Unit 1 Topic 11- Life Assurance

Question 1

When does a life assurance policy pay out?

Answer 1

The sum assured is payable only if the death of the life assured occurs within a specified period of time (the term).

Question 2

How long can a life assurance term be?

Answer 2

From a few months to 40 years or more (for terms that end after age 65, it may be better to take out a whole-of-life policy instead).

Question 3

What happens to the life assurance after the term?

Answer 3

If the life assured survives the term, the cover ceases and there is no return of payments.

Question 4

What is the cash-in value of a life assurance policy?

Answer 4

There is no cash-in value or surrender value at any time.

Question 5

What happens to the policy if premiums are missed or not paid?

Answer 5

If premiums are not paid within a certain period after the due date (normally 30 days), cover ceases and the policy lapses with no value.Most companies will allow reinstatement within 12 months provided all outstanding premiums are paid and evidence of continued good health is provided.

Question 6

How are life assurance premiums paid?

Answer 6

Normally paid monthly or annually, although single premiums (one payment to cover the whole term) are allowed.

Question 7

How do life assurance premiums vary?

Answer 7

Premiums are normally level (the same amount each month or year), even if the sum assured varies from year to year.

Question 8

Define Sum assured

Answer 8

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

Question 9

Define Life assured

Answer 9

The person whose life is covered by the policy, ie the policy is designed to pay out if this person dies while the policy is in place.

Question 10

Define Policyholder (wrt life assurance).

Answer 10

The person who owns the policy and pays the premiums. Often this is the same as the life assured.

Question 11

Define Term (wrt life assurance).

Answer 11

The period for which cover is provided under the policy.

Question 12

Define Surrender value (wrt life assurance).

Answer 12

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

Question 13

What is a level term assurance and what is it suitable for?

Answer 13

• Sum assured remains constant throughout the term.
• Premiums are normally paid monthly or annually throughout the term, although single premiums can be made.
• Often used when a fixed amount would be needed on death to repay.

Question 14

What is a decreasing term assurance and what is it suitable for?

Answer 14

• Sum assured reduces to nothing over the policy.
• Premiums may be payable throughout the term, or may be limited to a shorter period such as two-thirds of the term.
• The most common use is to cover the amount outstanding on a repayment mortgage (mortgage protection policy/mortgage protection assurance).

Question 15

What is gift inter vivos cover?

Answer 15

A term assurance policy designed to cover certain inheritance tax liabilities. Gifts inter vivos are gifts made during a person’s lifetime, as opposed to on death.

Question 16

What is a convertible term assurance?

Answer 16

Includes an option to convert the policy into a whole-of-life or endowment assurance, at normal premium rates, without the life assured having to provide evidence of their state of health at time of conversion.Cost is typically an addition of 10%.

Question 17

What rules and restrictions apply to a convertible term assurance?

Answer 17

• Conversion carried out by cancelling the term assurance and issuing a new whole-of-life endowment policy.
• Can only be exercised while convertible term assurance is in force.
• The sum assured on the new policy cannot exceed the sum assured of the original convertible term assurance.
• The premium for the new policy is the current standard premium for the new term and for the life assured’s age at the conversion date.

Question 18

What are increasing term assurances?

Answer 18

Increasing term assurance where the sum assured increases each year by a fixed amount or a percentage of the original sum assured.

Question 19

What are renewable term assurances?

Answer 19

Renewable term assurance includes an option to renew the policy at the end of the initial term for the same sum assured, without the need to provide further medical evidence.

Question 20

What is family income benefit?

Answer 20

Designed to provide replace the lost income on death.Usually, these policies pay a tax-free regular income (monthly or quarterly) from date of death of the life assured until end of the chosen term.Beneficiaries may choose to receive a lump sum payment.

Question 21

What type of assurance does family income benefit generally fall under?

Answer 21

Since, usually, the cover reduces as time passes, this policy can be described as a form of decreasing term assurance.However, policies can be arranged with escalating instalments.

Question 22

What is whole-of-life assurance?

Answer 22

Covers the whole lifetime of assured, whenever death occurs provided policy remains in force.Examples of uses:- Protect dependants against loss of financial support in event of death of breadwinner.- Provide a tax-free legacy.- Cover expenses on death.- Provide funds for the payment of inheritance tax.

Question 23

What is the premium schedule on whole-of-life assurance policies?

Answer 23

• Payable throughout life (ie for the full term of the policy, whatever that turns out to be); or
• Limited to a fixed term (eg 20 years) or to a specified age (such as 60 or 65).

Question 24

What are the different investment structures for whole-of-life assurance policies?

Answer 24

• Non-profit
• With-profits
• Low-cost
• Unit-linked
• Unitised with-profits

Question 25

What are the features of Non-profit whole-of-life assurance policies?

Answer 25

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

Question 26

What are the features of With-profit whole-of-life assurance policies?

