Topic 12

Question 1

How are income Protection Insurance benefits taxed?

Answer 1

Where income protection insurance (IPI) is taken out on an individual basis the
benefits are tax‑free.
IPI can be arranged by an employer on a group basis and in this case the
income is taxable as earned income. The employer pays the premium, which
is a tax‑deductible business expense

Question 2

Proposer

Answer 2

The individual who is
applying for cover under the
insurance policy and will pay
the premiums, also referred
to as the policyholder. The
proposer is often the same as
the person(s) covered under
the policy, the life assured,
but can be different.
PROPOSER

Question 3

Private medical insurance exclusions

Answer 3

EXCLUSIONS
PMI cover will not be provided for any pre‑existing medical
conditions. Other general exclusions are the costs of:
„ routine optical care (such as the provision of glasses or
contact lenses);
„ routine dental treatment;
„ routine maternity care;
„ chiropody;
„ the treatment of ailments that are self‑inflicted, for example,
the consequences of drug abuse and alcohol;
„ cosmetic surgery;
„ alternative medicine

Question 4

How are PMI premiums and benefits taxed?

Answer 4

Premiums are subject to insurance premium tax but the benefits are paid
out tax‑free. Employers who contribute to PMI on behalf of their employees
are able to claim the cost as an allowable deduction against corporation tax.
Contributions paid by an employer are regarded as a benefit in kind as far as
the employee is concerned and are taxable

Question 5

ANNUITY

Answer 5

A financial product purchased with a lump sum, which then pays out
a regular income, potentially for the lifetime of the annuity holder (the
annuitant)

Question 6

IMMEDIATE NEEDS ANNUITY

Answer 6

An annuity from which the benefits are used to pay for care needs that
the insured already has

Question 7

DEFERRED NEEDS PLAN

Answer 7

An investment designed to build up funds that can then be drawn on to
pay for care needs as and when required

Question 8

tax

Answer 8

if an annuity does not qualify as an immediate needs annuity, ie if its benefits
can be paid to the policyholder, only the interest element is taxable as savings
income. Tax rates applicable are as follows:
„ Tax at a rate of 20 per cent is deducted at source.
„ Non‑taxpayers or individuals not liable to tax on their savings income can
reclaim any overpaid tax.
„ Higher‑rate taxpayers having a further liability of 20 per cent.
„ Additional‑rate taxpayers have a further liability of 25 per cent

Question 9

What is payment protection insurance?

Answer 9

Payment protection insurance (PPI) can cover monthly loan repayments if the
policyholder’s salary is reduced due to accident, sickness or unemployment.
The policy will pay out only for a fixed period of time, usually 12 months

Question 10

When Gary was diagnosed with bowel cancer at the age of
50, he was able to use the lump sum he received under his
insurance policy to pay off his outstanding mortgage. Which
of the following types of insurance did Gary have?
a) Private medical insurance.
b) Income protection insurance.
c) Critical illness insurance.
d) Long‑term care insurance

Answer 10

c) Critical illness insurance. Private medical insurance covers costs
associated with treatment while income protection insurance pays a
regular income rather than a lump sum. Long‑term care insurance is
designed to meet the costs of care in later life

Question 11

Marco, a self‑employed painter and decorator, is considering
taking out income protection insurance. He should opt for as
short a deferred period as possible. True or false?

Answer 11

True. Marco’s income will reduce very rapidly if he is unable to work. He
should opt for a short deferred period rather than a long one

Question 12

Marco’s partner Lydia, an HR manager, already has income
protection insurance. If she claims under her policy, she will
have to pay tax and NICs on the income she receives. If Marco
goes ahead and buys income protection, he will not pay tax or
NICs if he has to claim benefits under the policy. This is likely
to be because:
a) Marco’s earnings are below the personal allowance for
income tax.
b) Marco’s policy will be arranged on an individual basis
whereas Lydia’s policy has been arranged as part of a
group scheme.
c) Marco is self‑employed whereas Lydia is an employee.
d) The insurance provider from whom Marco is thinking of
buying his policy has different rules to Lydia’s insurance
provider

Answer 12

b) Marco’s policy will be arranged on an individual basis whereas Lydia’s
policy has been arranged as part of a group scheme

Question 13

Adaeze, an office administrator, hurts one of her hands,
causing permanent damage, and has to be re‑employed on a
lower salary. What effect would her return to work have on her
IPI benefits?
a) Full benefits would be paid until Adaeze has fully recoveredb) Proportionate benefits would be paid, but no other claims
under the policy would be accepted by the insurance
company.
c) Benefits would cease immediately.
d) Proportionate benefits would be paid until retirement,
death or the end of the policy

Answer 13

d) Proportionate benefits would be paid until retirement, death or the end
of the policy

Question 14

Annette, who retired last year, has developed arthritis and
needs a hip replacement. Under which of the following types
of insurance policy might she be eligible to claim benefits?
a) Critical illness cover.
b) Accident, sickness and unemployment insurance.
c) Private medical insurance.
d) Income protection insurance.

Answer 14

c) Private medical insurance, to cover the cost of treatment. Critical illness
cover would not cover a hip replacement, while accident, sickness and
unemployment insurance and income protection insurance provide
cover for people who are working

Question 15

Vanessa is unhappy in her current job and has decided to
resign. She will be able to claim benefits under her ASU policy
to tide her over until she finds a new post. True or false?

