1: Financial Protection In The Event Of Death

Question 1

Two types of protection need? What are the two key risk factors?

Answer 1

• Personal - normally to safeguard the lifestyle of self, partner and family
• Business – safeguarding the interests of employers, shareholders or
  business partners.

Risk factors: Death or illness/disability (mortalitly and morbidity)

Question 2

Personal Protection needs - financial protection provides solutions to (name 6)

Answer 2

• Replacing lost income
• Repay debts
• Replace pension funding should a spouse pass away/become unemployed
• meet additional living expenses (such as adapting a property and paying for childcare)
• ensure existing plans can be completed;
• provide specific medical treatment or care
• enable inheritance tax liabilities to be met without having to sell property.

Question 3

Business Protection needs - Main needs

Answer 3

• protection for a key employee whose death or illness would have a severe impact
  on the business
• protection for shareholders/business partners in the event of a shareholder’s/
  partner’s death or illness
• protection for the self‑employed, whose inability to work would have an immediate
  and severe impact on the business’s finances.

It is customary to treat self-employed clients as personal clients and arrange personal protection for them as opposed to business protection, unless a company is insuring a contractor as a key person.

Question 4

Protection needs - Young, single adult

Answer 4

Unlikely to be a priority - No dependants, liabilties may be low, may not yet have mortgage. However, they may be interest in:

• Protection in the event of illness or accident
• Protection against the financial effects of a critical illness or unemployment

Financial loss through inability to work is likely to be the primary concern.

Question 5

Protection needs - Younger couple without children

Answer 5

Needs more likely to be diverse - The extent of financial loss in various situations is still the guiding factor

More likely
* Income Protection & CIC
* Term/ life assurance - Protection for joint mortgage or unsecured debts
* Private medical insurance

Less likely
* Long term care - psychologically, may be too far away to worry about
* Inheritance tax planning

Question 6

Protection needs - Younger couple with children

Answer 6

Similar to the needs as couples without children, however, needs are magnified

Most likey/important
* Protection in the event of death and illness - Cover debts, liabilities, childcare etc.
* Income protection
* Critical illness
* Life assurance

If only one parent works, the needs are** not likely to be diminished**as in the event of death or critical illness, the other will need to work/provide childcare.

Question 7

Protection needs - Middle‑aged couple, children have left home

Answer 7

Protection needs from eralier life may have disappered by middle age, may have been replaced by other needs.

Most likely/important
* Private medical insurance
* Funding long-term care
* IHT planning

Least likely/important
* Protection in the event of death/illness (need unlikely to disappear completely)
* Term/life assurance for mortgage (May have been paid off)

Question 8

Protection needs - Retirement

Answer 8

Most likely/important
* Care provision
* IHT mitigation
* Annuity protection/guarantee period

Least likely/important
* Income protection

Question 9

Protection for Mortgage payments - considerations

Answer 9

• Not only covering repayment of outstanding mortgage balance/monthly paymnets
• Also factor in interest

Unemployment and redundancy are, alongside divorce and sepatation, are the major causes of arrears and subsequesnt repossession of mortgaged properties.

Question 10

Specific factors in determining protection needs - 4 points

Answer 10

• Little or no savings
• Inability to replace earned income
• Unprotected debts
• Financial dependants (often, but not exclusively, a young family).

If one or more of these points apply, there is generally a need for financial protection

Question 10

Underinsurance statistics

Answer 10

• Only one family in 20 in Britain has sufficient life assurance to provide an income equivalent to the national average earnings
• one family in every five has no life cover at all.

Question 11

Why is underinsurance so widespead?

Answer 11

• The thought that “it wouldn’t happen to me”
• The misconception that it is unaffordable
• Not wanting to discuss the subject of death and illness

The best case scenario is that they pay for something they don’t need. the alternative of not doing anything can be devastating

Question 12

Impact of trends in health and unemployment

Answer 12

People are living longer:
* Increased need for income & critical illness cover

General trend away from whole-of-life plans
* Rise in popularity of term assurance - simpliciy and lower cost

Periods of unemployment:
* Lower sales of life & CIC
* People consider cancellation of policies
* More likely to look for policies that include unemployment cover, but becoming increasingly more difficult to find during these times.

Question 13

‘Methods of distribution’

Answer 13

• Traditionally, protection used to be purchased through an advisor
• Now, providers enable clients to but protection online, on a ‘non-advised’ basis.

