Topic 17: Types of Financial Protection 1

Question 1

What are state benefits?

Answer 1

Paid to eligible claimants to provide a relatively minimal degree of financial protection

Question 2

What is Eligibility criteria?

Answer 2

Factors determining the circumstances in which someone is able to claim a particular benefit.

Question 3

What is a means-tested benefit?

Answer 3

Eligibility depends not only on the claimant suffering from a certain condition or experiencing a certain life event, but also on the claimant’s financial circumstances – in particular, how much income and/or savings they have.

Question 4

What is Universal credit?

Answer 4

An integrated means‑tested benefit not limited to people who are in or out of work, thus aiming to improve the transition between the two.

Question 5

What is Statutory Sick Pay (SSP)?

Answer 5

Paid by employers to employees who are off work owing to sickness or disability for four consecutive days or longer.

Question 6

What is Lower Earnings Limit (LEL)?

Answer 6

The amount above which an individual is entitled to National Insurance contribution (NIC)‑dependent benefits. For earnings in the LEL band, the person does not pay NICs but gets the benefits of paying.

Question 7

What is Personal Independence Payment (PIP)?

Answer 7

Helps people with the additional costs arising from illness or disability, usually where the person has had difficulties with daily living or mobility for three months and expects their difficulties to continue for at least another nine months.

Question 8

What is Support for Mortgage Interest (SMI)?

Answer 8

Government support paid as a loan, not a benefit, to help those who are out of work or in receipt of certain state benefits to meet their mortgage payments. It is paid to cover interest (not capital) on the first £200,000 of a mortgage, and it must be repaid when the property is sold or transferred to another owner.

Question 9

What is Equitable right?

Answer 9

Applies when the lender asks for a policy to be deposited with it as security for a loan. Although the lender has no legal rights over the policy, the deposit indicates that the two parties have agreed its use as security and gives the lender an equitable (in fairness) right.

Question 10

What is Term Assurance?

Answer 10

Life assurance that provides a tax-free lump sum on death during a stated term. There is no investment element and cover stops at the end of the term.

Question 11

What is Life Assured?

Answer 11

The person covered by a life assurance policy.

Question 12

What is Sum Assured?

Answer 12

The monetary amount of cover provided by a life assurance policy.

Question 13

What is Level term assurance?

Answer 13

The sum assured is set at the start and stays the same throughout the term. Mainly used for interest-only mortgages.

Question 14

What is Mortgage Protection Assurance (decreasing term)?

Answer 14

Term assurance where the sum assured reduces annually, broadly in line with the capital outstanding on a repayment mortgage. Premiums remain level throughout the term.

Question 15

What is Convertible term assurance?

Answer 15

Level term insurance that provides an option to convert the policy into a whole-of-life or endowment policy during the term, although the sum insured can’t be increased. No medical underwriting is required on conversion. There may also be an option to extend the term.

Question 16

What is assignment?

Answer 16

Where a mortgage lender insists on the policyholder signing over the benefits of a life policy to the lender for the term of the mortgage. It gives the lender certain rights, including the right to surrender the policy if the borrower fails to make mortgage payments.

Question 17

What is Whole-of-life assurance?

Answer 17

A life policy that combines life cover with investment. It covers the life assured for their whole lifetime and pays out the sum assured in the event of death, whenever it occurs, provided that the premiums have been paid.

Question 18

What is Reviewable premiums?

Answer 18

Insurers may offer reviewable premiums on some term plans. The premium is reviewed during the term, typically every five years, in line with the insurer’s claims experience and administration costs. Reviewable premiums are generally lower than fixed premiums in the early years of the contract but premiums are likely to increase at a review.

Question 19

What is Surrender value?

Answer 19

An amount paid when cashing in an investment-linked policy early. This ends the policy and typically incurs high charges.

Question 20

What is Critical Illness Cover (CIC)?

Answer 20

Provides a tax-free lump sum if the policyholder is diagnosed with one of a range of specified medical conditions, known as critical illnesses. Not all illnesses are covered, and the policy will clearly define what is covered and when a claim would be eligible.

Question 21

What is a Combined plan?

Answer 21

When CIC is arranged through a plan that also offers life cover, death does not have to arise from a critical illness for death benefits to be paid.

Question 22

What is a Buyback option?

Answer 22

Included on some critical illness policies and requires an additional premium from the start. Allows those who have made a CIC claim to arrange a limited amount of life cover without medical underwriting

Question 23

What is Income Protection Insurance (IPI)?

Answer 23

Provides a tax-free monthly income if the insured cannot work due to accident, injury or illness. The insured can choose a term and a deferred period to suit their needs. Claims are paid until the earlier of return to work, death or the end of the selected term. The policy is not renewable, which means that, as long as premiums are maintained, the insurer cannot cancel the policy.

Question 24

What is Maximum benefit?

Answer 24

To prevent prolonged IPI claims, life companies insist on a maximum benefit that can be paid out. This amount applies across all IPI policies a client may have, so they are asked to disclose whether they have any other policies or sources of income.

Question 25

What is a Deferred period?

Answer 25

The period after which benefits are payable, for example on an IPI policy, effectively excluding claims for short-term illnesses. The insured can choose from a range of deferred periods based on the cost and their existing protection

Question 26

What is Indexation?

Answer 26

Linking the sum assured to an index figure, such as an inflation measure, so that the sum assured rises year on year in line with the index.

Question 27

What are Exclusions?

Answer 27

Conditions under which payment will not be made in the event of a claim.