Answer 15

False. ASU benefits are not available to policyholders who resign voluntarily

Question 16

Roger, who is 78, is finding it difficult to look after himself
at home and is planning to move into residential care next
month. He has purchased an immediate needs annuity so his
fees will be paid direct to his care provider, once tax has been
deducted. True or false?

Answer 16

False. With an immediate needs annuity, the benefits are paid directly to
the care provider but they are tax‑free

Question 17

General insurance policies operate on the principle that
policyholders should be restored to the position they were in
before the event occurred that led to their claim. True or false?

Answer 17

True. This is the principle of indemnity

Question 18

Steve’s home contents were insured for £25,000. Last winter
his kitchen was flooded and he claimed under his contents
insurance for £6,000 damage to kitchen appliances and
contents. His insurers established that his home contents
should have been insured for £32,000. Calculate how much
Steve actually received once his insurers had taken account of
the fact that he was underinsured

Answer 18

(£25,000 ÷ £32,000) × £6,000 = £4,687.50 (less any excess)

Question 19

It is illegal to drive a vehicle on public roads in the UK unless
you have insurance that covers damage to your car or injury to
yourself. True or false?

Answer 19

False. It is a legal requirement to have third‑party motor insurance, which
covers injury to other people and their property

Question 20

Andrea has private medical insurance, paid for by her employer as part of her employment package. Which of the following would not apply?

Question 1 options:

a)

Insurance premium tax on the premiums.

b)

An income tax liability for Andrea on payments made in the event of a claim.

c)

An income tax liability for Andrea on the value of the premiums.

d)

Premiums qualify as business expenses for her employer.

Answer 20

b)

An income tax liability for Andrea on payments made in the event of a claim

Question 21

Payment protection insurance:

Question 2 options:

a)

provides benefits in the event of death, accident, sickness or unemployment.

b)

is not covered by the Financial Services Compensation Scheme.

c)

pay outs are typically limited to 12 months.

d)

can cover the applicant’s combined borrowing.

Answer 21

c)

pay outs are typically limited to 12 months.

Question 22

Which of the following would be least likely to be covered on a critical illness assurance policy?

Question 3 options:

a)

Breast cancer.

b)

Kidney failure.

c)

Angina.

d)

Heart attack.

Answer 22

c)

Angina.

Question 23

The Road Traffic Act 1988 requires all vehicles to have at least:

Question 4 options:

a)

third-party insurance.

b)

comprehensive insurance.

c)

Road Traffic Act insurance.

d)

third-party, fire and theft insurance.

Answer 23

a)

third-party insurance.

Question 24

Billie insured her house contents for £30,000 and accepted a £100 excess. Later that year she made a claim for £5,000 as a result of local flooding. The insurer has written to her, stating that the true value of her contents should have been £40,000 and that they are disputing her claim. How much is Billie likely to receive in settlement of her claim?

Question 5 options:

a)

The insurer will reject her claim as she was underinsured.

b)

Billie is likely to receive £3,650.

c)

Billie is likely to receive £3,750.

d)

The insurer is likely to pay the claim in full, as the underinsurance was unintentional.

Answer 24

b)

Billie is likely to receive £3,650.

Question 25

Which of the following statements is true in relation to income protection insurance (IPI)?

Question 6 options:

a)

IPI provides a surrender value for early surrender.

b)

A tax-free income benefit will be payable after a specified period of incapacity.

c)

Benefits are paid for a maximum of 12 or 24 months.

d)

It is the same as an ASU policy, but without redundancy cover.

Answer 25

b)

A tax-free income benefit will be payable after a specified period of incapacity.

Question 26

Sean has been claiming on his income protection insurance policy for six months and has now been cleared to return to work on a part-time basis on a lower salary. What policy feature would solve his concern about the reduced income?

Question 7 options:

a)

Proportionate (pro-rata) benefit.

b)

A shorter deferred period.

c)

Suspension of premiums during a claim.

d)

Increasing benefit.

Answer 26

a)

Proportionate (pro-rata) benefit.

Question 27

In relation to insurance for commercial purposes, pecuniary loss is a loss resulting from:

Question 8 options:

a)

criminal damage of vandalism.

b)

injury, illness or death of an employee.

c)

an interruption to a business’s operation.

d)

a defaulting creditor.

Answer 27

d)

a defaulting creditor.

Question 28

Which of the following is the same for both accident, sickness and unemployment insurance and income protection insurance?

Question 9 options:

a)

Length of the policy term.

b)

Deduction of state benefits from payments.

c)

Deferred period.

d)

Taxation of benefits.

Answer 28

d)

Taxation of benefits.

Question 29

Which of the following is true in relation to long-term care insurance?

Question 10 options:

a)

Any annuity payments from a long-term care plan are tax free.

b)

Inability to move between rooms would be an activity of daily living for a claim.

c)

Long-term care benefits are only payable when the insured is in a care home.

d)

Inability to carry out four or more activities of daily living is required for a successful claim.

Answer 29

b)

Inability to move between rooms would be an activity of daily living for a claim.