Question 14

When is usually the first time people consider protection?

Answer 14

Upon taking out a mortgage
* It is at this time easier for them to grasp the implications of inadequate protection in the event of death/unemployment/illness

However:
* Renting continues to increase
* This customers may be in greater need for income & CIC
* Not so much need for lump sum via term assurance etc.

Other times include:
* Birth of a child
* Death/illness of a parent

It is also the first time most people will speak to a financial advisor

Question 14

Defining the amount of cover required in the event of
death

Answer 14

Based on quantifying the shortfall in income dependants would suffer in the event of death. This can be expressed as:

• The amount of protection that would be needed if the risk event happened
  Versus
• The amount of protection that the client currently has

Question 15

Main types of protection in the even of death:

Answer 15

Term assurance
* Can be level or decreasing
* Usually linked to the repayment of a mortgage or other death
* For interest-only mortgages, term assurance may be used to cover the full amount for the duration of the mortgage term.

Whole-of-life assurance

Question 16

What is churning?

Answer 16

The process of changing protection policies unnecessarily to receive commission or payment
* Not normally appropriate to recommend the cancellation of existing pilicies in order to replace them with similar ones

Regulator takes a dim view of this practice

Question 17

What must be considered when recommending a protection policy to a client?

Answer 17

• It must be objectively necessary
• What are the client’s attitude to utilising their savings and investments in the event of unexpected expenditure?
• It must provide the same level or cover at a cheaper cost when provision is in place
• The current policy must remain in force until the new one has been implemented, in order that the client is always covered.

Question 18

What protection provision do employers offer?

Answer 18

There is no statutory requirement to provide employees with death or sickeness benefits.

Some employers do, but the level of provison can vary widely. Some examples include:
* Lump sum death benefit
* Depenants pension

Question 19

What protection provision does the state offer?

Answer 19

State benefits are likely to be limited in amount and entitlement (and even more so in the future)

If a husband, wife or civil partner dies on or after 6 April 2017, a Bereavement Support
Payment may be available.

Before this time, the main state benefits related to death were:
* Bereavement Payment;
* Widowed Parent’s Allowance; and
* Bereavement Allowance

Question 20

Outstanding loan balance in the even of death of income earner: How can protection tackle this problem?

Answer 20

• Provision of a lump sum - Life and term assurance, this is most commonly used to cover mortgage liability.
• Provision of a monthly income equal to the amont of the loan repayment - the disadvantage here is that the interest rate on the loan may change.

Question 21

Effects of not havings adequate protection: Loans & Mortgages

Answer 21

• Repossession of assets or property
• Payment defaults recorded on credit register - affecting credit score and making it more difficult to obtain credit in future
• Bankruptcy

Question 22

Factors affecting the scale of protection need:

Answer 22

• Children and dependants
• Ability of spouse/civil partner to generate a replacement income
• State benefits
• Employer-provided benefits
• Childcare - family/other assistance
• Amount and accessibility of any savings
• Outstanding financial liabilities
• Level of income earned.

Question 23

It may be more beneficial to base protectuin need on the dependant's projected expenditure, as this is what will actually be needed. Things to consder:

Answer 23

* current outgoings/cost of living * changes to outgoings on death (either increase or decrease) * expected changes in outgoings in the future (such as end of mortgage, or children leaving home or entering private education) * the cost of plans for the future that are still to be implemented * the standard of living aspired to in the future * how long the need will last for – for example, when will children be expected to be independent; when will the state pay pension benefits?

Question 24

Death of a dependant parter - things to consider

Answer 24

Whilst household income will not decrease, household expenditure may increase as additiona services may be required to provide childcare, clearning etc. in order to maintian the families standard of living. Therefore: * Additonal level of provision may be needed to **cover the additional costs of childcare etc.**. * Alternatively. the income earned may find it necessary to look after the children themeselves, and therefore **replacement income** will need to be provided.

Question 25

Death of an income earner - Lump sum needed. Which policy?

Answer 25

**Term assurance** * Calculated by multiplying the additional annual income required by a factor that takes into account the period over which that income is required. * **A typical factor might be the number of years until the youngest child reaches the age of financial independance (typically 18 or 21).**

Question 26

Death of parents?

Answer 26

Primary concern is outstanding liabilites that may affect inheritance and covering inheritance tax due on their estate.