer 30

A nonprofit endowment has a fixed sum assured which is payable on maturity or earlier on death. premiums are fixed for the term

The policyholder is shielded from losses due to adverse Stock market movements on the other hand they are equally unable they are equally unable to share in any profits the company might make over and above those allowed for in calculating the premium rate

Question 31

What is a fall with profits in endowment

Answer 31

A with profits endowment has a fixed basic sum assured and a fixed regular premium

the premium however is higher than that of a non profit policy of the same sum assured and the additional premium sometimes called a bonus loading entitles the policyholder to share in the profits of the life assurance company

The profits are distributed among the policyholders buy the company by declaring bonuses that increase the value of the policy and are payable at the same time and in the same circumstances as the sum assured

Question 32

What are the 2 types of bonuses paid on a full with profits endowment

Answer 32

Reversionary bonuses - These are normally declared each year and once they have been allocated To a policy they can not be removed by the company

Some companies declare a simple bonus where each annual bonus is calculated as a percentage of the sum assured others declare a compound bonus with the new bonus being based on the total of their summer short and previously declared bonuses

Terminal bonus - These are bonuses that may be added when a death or maturity claim becomes payable

Question 33

What 2 elements make up low cost with profits endowments

Answer 33

With profits
Decreasing term assurance

Question 34

Briefly explain low cost with profits endowments

Answer 34

The policy offers a guaranteed death benefit = the mortgage ensuring that it is fully protected

The basic with profits some assured is lower than the overall level of the mortgage to be funded meaning that full repayment is not guaranteed

Bonuses are added over time with the aim of building a sum = the mortgage by the end of the term

Until the with profits some assured plus the bonuses are = the mortgage amount any sthe mount any shortfall on death of the life assured is made up by a decreasing term assurance perm assurance once the basic sum assured plus bonuses in quick sure plus bonuses increases beyond the mortgage amount the decreasing term assured element ceases

Question 35

List 3 problems that occurred in endowment miss selling

Answer 35

The inherent risks of this type of policy were not adequately explained

The plans were sold to people with a low or cautious attitude to risk

Yet prospective investment returns were overstated and/or customers were promised that the plans were guaranteed to repay their mortgage info

Question 36

Briefly explain unit linked endowments

Answer 36

These work on the basis that when a premium is paid the amount of the premiums less any deductions for expenses is applied to the purchase of units in a chosen fund

A pool of units gradually built up and at the maturity date the policyholder received an amount = the total value of all units then allocated to the policy

Most unit linked endowments also provide a fixed benefit on death before the end of the term

Question 37

Briefly explain unitized with profits endowments

Answer 37

Premiums are used to purchase units in a fund and the benefits paid out on a claim depend on the number of units allocated and the then current price of units