U5: T16 - FINANCIAL PROTECTION AND PLANNING

Question 1

What type of life insurance product is usually best to support a mortgage?

Answer 1

Term insurance. The need is to provide cover for a defined term, and there is no need to build up a cash value in the plan; this makes some form of term insurance the answer. The exception is an endowment mortgage, where the plan has dual objectives – to pay off the mortgage in the event of death and to provide a lump sum to pay off the mortgage at the end of the term.

Question 2

Why would we not normally use whole-of-life assurance (non term) to protect a mortgage?

Answer 2

There is no technical reason why whole‐of‐life assurance could not be used to protect a mortgage. However, there are practical reasons why it is not normally used:
„1) It provides whole‐of‐life cover so is effectively open‐ended, while a mortgage has a defined term. Due to its open‐ended nature, whole‐of‐life assurance is more expensive than term insurance – the insurer’s risk is far harder to define.
„2) Whole‐of‐life plans usually build up a cash value, which can be released on early surrender. While this may seem attractive, it adds to the cost of the policy, and is not an essential element for mortgage protection.

Question 3

What type of insurance is likely to be a priority for a young, single person?

Answer 3

1. Illness or accident
2. Critical illness or unemployment

Not:
Life assurance

Question 4

What type of insurance is likely to be a priority for a young couple without children?

Answer 4

1. Income protection (service mortgage debts etc)
2. Private Medical Insurance (PMI)
3. IHT planning

Not:
Long term care

Question 5

What type of insurance is likely to be a priority for a young couple with children?

Answer 5

1. Illness and death (crucial)
2. Income protection (service mortgage debts etc)
3. Private Medical Insurance (PMI)
4. IHT planning

Not:
Long term care

Question 6

What type of insurance is likely to be a priority for a middle‐aged couple, children have left home?

Answer 6

1. PMI
2. long-term care needs
3. IHT planning

Question 7

Define Annuity.

Answer 7

If the scheme member has bought an annuity (which pays an income in retirement), this will cease on death unless there is annuity protection or a guarantee period.

Question 8

What type of insurance is likely to be a priority for a retired couple?

Answer 8

1. Pension protection (incase one dies)
2. IHT mitigation

Question 9

What does CIC stand for?

Answer 9

Critical illness cover

Question 10

What does IPI stand for?

Answer 10

Income protection insurance

Question 11

Protection for dependants in the event of death or illness is likely to be most crucial at which life stage?

a) Young, single person.
b) Younger couple with children.
c) Middle‐aged couple, children have left home.

Answer 11

b) Younger couple with children.

Question 12

PMI may become a priority at which life stage?

a) Young, single person.
b) Younger couple with children.
c) Middle‐aged couple, children have left home.

Answer 12

c) Middle‐aged couple, children have left home.

Question 13

Financial protection through life assurance is unlikely to be a priority for which of the following?

a) Young, single person.
b) Younger couple with children.
c) Middle‐aged couple, children have left home.

Answer 13

a) Young, single person.

Question 14

“I find income protection policies hard to understand.” This customer is voicing which reason for underinsurance?

a) It won’t happen to me.
b) Product complexity.
c) State provision.

Answer 14

b) Product complexity.

Question 15

If a mortgaged property owner dies, the survivor might end up with the whole mortgage while owning only half the value of the property if it was registered:

a) as tenants in common.
b) as a joint tenancy.
c) in the deceased’s sole name.

Answer 15

a) as tenants in common.

Question 16

If a person has an amount of protection already in place, they are likely to have no shortfall. True or false?

Answer 16

False. A simple way to calculate the shortfall is described in a following question.

Question 17

Protection funds may be used to meet what liabilities without selling property?

Answer 17

IHT

Question 18

The shortfall in protection cover can be expressed as the difference between the amount of protection that would be needed if the risk event happened, and the:

a) amount of protection the client desires.
b) amount of protection the client currently has.
c) amount of protection the client will have in five years’ time.

Answer 18

b) amount of protection the client currently has.

Question 19

The mortgagee will both recommend and arrange life cover. True or false?

Answer 19

False. Although the mortgage offer may recommend life cover, it is up to the mortgagor to arrange it.

Question 20

Which of the following protection needs is generally prioritised highest?
a) Protection of dependants from the effects of loss of income in the event of premature death.
b) Protection of income for a time later in life when the client does not want to work.
c) Protecting self and dependants from the effects of losing the ability to earn an income in the long term.

Answer 20

A) Protection of dependants from the effects of loss of income in the event of premature death.

Question 21

Protection for dependants in the event of death or illness is likely to be most crucial at which life stage?

A) Young, single person.
B) Younger couple with children.
C) Middle-aged couple, children have left home.

Answer 21

B) Younger couple with children.

Question 22

A person’s reliance on earned income should have ceased by retirement. True or false?

Answer 22

True.

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.

Question 23

If a mortgaged property owner dies, the survivor will still have an outstanding mortgage on the property, even though they become the sole owner. What form of ownership does this describe?

A) Registered in the deceased’s sole name.
B) Registered as a joint tenancy.
C) Registered as tenants in common.

Answer 23

B) Registered as a joint tenancy.

This could cause problems with mortgage repayments, because only one party is contributing to the mortgage whereas both likely contributed in the past.

Question 24

PMI is aimed at covering:

A) acute conditions.
B) chronic conditions.
C) debilitating conditions.

Answer 24

A) acute conditions.

PMI is aimed at covering acute conditions, which develop rapidly and respond to treatment.

Question 25

Life cover is likely to be more important for someone who is single with no dependants than it is for a client with a family. True or false?

Answer 25

False.

Life cover is likely to be less important for a single person with no dependants.

Question 26

“I feel confident that the government will help me out if things go wrong.” This person is voicing which reason for underinsurance?

A) Affordability perception.
B) Consumer trust.
C) State provision.

Answer 26

C) State provision.

Some clients may feel confident in the provision of state benefits. However, state benefits are unlikely to support more than a threshold standard of living.

Question 27

Some people want to meet certain tax liabilities without selling property. This relates to which tax?

A) IHT.

B) Income tax.

C) Capital gains tax.

Answer 27

A) IHT.

One use of protection policy funds is to meet IHT liabilities without selling property.

Question 28

In the event of a person’s death, a surviving family member may require additional capital to cover mortgages, other debts or:

A) adaptations to the home.
B) funeral costs.
C) medical care.

Answer 28

B) funeral costs.

Funeral costs are a common additional capital need in the event of death.

Question 29

More than half of customers without life assurance say they would be encouraged to take out:

A) simple, low-cost cover.
B) Simple, high-cost cover.
C) complex, low-cost cover.

Answer 29

A) simple, low-cost cover.

Complexity of products is an issue in underinsurance. The FCA found that customers favour simple, low-cost life assurance.

Question 30

Mortgages and other debts may be reduced, or perhaps paid off, for which of the following people?

A) Younger couple with children.
B) Young, single person.
C) Middle-aged couple, children have left home.

Answer 30

C) Middle-aged couple, children have left home.

Mortgages and other debts may be reduced, or perhaps paid off, for a middle-aged couple whose children have left home, thus reducing the need in some areas of protection.

Question 31

In prioritising protection needs, the overriding consideration is to:

A) ensure adequate protection of what the client expects to have in the future.

B) ensure adequate protection of what the client currently has before looking to improve things for the future.

C) ensure mediocre protection of what the client currently has before looking to improve things for the future.

Answer 31

B) ensure adequate protection of what the client currently has before looking to improve things for the future.