U1: T11 - LIFE ASSURANCE

Question 1

Where a claim is made on a term assurance policy the benefits payable are always free of income tax.

True or false?

Answer 1

True – term assurances have no investment element so proceeds are paid tax‐free.

Question 2

What is the main benefit of a convertible term assurance?

Answer 2

A convertible term assurance allows conversion of some or all of the plan to a different type of plan, at a later date, without the life assured having to provide evidence of their state of health.

Question 3

Which of the following statements relating to term assurance is correct?

a) A decreasing term assurance will pay benefits only if the insured dies within the policy term.

b) Gift inter vivos cover is maintained at the same level for seven years.

c) A convertible term assurance policy can be converted to an endowment or whole‐of‐life assurance only within two years of the date of the original policy.

d) If a convertible term assurance policy is converted to an endowment, the maturity date of the new policy must not be more than five years later than that of the original policy.

Answer 3

Answer is A.

A decreasing term assurance will pay benefits only if the insured dies within the policy term.

Question 4

Which of the following is true of a whole‐of life policy?

a) It is designed to provide protection rather than investment.

b) Premiums are always payable throughout
the full term of the policy.

c) It can only be used on a with‐profits basis.

d) It will pay out only on the death of the insured and cannot be surrendered.

Answer 4

Answer is A.

It is designed to provide protection rather than investment.

Question 5

Duncan and Alice, who are married, are taking out a whole‐of‐life plan to provide for payment of inheritance tax liabilities on their deaths.

The policy would normally be set up in which of the following ways?

a) Two single lives.
b) Single life.
c) Joint‐life first‐death.
d) Joint‐life second‐death.

Answer 5

Answer is D.

Transfers between husband and wife are free of IHT so any liability generally arises on second death. A plan being set up to provide the funds to pay IHT would be set up on a joint‐life second‐death basis.

Question 6

The main advantage of writing a life assurance policy in trust is to:

a) increase personal allowances.
b) ensure the policy obtains qualifying status.
c) create a tax‐exempt fund.
d) ‘ring‐fence’ the proceeds outside the individual’s estate.

Answer 6

Answer is D.

‘Ring‐fence’ the proceeds outside the individual’s estate.

Question 7

Which type of whole‐of‐life policy offers a fixed level of life cover at outset that may be increased by the addition of bonuses?

a) With‐profits.
b) Non‐profit.
c) Unit‐linked.
d) Low‐cost.

Answer 7

Answer is A.

A with‐profits whole‐of‐life plan has a certain level of life cover at outset which can then be increased as bonuses are added during the term.

Question 8

What other type of life assurance is combined with a with‐profits plan in a low cost whole‐of‐life plan?

a) Non‐profits.
b) Decreasing term assurance.
c) Level term assurance.
d) Increasing term assurance.

Answer 8

Answer is B.

A low‐cost whole‐of‐life plan combines with‐profits with a decreasing term assurance.

Question 9

If a policy benefits from ‘waiver of premium’, what does it mean?

a) No premiums are paid for the first 12 months of a life assurance plan.

b) Reduced premiums are paid for the first 12 months of a life assurance plan.

c) No premiums are payable if the life assured is unable to work as a result of accident or sickness.

d) Any increase in premium as a result of medical underwriting is added as a debt to the policy.

Answer 9

Answer is C.

Waiver of premium cover means that premiums are not payable (ie they are waived) in the event that the insured is unable to work due to accident or sickness.

Question 10

Which of the following is incorrect in respect of low‐cost endowment policies?

a) The basic sum assured increases with the addition of bonuses.

b) The basic sum assured is lower than the amount borrowed.

c) The policy is made up of a with‐profits endowment and a decreasing term assurance.

d) The policy is guaranteed to repay the mortgage in full at the end of the term.

Answer 10

The answer is d).

The policy is not guaranteed to repay the mortgage in full at the end of the term.

Question 11

What is Term Assurance?

Answer 11

Is the most basic form of life assurance - pure protection for a limited period with NO ELEMENT OF INVESTMENT

Question 12

In the context of Term Assurance - what is ‘Sum Assured’?

Answer 12

The amount that will be paid out under the terms of the policy

Question 13

In the context of Term Assurance - what is ‘Life Assured’?

Answer 13

The person whose life is covered by the policy i.e. if the person dies within the term of the policy a lump sum or income will be paid.

Question 14

In the context of Term Assurance - what is ‘Policyholder’?

Answer 14

The person who owns the policy and pays the premiums - can be the same individual as the life assured

Question 15

In the context of Term Assurance - what is ‘Term’?

