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CeMAP Unit 1 > Topic 15 The Main Advice Arrears > Flashcards

Topic 15 The Main Advice Arrears Flashcards

1
Q

What is Budgeting?

A

A balance between buying the necessities of life and buying the luxuries of life

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2
Q

Why is it important for an advisor to consider the financial impact of selling too many products to a client?

A

To not stretch the client expenditure too far to make their life financially difficult

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3
Q

What are the reasons people make not take out family protection?

A
  • May be unaware of the risk
  • Believe they can’t afford it
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4
Q

What are the financial impacts of not taking out any life cover for a family?

A
  • Surviving spouse may need to work more
  • Childcare costs may now be a possibility
  • May have to move out if mortgage payments become unaffordable
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5
Q

Why might it be a good idea to purchase some form of life cover for a spouse who is a homemaker?

A

On the event of their death the surviving spouse may give up work to look after children or have childcare or housekeeping costs

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6
Q

Why might it be even more important to have protection against long term illness than premature death?

A
  • Greater chance of long term illness than premature death
  • Financial impact on family can be greater
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7
Q

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
A

Examples of why it is a benefit to have protection for long term sickness

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8
Q

What are the questions an adviser may consider in relation to the amount and type of cover required for long term illness cover?

A
  • 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?
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9
Q

Why is it harder to obtain protection because of unemployment or redundancy?

A

It is harder for insurance to predict the changes of job loss over loss of health or loss of life

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10
Q

What are examples of a key employee in a business?

A
  • 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
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11
Q

What are the ways term assurance is calculated on a key person in a business?

A
  • 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
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12
Q

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

A

Example of how cover is determined for a key person

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13
Q

In the event of a claim of a business life assurance the proceeds are not subject to corporation tax.

True or False

A

False

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14
Q

If a member of a partnership dies & no life cover is in place. What does the Partnership Act of 1890 stipulate must happen?

A

Partnership is dissolved & profits divided between remaining partners & deceased partners estate

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15
Q

What should the arrangements include include for death of a business partner for arrangements after the death of a business partner?

A
  • 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
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16
Q

What are the 3 main methods for arrangements for life assurance of a partner in a partnership?

A
  1. Automatic Accrual Method
  2. Buy-and-sell Method
  3. Cross-Option Method
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17
Q

How does Automatic Accrual Method work for the deceased partnership share in a partnership?

A
  • 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
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18
Q

How does the Buy-and-sell method work for the deceased partnership share in a partnership?

A
  • 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
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19
Q

How does the Cross-Option method work for the deceased partnership share in a partnership?

A
  • 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
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20
Q

How are Partnership & Shareholder similar in regards to the death of a key person?

A

The both have the same life assurance products available

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21
Q

What would a business need to do to do in the event of the sickness of an employee?

A

Purchase Critical Illness Cover (CIC) to cover the sickness of a employee and pay the salary of a replacement

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22
Q

What would a business need to do to do in the event of the sickness of a business partner?

A

Purchase Income Protection Insurance (ICP) or Critical Illness Cover (CIC) to avoid the sick partner becoming a drain on the businesses resources

23
Q

What could a sole trader do lessen the affect of being sick for a period?

A

Take out Income Protection Insurance (IPI) with a short deferred period

24
Q

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
A

Considerations of borrowing

25
Q

What is Citizens Advice?

A

A service to provide advice on many issues including financial anybody

26
Q

What are the 2 reasons people invest?

A
  • Provide Income
  • Provide a capital lump sum
27
Q
  • 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?

A

Why people need income or capital

28
Q

How are savings built up?

A
  • Small regular amounts from disposable income
  • Invest a lump sum from a legacy or a windfall
29
Q

Is the below statement correct?

A customer who invests in stock market activities takes a higher risk but has the option of greater returns?

A

Yes it is the principles of risk reward

30
Q

How are funds accessible on the below accounts

  1. Deposit Accounts
  2. Gilts, Corporate Bonds
  3. Shares (Irredeemable)
A
  1. Instant Access
  2. Fixed Maturity Date
  3. Have to be sold
31
Q

What are the main taxes affecting investors in the UK?

A
  1. Income tax
  2. Capital Gains tax
32
Q

Why is it important to consider the tax regime of an investors before recommending products?

A

To see which products will suitable for tax purposes

33
Q

What is important to remember with Inflation?

A

Before an investment can grow in real terms it must first grow in line with inflation

34
Q

What is the aim of investment?

A

Provide a real return

35
Q

What is real rate of return?

A

Nominal interest / Growth rate minus inflation rate

36
Q

What is the “Money Illusion”?

A

Investors only think of the headline rate and fail to factor in the effects of inflation

37
Q

What might savers do if they feel savings accounts are offering a return too low?

A

They may invest in riskier accounts to try to gain a higher return

38
Q

What might borrowers do if interest rates are low?

A

May be tempted to borrow more as rates are low and it is cheap to borrow

39
Q

What is the difference between “Actual” & “Real” terms of inflation?

A
  • Actual terms is the amount and investment
  • Real terms is the effect inflation has on purchasing power
40
Q

Why is retirement planning important?

A
  • 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
41
Q

It is cheaper for an individual to invest in an pension at an earlier age?

True or False

A

True

42
Q

What are the factors that may affect the ability for a person to save for retirement later in life?

A
  • Long term care insurance
  • Estate Planning
  • Power of Attorney
43
Q

What are the 2 main questions to ask when dealing with estate planning?

A
  1. Has the client made a valid will?
  2. Has the client taken steps to mitigate IHT liability
44
Q

What should a financial advisor encourage a client to do regarding estate planning?

A

Contact a legal advisor to create a will

45
Q

What are the 2 approaches relating to IHT a person can take?

A
  1. Avoid having to pay it
  2. Make provision for paying it when it’s due
46
Q

What are the ways that IHT liabilities can be reduced?

A
  • Making gifts out of the estate
  • Placing the assets in trust
47
Q

What have the tax authorities done to stop the tax loophole of people placing their property in trust to avoid IHT?

A

An annual tax is charged on they property that they occupy

48
Q

What is another way that people can reduce their liability to IHT?

A

Take out a life assurance policy & ensure the policy is written in trust

49
Q

A recommended product should just factor in tax considerations?

True or False

A

False it should factor in

Risk, accessibility, product type, minimum contributions & term

50
Q

How can a customer reduce their personal tax liability

A
  • 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
51
Q

Can a non-tax payer reclaim tax that has been paid on their behalf?

True or False

A

False

52
Q

What should a person who is leaving or moving to the UK for tax purposes regarding their investments?

A

They should consider whether it is better to encash or retain these investments

53
Q

What do the Gift With Reservations (GWR) mean for a person who gifts a property but continues to leave in the property?

A

It means they are liable to IHT if they receive benefit from the asset

54
Q

What percentage of national earnings is state pension set at?

A

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CeMAP Unit 1 (18 decks)

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