Unit 6 – Topic 21 Flashcards
Using endowment policies for mortgage repayment
Which of the following would provide a borrower with a high degree of certainty that the loan will be repaid in full by the end of the mortgage term, together with a low-cost form of life assurance?
A. A capital repayment mortgage with decreasing term assurance
B. An interest-only mortgage with a full with-profits endowment policy
C. An interest-only mortgage with an ISA and decreasing term assurance
D. An interest-only mortgage with level term assurance
A. A capital repayment mortgage with decreasing term assurance
This is an interesting question and needs a little bit of thought. The clue is in the
words ‘low-cost form of life assurance’ which point us towards decreasing term . A high
degree of certainty is provided by a capital repayment mortgage.
You could consider option B, but whilst this policy provides a guaranteed value, a full endowment doesn’t provide lowcost cover.
Which of the following policies is guaranteed to pay off an interest-only mortgage on death or maturity ? (21.2.5)
A. A unit-linked endowment
B. A full with-profits endowment
C. A low-cost endowment
D. A personal pension
B. A full with-profits endowment
The full with-profits endowment is the only endowment that provides a guarantee that the
mortgage can be repaid, because the guaranteed sum assured will match the mortgage loan. (17.2.5)
What could be the main disadvantage to a borrower with a low-cost, low-start endowment policy, if they get into financial difficulties in the first 5 years? (21.2.6)
A. Reversionary bonuses not rising as anticipated
B. A standard policy premium could have saved them money
C. Mortgage interest rates would be scheduled to rise each year
D. Policy premiums are rising by 20% per annum
D. Policy premiums are rising by 20% per annum
The premiums increase by 20% in each of the first 5 years, leading to a doubling of the premiums at that point.
Which of the following might be regarded as a drawback of a low-start, low-cost endowment policy ? (21.2.6)
A. Guaranteed death benefit is reduced during the period of lower premiums
B. The basic sum assured is reduced during the period of low premiums
C. The policy is more likely to underperform because of the reduced premiums
D. The premiums after the initial period will be higher than a standard low-cost endowment.
D. The premiums after the initial period will be higher than a standard low-cost endowment.C. The policy is more likely to underperform because of the reduced premiums
Related to the previous question, the premiums on this type of policy from the point when they double, will be higher than a standard low-cost endowment.
Which of the following types of mortgage cannot have the term extended ? (Table 21.1)
A. Repayment mortgage
B. ISA mortgage
C. Unit-linked endowment mortgage
D. Low-cost endowment mortgage
D. Low-cost endowment mortgage
A low-cost endowment is inflexible, because the term cannot be extended ; this restriction
applies to any of the with-profits endowments. The term of a unit-linked endowment, on the
other hand, can be extended, subject to the insurer’s rules. Repayment mortgages can have
their term extended, with the lender’s agreement and ISAs are open-ended products anyway.
What name is given to the bonuses which are usually added to a with-profits endowment policy each year ? (21.2.1)
A. Reversionary
B. Compound
C. Terminal
D. Periodic
A. Reversionary
Reversionary bonuses are only applied to with-profits policies and are not guaranteed. They
are usually added annually and are paid as a percentage of the Guaranteed Sum Assured.
Provided the policy remains in force, these bonuses will be payable at maturity
Jack has a low-cost endowment policy which he took out 10 years ago in connection with an interest only mortgage loan of £50,000. The guaranteed sum assured is £18,000 and the reversionary bonuses currently stand at £5,500. The surrender value is £4,500. What would be payable if Jack died now? (21.2.6)
A. £23,500
B. £28,000
C. £50,000
D. £55,500
C. £50,000
Low-cost endowments will always pay an amount equal to the mortgage amount if the
policyholder dies, so our answer is £50,000. The way the amount is made up is a little
trickier and comprises four parts:
1) The guaranteed sum assured
2) The reversionary bonuses built up
3) Potential terminal bonus
4) Decreasing term insurance to make up the gap, up to the mortgage amount
The amount available to repay an interest-only mortgage from a unit-linked investment depends on the price of the units at the repayment date. The price at which units are
encashed is the: (21.3)
A. Bid price
B. Cash price
C. Offer price
D. Reserve price
A. Bid price
The bid price is the price at which units are bought back by the managers of the fund when when a policy is surrendered or encashed. A simple way to remember this is ‘bid to get rid’
In relation to the choice of funds available with a unit-linked endowment policy, most mortgage investors will choose : (Table 21.2)
A. a managed fund
B. a fixed interest fund
C. a cash fund
D. a UK equities fund
A. a managed fund
A managed or balanced fund will be the choice of most investors who probably prefer to
leave the investment choices to a professional fund manager.
Jack took out his 25-year mortgage-linked unit-linked endowment policy in 2018. When typically is the first policy review likely to be carried out? (21.3.2)
A. 2023
B. 2028
C. 2033
D. 2038
B. 2028
Reviews would take place after 10,15 and 20 years and annually after that
George has a 25-year unit-linked endowment policy as his mortgage repayment vehicle. The death benefit of the policy is £150,000 and the investment value is £40,000. If George dies, what amount will be payable ? (21.3)
A. £40,000 unit value + variable term assurance of £110,000
B. £150,000 death benefit + £40,000 unit value.
C. £40,000 unit value + decreasing term assurance of £110,000
D. Guaranteed sum assured of £150,000 + bonuses
A. £40,000 unit value + variable term assurance of £110,000
The guaranteed death benefit is provided through a combination of the plan’s value and
variable term assurance. On death, the plan’s investment value is topped up to the guaranteed death benefit by the term assurance
A unit-linked endowment policy has which one of the following features? (21.3)
A. A guaranteed sum is payable when the policy matures.
B. The amount payable on death comprises the bid value of the units.
C. The value of the plan will be determined by the unit value + bonuses
D. The policy term may be extended
D. The policy term may be extended
You have to look carefully at the options here.
Not A = There is no guaranteed sum payable at the maturity of the policy
Not B = The amount payable on death will comprise the value of the plan plus variable term
Not C = There no bonuses payable with a unit-linked product.
Yes D = Unlike with-profits policies, it may be possible to extend the term
