Topic 21 - Using endowment policies for mortgage repayment Flashcards
Gavin is a CeMAP-qualified mortgage adviser with no other financial services qualifications. In relation to endowments, he can:
provide a customer with information about the product.
make recommendations to a customer about the product.
provide an execution-only service to allow the customer to arrange an endowment.
provide a customer with information about the product. - Only qualified financial advisers can provide recommendations on investment products.
Jack and June would like to arrange an endowment-backed interest-only mortgage to buy their house. It should be set up using:
two ‘single life’ policies.
a ‘joint life first death’ policy.
a ‘joint life second death’ policy.
a ‘joint life first death’ policy. - If a mortgage is arranged in joint names, any endowment should be set up on a ‘joint life first death’ basis, which will pay out when the first joint owner dies and allow the survivor to pay off the mortgage. A ‘joint life second death’ policy would provide the death benefit when the second person died, which is too late.
With a with-profits endowment, the fund manager will:
take a relatively cautious approach to investment.
invest only in guaranteed investment areas.
take a significant element of risk to achieve growth.
take a relatively cautious approach to investment. - The manager will take a relatively cautious approach to investment, but will make some investment in areas such as stocks and shares that do not provide guarantees. They are unlikely to take significant risks, due to the guarantees and liabilities provided by this type of fund.
Julian has a low-cost with-profits endowment to support his interest-only mortgage. His reversionary bonus is likely to be added to the policy:
each day.
each month.
each year.
each year - Reversionary bonuses can be calculated in a number of ways and are usually added to the policy each year.
A potential advantage of a unit-linked endowment over a low-cost with-profits endowment is that:
there is a choice of investment funds.
the guaranteed maturity value is usually higher.
bonuses may be higher if the fund performs well.
there is a choice of investment funds. - Unit-linked endowments offer a range of funds, while with-profits offer just one fund. While the guaranteed sum assured on a with-profits plan will be paid on maturity, there is no such guarantee on a unit-linked plan. Unit-linked plans do not offer bonuses.
Assuming all were set up to cover the same mortgage, which type of endowment would guarantee to repay an interest-only mortgage on maturity?
Low-cost with-profits endowment.
Full with-profits endowment.
Unitised with-profits endowment.
Full with-profits endowment. - A full with profits endowment has a guaranteed sum assured equal to the mortgage, so if premiums are maintained the maturity amount will be at least equal to the mortgage. Both low-cost with-profits and unitised with-profits endowments have a guaranteed sum assured lower than the mortgage and rely on bonuses, which are not guaranteed, to meet the maturity target.
The death benefit on a unit-linked endowment is:
guaranteed and comprises the plan’s value on death plus variable term assurance.
guaranteed and provided by a form of level term assurance.
not guaranteed and comprises the bid value of units at the time of death.
guaranteed and comprises the plan’s value on death plus variable term assurance.
- The death benefit is guaranteed and comprises the plan’s value on death plus variable term assurance to plug the gap between the guaranteed death benefit and the unit value.
For a typical 25-year unit-linked endowment, policy reviews would occur after:
5, 10 and 20 years and then annually.
10, 15 and 20 years and then annually.
10 years and then annually.
10, 15 and 20 years and then annually.
Which of the following statements about qualifying unit-linked endowments are true? Select all that apply.
A - Investors buy units at the bid price.
B - There is no tax to pay on maturity.
C - Maturity benefits are partially guaranteed.
D - The death benefit is paid for by a separate charge on the plan.
E - It may be possible to stop, restart or alter premiums.
F - Good fund growth may mean the mortgage could be paid off early.
B, E&F - Units are bought at the offer price. There is no maturity benefit guaranteed. The death benefit is paid for by cashing in units from the plan.
A unitised with-profits plan offering ‘fixed units’ fixes the value of units on purchase, and:
does not add bonuses.
adds bonuses by buying more units.
adds bonuses by increasing unit values.
adds bonuses by buying more units. - With fixed units, bonuses are added by buying more units at the current price.
Which of the following courses of action would be the least prudent if a unit-linked endowment policyholder received a red letter from the insurer?
Increase the endowment premiums.
Switch the projected shortfall to a capital repayment basis.
Convert the mortgage to a capital repayment basis.
Increase the endowment premiums. - There are a number of approaches, but increasing the endowment premium would not guarantee a sum sufficient to repay the mortgage, and given the existing performance the policyholder would not have much confidence in this approach. Converting some or all of the mortgage to a capital repayment basis would provide a higher level of security.
‘Smoothing’ refers to the building up of a reserve when fund performance is poor. True or false?
False - ‘Smoothing’ refers to the building up of a reserve when fund performance is good, with the aim of ensuring that when fund performance is poor it is still possible to pay some level of bonus, ie it reduces the potential variation in the level of bonus paid across a number of years.
Once added to the GSA, reversionary bonuses:
cannot be removed but may be reduced if the policy is surrendered early.
cannot be removed but may be reduced if the policyholder dies before the policy reaches maturity.
may be removed if the policy is made paid up.
cannot be removed or reduced in any circumstances.
cannot be removed but may be reduced if the policy is surrendered early.
A low‑cost with‑profits endowment guarantees to repay the mortgage on the death of the borrower. True or false?
True
The low‑cost with‑profits endowment has reduced premiums for the first five years. True or false?
False - False. It is the low‑start low‑cost with‑profits endowment that has reduced premiums for the first five years.
