10: Personal Protection Flashcards
(42 cards)
Why is it true that a Will becomes invalid at point of marriage, if it does not explicitly state that it was made in consideration of the upcoming marriage?
This is designed to protect spouses/partners, so people don’t unintentionally disinherit their new partner by failing to update their will.
What is the effect of divorce on an existing will, and why is it important to update your will after divorce?
Divorce doesn’t wipe out the will, but it cuts out your ex-spouse from inheriting under it. You should still update your will after divorce to reflect your current wishes clearly.
When might a clients Attitude to Risk become an important factor in protection planning?
For a policy involving an element of investment. Examples would be unit-linked or with-profit whole life assurance. (i.e., not pure protection).
To calculate lump sum cover shortfall for term assurance (using the life cover calculator), what are the 4 steps?
A - asses immediate capital needs
B - asses long-term capital needs
C - asses short-term income needs
A+B+C = D
D = total lump sum cover
You should then deduct from this any existing lump sum cover (E) which will equal the lump sum shortfall (F)
Therefore: F = A+B+C = D - E
What are income multipliers used for?
Calculate the amount of capital needed to generate a required net income over a specific period. Broadly based on temporary annuity rates.
Your client needs a net income of £8,000 per year for 10 years. Using income multipliers, how much capital is required?
£8,000 × 10 = £80,000
Calculate the capital needed to provide £12,000 net income per year for 20 years using income multipliers.
£12,000 × 18.5 = £222,000
You require £9,500 per year for 25 years. Calculate the capital needed using the income multipliers.
£9,500 × 22.5 = £213,750
What are the income multipliers based on current annuity rates when it comes to calculating capital need for future?
5 years: 5
10 years: 10
15 years: 14.5
20 years: 18.5
25 years: 22.5
What assumption is made about how the capital is used when calculating the income multipliers?
The capital will be used up over the period to provide the spendable income.
What is the assumed annual increase rate in income for the multipliers, and what should be considered if the income needs to increase at a rate higher than 3%?
Income is assumed to rise by about 3% per year.
Additional cover may be required.
How is tax factored into the income multipliers?
20% tax is deducted from the taxable income element of withdrawals.
How are the income multiplier factors rounded?
They are rounded to the nearest 0.5
What is a rough alternative to using income multipliers to estimate capital needed?
Multiplying the income by the number of years needed, though this tends to overstate capital for longer terms.
Peter earns a salary of £40,000 and has building society savings of £5,000. His wife, Jenny, earns about £15,000 a year. They have calculated that the net income loss to the
household if Peter died would be about £30,000 a year.
How much of a lump sum would be required for Jenny, if Peter dies?
To provide this amount, increasing by indexation over the next 20 years, would require a
lump sum of approximately 18.5 times this amount, e.g. £555,000.
Mental illness and musculoskeletal conditions are more likely to be covered by what type of policy; income protection or CIC?
Income protection
What is the standard interest rate used to calculate Support for Mortgage Interest (SMI) payments as of March 2024?
3.16%
(3.66% at point of checking 12/06/2025)
SMI is paid as a loan which will need to be repaid when?
With interest when the home is sold or ownership is transferred.
Support for Mortgage Interest (SMI) usually helps pay the interest on up to £200,000 of your loan or mortgage. However, you may only get up to £100,000 in which 2 circumstances?
- you’re getting Pension Credit
- you started claiming another qualifying benefit before January 2009 and you were below State Pension age at that time
SMI is normally paid direct to whom?
Lender
When do Support for Mortgage Interest (SMI) payments start if you receive Income Support, income-based JSA, or income-based ESA?
SMI payments start after you have claimed Income Support, income-based JSA, or income-based ESA for 39 weeks in a row.
What are the 3 disadvantages of redundancy cover?
- may never pay out if your circumstances change (i.e., you become self-employed)
- expensive in relation to the level of benefits provided
- typically inly pays out for a set period of say 2 years
According to the Retail Distribution Review of 2012, firms may no longer receive commission on most protecting products they recommend, except for which ones?
Pure protection - firms may continue to receive commission for pure protection sales and may operate in this market without holding a Level 4 qualification.
Commission earned in selling protection policies should not be disclosed tot he customer. True or false.
False, it must be disclosed.