Answer 15

The specified period for which the protection is provided

Question 16

In the context of Term Assurance - what is ‘Cash value’?

Answer 16

As there is no investment element then there is no cash value which can be taken prior to death occurring

Question 17

How is ‘Critical Illness Cover’ paid?

A) Tax-free lump sum
B) Tax-free monthly payments
C) Taxed lump sum
D) Taxed monthly payments

Answer 17

A) Tax-free lump sum

Question 18

What term is defined by:
‘pure protection for a limited period with no element of investment. For this reason, it is also the cheapest.’

Answer 18

Term Assurance

Question 19

‘The sum payable by the insurance company to the policyholder if the policyholder chooses to terminate the policy before the end of the term, or before the insured event occurs.’

Is known by what term?

Answer 19

Surrender Value

Question 20

What is X in the next sentence?

“A tax rate of X per cent is deemed to have been deducted from most income and gains on life assurance funds.”

Answer 20

X = 20%

Question 21

In addition to the 20% deducted from most income/gains on life assurance funds. For non qualifying policies there is the possibility of what additional income?

Answer 21

For non-qualifying policies there is the possibility of higher-rate income tax at 20 per cent or additional rate income tax at 25 per cent.

For qualifying policies there is no further liability to tax.

Question 22

Flexible whole-of-life assurance is cashed in at what level:
A) Cancellation price
B) Bid Price
C) Single unitised price

Answer 22

B) Bid Price

Question 23

The most appropriate life assurance policy to protect a repayment mortgage would be a form of:

a) increasing term assurance.
b) convertible term assurance.
c) level term assurance.
d) decreasing term assurance.

Answer 23

d) decreasing term assurance.

Question 24

What is the normal maximum age for exercising the renewal option on a renewable term assurance policy?

a) 50.
b) 55.
c) 60.
d) 65.

Answer 24

d) 65.

Question 25

During the lifetime of a full with-profits endowment, the death benefit should:

a) stay level.
b) increase.
c) decrease.
d) fluctuate.

Answer 25

b) increase.

Question 26

In strong stock market conditions, which type of mortgage-linked endowment is most likely to allow early repayment of the mortgage?

a) Low-cost with profits.
b) Non-profits.
c) With-profits.
d) Unit-linked.

Answer 26

d) Unit-linked.

Question 27

Jason has a flexible whole-of-life assurance policy on a maximum cover basis. This means that Jason’s:

a) premiums will be higher than those of a balanced cover policy.
b) plan will accumulate a higher investment value than a minimum cover policy.
c) premiums are likely to increase after ten years.
d) sum assured will increase after ten years.

Answer 27

c) premiums are likely to increase after ten years.

Question 28

Which of the following is true of a unitised with-profits endowment?

a) It cannot be assigned to a lender.
b) Unit values cannot fall.
c) Only terminal bonuses are added.
d) The full unit value is payable on surrender of the policy.

Answer 28

b) Unit values cannot fall.

Question 29

Jim has a with-profits whole-of-life plan, and Jenny has a low-cost with-profits whole-of-life plan, both offering the same death benefit. The main difference in the two plans is that:

a) Jenny’s policy will not benefit from regular bonuses.
b) The fixed death benefit on Jim’s plan will be lower.
c) Part of the death benefit on Jenny’s policy is on a reducing basis.
d) The value of units on Jenny’s plan will be lower.

Answer 29

c) Part of the death benefit on Jenny’s policy is on a reducing basis

Question 30

Charu and Rajeev have written wills leaving everything to the survivor, and on their death the estate will pass to their children. They wish to provide a lump sum for the children to be able to settle any inheritance tax (IHT) liability on their inheritance. What life assurance arrangement would achieve their objective?

a) A joint-life second-death whole-of-life plan for the potential IHT liability, in trust.
b) A joint-life second-death gift inter vivos policy for the potential IHT liability, in trust.
c) Two single whole-of-life plans, in trust, each for 50% of the potential IHT liability.
d) A joint-life first-death whole-of-life plan for the potential IHT liability, in trust.

Answer 30

a) A joint-life second-death whole-of-life plan for the potential IHT liability, in trust.

Question 31

A single parent wants to provide an income for his two children in the event of his death, payable until the youngest child is 21. What type of life assurance policy would suit his requirements and cost the least?

a) Family income benefit.
b) Low-cost endowment.
c) Level term assurance.
d) Whole-of-life assurance.

Answer 31

a) Family income benefit.

Question 32

What add-on benefit will ensure a life assurance policy will continue to provide cover when premiums are suspended due to the policyholder’s illness preventing them from working?

a) Temporary disability cover.
b) Income protection benefit.
c) Waiver of premium benefit.
d) Terminal illness benefit.

