topic 11 - life assurance

Question 1

Term assurance

Answer 1

• Most basic form of life assurance
• Pure protection for a limited period with no element of investment
• Can be either personal or family protection and also for a wide range of business situations

Question 2

key features of term assurance

Answer 2

• Life insurance in its cheapest form
• Sum assured is only payable if someone dies during the term assured
• Terms can be anything from a few months to years
• If they survive the term, then cover ceases and there’s no return of premiums
• If premium is not paid within a certain period cover ceases and policy lapses with no value
• Premiums normally paid monthly or annually, although single premium also allowed

Question 3

Level term assurance

Answer 3

• Sum assured remains constant throughout the term
• Premiums normally paid monthly, annually or sometimes single payments can be made
• Used when a fixed amount is needed on death to repay a constant fixed-term debt
• Also used to provide family cover – eg pay be used until children finish education

Question 4

Decreasing term assurance

Answer 4

• Sum assured reduces to nothing over the term of the policy
• Premiums may be payable throughout term or limited to a shorter period
• Could be used to cover the outstanding capital on a decreasing debt (eg a mortgage)

Question 5

Gift inter vivos cover

Answer 5

• Using a gift inter vivos policy, the sum assured is set at the outset as the amount of tax that is due.
• reduces in line with the tapering relief on taxation of gifts.
• After 7 years the cover ceases as the gift becomes exempt from tax

Question 6

Convertible term assurance

Answer 6

• 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 time of conversion

Question 7

Renewable term assurance

Answer 7

• Includes an option to renew the policy at the end of the initial term for the same sum assured. Without need for further medical evidence
• There is a maximum age, after which this option is no longer available

Question 7

Increasing term assurance

Answer 7

• The sum assured increases each year by a fixed amount or a % of the original sum assured
• Used when temporary cover of a fixed amount is required but the cover needs to increase to take account of inflation

Question 8

Family income benefit

Answer 8

• Designed to provide a regular income to the replace the income lost on death.
• Usually, a tax-free regular income from the date of death until the end of the chosen term.
• Cover usually reduces with time. However, policies can be arranged with escalating instalments, but the premiums are higher

Question 9

Whole-of-life assurance

Answer 9

is designed to provide protection rather than investment

• To cover the life assured for the whole of their lifetime
• Used in personal and business situations:
  o Protect dependants against loss of financial support
  o Provide a tax-free legacy
  o Cover expenses on death
  o Provide funds for the payment of IHT
• Will definitely pay out sooner or later, unlike term assurance

Question 10

Non-Profit Whole-of-life assurance

Answer 10

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

Question 11

With-Profit Whole-of-life assurance

Answer 11

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

Question 12

Low-cost Whole-of-life assurance

Answer 12

• Promise a certain level of cover
• Provided by the combination of with-profits and a decreasing term assurance

Question 13

Unit-linked Whole-of-life assurance

Answer 13

• Units are issued to the plan holder
• Minimum level of cover is set at outset which is increased when the value of the units held rises above that amount
• In strong market conditions, is most likely to allow early repayment of a mortgage

Question 14

Unitised Whole-of-life assurance

Answer 14

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

Question 15

Waiver of premium

Answer 15

No premiums are payable if the life assured is unable to work as a result of accident or sickness

Question 16

Endowment policies

Answer 16

• Combine life assurance and savings
• Unlike whole-of-life assurance, endowment runs over an agreed term
• If death occurs during term, the sum assured is paid out, while if the plan runs for the full term and matures an investment value if paid out.

Question 17

Non-profit endowment

Answer 17

• Has a fixed sum assured, payable on maturity or on death
• Return is fixed and guaranteed

Question 18

Full with-profits endowment

Answer 18

o Usually a higher fixed premium
o Entitles policyholder to share in profits of the life assurance company

Question 19

Low-cost with-profits endowments

Answer 19

o A low-cost endowment overcomes the high premiums of a full with-profits policy by having a sum assured that is payable on death
o The basic with-profits sum assured is lower than the mortgage amount needed to be funded, so full repayment is not guaranteed at maturity
o Bonuses are added over time to equal mortgage amount. But during this time any shortfall on death would be made up by a decreasing term assurance

Question 20

Unit-linked endowments

Answer 20

o When a premium is paid, some of this is used to purchase units in a chosen fund.
o A pool of units gradually builds up and at the maturity date, the policyholder receives an amount equal to the total value of all units added to the policy
o Can provide a fixed benefit on death before end of term, by cashing in units monthly from this pool.

Question 21

Unitised with-profits endowments

Answer 21

o Combines the security of with-profits policies with the great potential for reward offered by the unit-linked approach
o Unit prices increase by the addition of bonuses
o The value of the policy is held until death or maturity