Topic 15 The Main Advice Arrears Flashcards
What is Budgeting?
A balance between buying the necessities of life and buying the luxuries of life
Why is it important for an advisor to consider the financial impact of selling too many products to a client?
To not stretch the client expenditure too far to make their life financially difficult
What are the reasons people make not take out family protection?
- May be unaware of the risk
- Believe they can’t afford it
What are the financial impacts of not taking out any life cover for a family?
- Surviving spouse may need to work more
- Childcare costs may now be a possibility
- May have to move out if mortgage payments become unaffordable
Why might it be a good idea to purchase some form of life cover for a spouse who is a homemaker?
On the event of their death the surviving spouse may give up work to look after children or have childcare or housekeeping costs
Why might it be even more important to have protection against long term illness than premature death?
- Greater chance of long term illness than premature death
- Financial impact on family can be greater
What are these in relation to protection against long term sickness?
- Replacement of an income (due to long term sickness)
- Paying someone to carry out the task of the ill person
- Income to pay for continuing medical treatment
- Lump sum to pay for medical treatment
- Lump sum for house alterations or move
Examples of why it is a benefit to have protection for long term sickness
What are the questions an adviser may consider in relation to the amount and type of cover required for long term illness cover?
- Is the client entitled to state benefits? What are they?
- Is the client employed? How much salary will they receive and for how long?
- How many depends do they have?
- Could the client rely on financial/Practical support from their family?
Why is it harder to obtain protection because of unemployment or redundancy?
It is harder for insurance to predict the changes of job loss over loss of health or loss of life
What are examples of a key employee in a business?
- MD with a strong personality
- Research scientist with specialist knowledge
- Skilled engineer with detailed knowledge company’s machinery
- Salesperson with a wide range of personal contacts
What are the ways term assurance is calculated on a key person in a business?
- Multiple of 5 to 10 times employee’s salary
- Key person salary divided by wage bill. Times by gross profits times years to be assured
Key person salary £45,000 /
Company’s wage bill £1,500,000 x
Company’s gross profits £3,000,000
X by sum assured term time taken for business to recover 5 years
Sum assured £450,000
Example of how cover is determined for a key person
In the event of a claim of a business life assurance the proceeds are not subject to corporation tax.
True or False
False
If a member of a partnership dies & no life cover is in place. What does the Partnership Act of 1890 stipulate must happen?
Partnership is dissolved & profits divided between remaining partners & deceased partners estate
What should the arrangements include include for death of a business partner for arrangements after the death of a business partner?
- Supported by life assurance
- State what should happen to the partners share of business in their death
- Trust should detail the distribution of proceeds of life assurance
What are the 3 main methods for arrangements for life assurance of a partner in a partnership?
- Automatic Accrual Method
- Buy-and-sell Method
- Cross-Option Method
How does Automatic Accrual Method work for the deceased partnership share in a partnership?
- Deceased partners share is divided amongst remaining partners in equal proportions
- Life assurance for partner’s family is compensated with proceeds of life policy
- 100% IHT for business purposes
How does the Buy-and-sell method work for the deceased partnership share in a partnership?
- Partners enter into an agreement where on the death of a partner the have to buy the deceased share
- Business relief for IHT is not available
How does the Cross-Option method work for the deceased partnership share in a partnership?
- Deceased partners estate have to option to sell their business shares to remaining partners
- Partners have the option to buy the shares
- Those who inherit receive relief from IHT
How are Partnership & Shareholder similar in regards to the death of a key person?
The both have the same life assurance products available
What would a business need to do to do in the event of the sickness of an employee?
Purchase Critical Illness Cover (CIC) to cover the sickness of a employee and pay the salary of a replacement
What would a business need to do to do in the event of the sickness of a business partner?
Purchase Income Protection Insurance (ICP) or Critical Illness Cover (CIC) to avoid the sick partner becoming a drain on the businesses resources
What could a sole trader do lessen the affect of being sick for a period?