Answer 32

c) Waiver of premium benefit.

Question 33

What is the minimum term limited premiums are payable for in a ‘Whole-of-life’ assurance policy?
A) 5 years
B) 10 years
C) 15 years

Answer 33

B) 10 years

If limited premiums are chosen, the minimum term is normally ten years.

Question 34

Which ‘Whole-of-Life assurance policy best describes:

“Fixed level of life assurance in return for payment of a fixed premium.”

A) Non-profit
B) With-profits
C) Low-Cost
D) Unit-Linked
E) Unit-Linked with Profits

Answer 34

A) Non-profit

Question 35

Which ‘Whole-of-Life assurance policy best describes:

” Units issued to the planholder. A minimum level of cover is set at outset which is increased when the value of the units held rises above that amount.”

A) Non-profit
B) With-profits
C) Low-Cost
D) Unit-Linked
E) Unit-Linked with Profits

Answer 35

D) Unit-Linked

Question 36

Which ‘Whole-of-Life assurance policy best describes:

“Promise a certain level of cover which is provided by the combination of with-profits and a decreasing term assurance. As bonuses are paid to the with-profits element, the decreasing term element reduces.”

A) Non-profit
B) With-profits
C) Low-Cost
D) Unit-Linked
E) Unit-Linked with Profits

Answer 36

C) Low-Cost

Question 37

Which ‘Whole-of-Life assurance policy best describes:

“Issues units with a guarantee that unit prices will either never fall below a certain level or will increase by at least a stated minimum amount.”

A) Non-profit
B) With-profits
C) Low-Cost
D) Unit-Linked
E) Unit-Linked with Profits

Answer 37

E) Unit-Linked with Profits

Question 38

Which ‘Whole-of-Life assurance policy best describes:

“Fixed minimum level of cover to which bonuses are added to reflect investment profits.”

A) Non-profit
B) With-profits
C) Low-Cost
D) Unit-Linked
E) Unit-Linked with Profits

Answer 38

B) With-profits

Question 39

Which type of flexible “whole of live” coverage is best described by the following sentence:

“this is normally set at such a level that cover can be maintained for ten years. After that point, all the units will have been used up and increased premiums will be needed if the cover is to continue.”

A) Maximum Coverage
B) Balanced Coverage
C) Minimum Coverage

Answer 39

A) Maximum Coverage

Question 40

Which type of flexible “whole of live” coverage is best described by the following sentence:

“a minimum level of life cover is maintained (probably the minimum required for the policy to remain qualifying) and the number of units attaching to the policy builds up to a substantial investment element.”

A) Maximum Coverage
B) Balanced Coverage
C) Minimum Coverage

Answer 40

C) Minimum Coverage

Question 41

Which type of flexible “whole of live” coverage is best described by the following sentence:

“This is the level of cover, for a given premium, that the company expects to be able to maintain throughout the life assured’s lifetime.”

A) Maximum Coverage
B) Balanced Coverage
C) Minimum Coverage

Answer 41

B) Balanced Coverage

Question 42

For a ‘with-profits’ endowment, if bonuses are paid on death - the endowment policy pays:

A) Reversionary Bonuses
B) Terminal Bonuses

Answer 42

B) Terminal Bonuses

Terminal bonuses – these are bonuses that may be added when a death or maturity claim becomes payable. Unlike reversionary bonuses, a terminal bonus does not become part of the policy benefits until the point of a death or maturity claim, thus allowing the company to change the terminal bonus rate – or even remove the terminal bonus altogether. Terminal bonuses are intended to reflect the level of investment gains that the company has made over the term of the policy, so the rate of bonus often varies according to the length of time that the policy has been in force. Since the 1990s, many companies have reduced the level of their terminal bonuses.

Question 43

For a ‘with-profits’ endowment, if bonuses are paid each year - the endowment policy pays:

A) Reversionary Bonuses
B) Terminal Bonuses

Answer 43

A) Reversionary Bonuses

Reversionary bonuses – these are normally declared each year and, once they have been allocated to a policy, they cannot be removed by the company, provided that the policy is held until the end of the term or earlier death. Some companies declare a simple bonus, where each annual bonus is calculated as a percentage of the sum assured; others declare a compound bonus, with the new bonus being based on the total of the sum assured and previously declared bonuses. Most companies set their reversionary bonuses at a level that they hope to be able to maintain for some time, in order to smooth out the short‐term variations of the stock markets. A trend of falling bonus rates over a number of years means that bonus rates are much lower now than they were in the 1980s and 1990s.