Answer 26

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

Question 27

What are the features of Low-cost whole-of-life assurance policies?

Answer 27

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.

Question 28

What are the features of Unit-linked whole-of-life assurance policies?

Answer 28

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.

Question 29

What are the features of Unitised with-profits whole-of-life assurance policies?

Answer 29

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.

Question 30

What is the tax treatment on whole-of-life assurance policies?

Answer 30

All policies offer the prospect of a surrender value, subject to investment performance.The tax treatment of proceeds under the plan will depend on whether it is classed as ‘qualifying’ or ‘non-qualifying’ under the tax rules applying to life assurance.For qualifying policies there is no further liability to tax.For non-qualifying policies there is the possibility of higher-rate income tax at 20% or additional rate at 25%.

Question 31

What are Flexible whole-of-life policies?

Answer 31

When whole-of-life policies are issued on a unit linked basis, they are generally referred to as ‘flexible whole-of-life’. Their flexibility lies in the fact that they can offer a variable mix between their life cover and investment content.

Question 32

Describe Maximum cover wrt flexible whole-of-life policies.

Answer 32

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.

Question 33

Describe Minimum cover wrt flexible whole-of-life policies.

Answer 33

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.

Question 34

Describe Balanced cover wrt flexible whole-of-life policies.

Answer 34

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.

Question 35

What are Universal whole-of-life assurance policies?

Answer 35

The flexibility of unit-lined whole-of-life assurance is sometimes extended further by adding a range of other benefits and options to the policy. What that is done, the policy is usually referred as a universal whole-of-life assurance.

Question 36

Define Waiver of premium.

Answer 36

A policy provision that allows the policyholder to suspend paying premiums but retain their policy cover if they are unable to work due to sickness or disability.

Question 37

What are endowment policies?

Answer 37

Endowment policies are life-assurance products that combine life assurance and savings.

Question 38

What are Non-profit endowment policies?

Answer 38

A non-profit endowment has a fixed sum assured, which is payable on maturity (ie at the end of the policy term) or on earlier death; premiums are fixed for the term.Because the return is fixed and guaranteed, the policyholder is shielded from losses due to adverse stock market movements.

Question 39

What are Full with-profits endowment policies?

Answer 39

A with-profits endowment has a fixed basic sum assured and a fixed regular premium. The premium is higher than that for a non-profit policy of the same sum assured.The additional premium (sometimes called a bonus loading) entitles the policyholder to share in the profits of the life assurance company.

Question 40

How are Full with-profits endowment profits distributed?

Answer 40

The company distributes its profits among policyholders by declaring bonuses that increase the value of the policy and are payable at the same time and in the same circumstances as the sum assured.

Question 41

What are Reversionary bonuses wrt endowment policies?

Answer 41

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.

Question 42

What are Terminal bonuses wrt endowment policies?

Answer 42

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.

Question 43

What are Low-cost with-profits endowment policies?

Answer 43

A low-cost or minimum-cost endowment overcomes high premiums by having a sum assured that is payable on death, that is made up of two elements:- with-profits; and- decreasing term assurance.

Question 44

What are Unit-linked endowments?

Answer 44

When a premium is paid, the amount of premium (less any deductions for expenses) is applied to the purchase of units in a chosen fund.A pool of units gradually builds up and at the maturity date, the policyholder receives an amount equal to the total value of all units then allocated to the policy.

Question 45

What are the pros and cons of Unit-linked endowments compared to with-profits policies?

Answer 45

Unit-linked policies have the potential to produce higher returns than with-profits policies.Unit-linked policies do not provide any guaranteed minimum return at maturity.

Question 46

What are Unitised with-profits endowments?

Answer 46

As with unit-linking, premiums are used to purchase units in a fund, and the benefits paid out on a claim depend on the number of units allocated and the then-current price of units.

Question 47

What is the difference between Unitised with-profits and Unit-linked endowments?

Answer 47

Unit prices for Unitised with-profits, increase by the addition of bonuses which, like the reversionary bonuses on a with-profits policy, cannot be taken away once they have been added.This means that unit prices cannot fall.

Question 48

Fill in table with the following heading:Fixed term
?Death BenefitSurrender value?
Tax treatment of benefits?
For the following policies:Level term assurance
Non profit whole of life
Decreasing term assurance
With-profit whole-of-life
Unit-linked whole-of-lifeIncreasing term assurance

Answer 48

Level term assuranceYes, Level, No, Only pays on death: tax free.Non profit whole of lifeNo, Level, Yes, Must ‘qualify…Decreasing term assuranceYes, Decreasing, No, Only…With-profit whole-of-lifeNo, Increasing, Yes, Qualify…Unit-linked whole-of-lifeNo, Level until value of units exceeds death benefit, Yes, Qualify…Increasing term assuranceYes, Increasing, No, Only…

Question 49

What is the main advantage of writing a life assurance policy in trust?

Answer 49

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

Question 50

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?

Answer 50

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.