Take out Income Protection Insurance (IPI) with a short deferred period
All these are what?
- Ensuring mortgage affordability
- Mortgage repayments stressed over a 5 year period
- Choice of an appropriate lender
- Wrong investments could lead to IO mortgage not being repaid at the end of the term
- Large Indebtedness leading to mortgage unaffordability
- Ensuring adequate protection is in place
Considerations of borrowing
What is Citizens Advice?
A service to provide advice on many issues including financial anybody
What are the 2 reasons people invest?
- Provide Income
- Provide a capital lump sum
- Short term emergencies
- Specific Purchases
- Education Fees
- Gifts to children
- Buying a business
- Loan repayment
- Funds for Retirement
All the above are examples of what?
Why people need income or capital
How are savings built up?
- Small regular amounts from disposable income
- Invest a lump sum from a legacy or a windfall
Is the below statement correct?
A customer who invests in stock market activities takes a higher risk but has the option of greater returns?
Yes it is the principles of risk reward
How are funds accessible on the below accounts
- Deposit Accounts
- Gilts, Corporate Bonds
- Shares (Irredeemable)
- Instant Access
- Fixed Maturity Date
- Have to be sold
What are the main taxes affecting investors in the UK?
- Income tax
- Capital Gains tax
Why is it important to consider the tax regime of an investors before recommending products?
To see which products will suitable for tax purposes
What is important to remember with Inflation?
Before an investment can grow in real terms it must first grow in line with inflation
What is the aim of investment?
Provide a real return
What is real rate of return?
Nominal interest / Growth rate minus inflation rate
What is the “Money Illusion”?
Investors only think of the headline rate and fail to factor in the effects of inflation
What might savers do if they feel savings accounts are offering a return too low?
They may invest in riskier accounts to try to gain a higher return
What might borrowers do if interest rates are low?
May be tempted to borrow more as rates are low and it is cheap to borrow
What is the difference between “Actual” & “Real” terms of inflation?
- Actual terms is the amount and investment
- Real terms is the effect inflation has on purchasing power
Why is retirement planning important?
- Older population has mean there is more strain on the pension system “Pension Crisis”
- Employers have moved away from defined benefits schemes to define contribution schemes
It is cheaper for an individual to invest in an pension at an earlier age?
True or False
True
What are the factors that may affect the ability for a person to save for retirement later in life?
- Long term care insurance
- Estate Planning
- Power of Attorney
What are the 2 main questions to ask when dealing with estate planning?
- Has the client made a valid will?
- Has the client taken steps to mitigate IHT liability
What should a financial advisor encourage a client to do regarding estate planning?
Contact a legal advisor to create a will
What are the 2 approaches relating to IHT a person can take?
- Avoid having to pay it
- Make provision for paying it when it’s due
What are the ways that IHT liabilities can be reduced?
- Making gifts out of the estate
- Placing the assets in trust
What have the tax authorities done to stop the tax loophole of people placing their property in trust to avoid IHT?
An annual tax is charged on they property that they occupy
What is another way that people can reduce their liability to IHT?
Take out a life assurance policy & ensure the policy is written in trust
A recommended product should just factor in tax considerations?
True or False
False it should factor in
Risk, accessibility, product type, minimum contributions & term
How can a customer reduce their personal tax liability
- Consider using tax free products such as ISA’s, Pensions, Friendly Societies
- Non-taxpayers should consider investing in offshore funds which are tax free
- If Annual Exempt Amount is exceed tax free investments in gilts & corporate bonds
Can a non-tax payer reclaim tax that has been paid on their behalf?
True or False
False
What should a person who is leaving or moving to the UK for tax purposes regarding their investments?
They should consider whether it is better to encash or retain these investments
What do the Gift With Reservations (GWR) mean for a person who gifts a property but continues to leave in the property?
It means they are liable to IHT if they receive benefit from the asset
What percentage of national earnings is state pension set at?
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