Topic 16: Financial Protection and Planning Flashcards
What is Financial Protection?
Provision to mitigate the financial difficulties that would arise in the event of serious illness, disability or death.
What is Underinsurance?
When people have inadequate financial protection in place. Underinsurance arises for a variety of reasons, including misapprehension of needs, affordability perception and product complexity.
What is Insurance Underwriting?
Assesses the risk involved in insuring the applicant by considering factors related to their health, lifestyle, occupation and environment.
What are Protection Priorities?
Clients’ differing prioritisation of financial protection needs depending on their circumstances, including marital status, life stage and whether they have dependants.
What are 6 uses of protection funds?
- Replace earned income
- Repay debts
- Meet additional living expenses (e.g childcare)
- Ensure existing plans can be completed
- Provide medical treatment or care
- Meet inheritance tax (IHT) liabilities without selling property
The shortfall can be expressed as the difference between the:
- amount of protection that would be needed if the risk event happened;
and - amount of protection that the client currently has.
There is a considerable amount of underinsurance for life cover and illness or
accident protection in the UK. The main reasons are as follows?
- ‘it wont happen to me’
- Misapprehension of needs
- Affordability perception
- State provision
- Unhappy subject
- Consumer trust and product complexity
What is the protection priorities for a young single person?
Protection is primarily intended to protect against the consequences of
financial loss. For a young, single person, there may be no adverse financial
consequences in the event of their death, even if they have a mortgage or
other loans.
Any outstanding mortgage or debts might be repaid from the sale of the
property and by the use of savings. So, financial protection through life
assurance is unlikely to be a priority.
- Protection in the event of illness or accident is, however, likely to be
important to maintain standards of living if the person is unable to work.
- Protection against the financial effects of critical illness or unemployment
is also likely to be significant.
What is the protection priorities for Younger couple without children?
A joint mortgage or unsecured debts may require protecting to the extent that each partner would be unable to afford repayments in the event of death or illness of the other.
A young couple may also have an interest in private medical insurance (PMI).
Planning for long‑term care is another area of need but, psychologically, may be too far away to worry about at this life stage.
The need to plan for IHT in expectation of receiving future legacies is a
possibility, depending on the situation
What is the protection priorities for Younger couple with children?
If both parents work, with children in paid childcare or being looked after by other family members, the couple is likely to rely on both incomes. So, protection in the event of death and illness
is crucial.
If one of the parents looks after the children full‑time, the protection needs
are not likely to be much diminished. Someone would probably need to be
employed to carry out that role if the parent were to fall ill or die.
What is the protection priorities for Middle-aged couple, children have left home?
Many of the protection needs from earlier in life may have disappeared by
middle age.
As children leave home and become financially independent, the need for
financial protection in the event of death and illness decreases, although it is
unlikely to disappear.
Mortgages and other debts may be reduced, or perhaps paid off, and this will reduce the need in some areas of protection.
However, other needs may come to the fore:
- ensuring that the costs of medical treatment are protected through PMI;
- planning to fund long‑term care needs;
- IHT planning, depending on the size of the couple’s estate and their plans
for its future distribution.
What is the protection priorities for retirement?
Reliance on earned income will have ceased by retirement. This reduces the need for protection in the event of death or illness, because the individual no longer relies on their ability to work to generate income. However, the nature
of needs may change.
Benefits from pension plans will continue to be paid if the pension holder
becomes ill. However, if the member dies, benefits are likely to be reduced
and may even be wiped out.A scheme pension may cease or pay only reduced dependants’ benefits on
the member’s death. Ensuring that a spouse/partner and dependants are adequately protected may be a major area for planning at this stage in life. Other priorities are likely to be IHT mitigation and care provision.
Explain the ranking of financial needs?
- Protection of dependants from the
financial effects of a
loss of income or of meeting outgoings in the event of premature death - Protecting self and dependants from the financial effects
of losing the ability to earn an income in the long term
and/or additional costs that may arise from illness - Protection of income for a time later in life when the client either does not want to work or expects to be incapable of doing so (ie retirement planning)
- Increase and/or protection of the value of money saved or invested, either now or in the future
