Case Study 2 Exam Questions

Question 1

State the additional information you would require in order to advise Sanjeev and Maya on the purchase of their new home.

Answer 1

 When will Sanjeev’s training period end?
 Do they have any debt and would they like to pay that off before
taking out mortgage?
 Confirmation target deposit is sufficient required?
 Whether it is feasible to have this saved in the next 3 years?
 ATR/ capacity for loss in relation to this objective?
 Willingness to maximise Lifetime ISAs for tax efficiency?
 Willingness to use other assets?
 What other house buying costs do they need to budget for?
 Parental help?
 Affordability?
 How much emergency fund do they need first?
 What type of mortgage do they intend to take out (repayment or
interest only)?
 And over what term?
 Willingness to protect mortgage repayments on illness / death?

Question 2

State the additional information a financial adviser would require in order to advise Sanjeev and Maya on identifying a suitable level of emergency fund.

Answer 2

 Current expenditure/planned expenditure/any surplus income?
 Estimated costs of buying a property.
 Assets earmarked buying a property
 National Insurance (NI) records for State Benefits.
 Do they have any debts?
 Any inheritances due?
 Current state of health/any healthcare needs?
 Job security/potential for promotion?
 Priority of objectives (e.g. protection/retirement)?

Question 3

State the factors you would take into account when advising Sanjeev and Maya on building up a suitable deposit for their property purchase.

Answer 3

 Size of deposit required / loan to value
 When required
 Tax status
 Affordability
 Emergency fund required
 Existing liabilities
 Attitude to risk
 Family assistance

Question 4

Explain to Sanjeev and Maya why they might not have to pay as much Stamp Duty Land Tax on their new home as they are first time buyers and what costs they may need to budget for on top of their deposit.

Answer 4

 First time buyer stamp duty land tax relief is available
 0% for properties under £425,000 where the property is valued up to
£500,000
 £425,000 to £625,000 charged at 5%
 Solicitors fees
 Search fees
 Removals
 Furnishing / improving the new home

Question 5

Explain to Sanjeev and Maya the key features of a Lifetime ISA.

Answer 5

 Can be used to save for first home or later life
 Must be 18 or over to open, but under 40
 Can invest up to £4,000 a year until age 50
 Government will add 25% bonus, up to £1,000 per year
 £4,000 counts towards £20,000 limit
 Cash, Stocks and Shares or both
 No contributions or bonus after 50, but interest / investment growth
accrues
 Funds can be withdrawn with no penalty to buy first home, age 60 or
over or terminally ill with less than 12 months to live
 Withdrawal charge if funds taken out for any other reason

Question 6

Explain to Sanjeev and Maya the conditions that apply to buying their first home with a Lifetime ISA.

Answer 6

 Property must cost £450,000 or less
 Bought at least 12 months after open Lifetime ISA
 ISA provider will pay funds to solicitor
 Must be buying with mortgage

Question 7

Identify the key benefits for Sanjeev and Maya of using a Lifetime ISA to save for their house deposit.

Answer 7

 Income / gains are tax free
 Can invest up to £4,000 per annum
 Both eligible for bonus as under 50
 Wide choice of investment funds / cash
 Government bonus of 25% / up to £1,000 per annum
 Bonus paid monthly in arrears
 Potential for growth
 No penalty for access if used to purchase first home
 Liquid – can access at any time (although lose government bonus)
 If not used for house deposit, can provide pension benefits at age 60
 As married, benefit from APS on death of Sanjeev and Maya
(maintains tax efficiency)
 Bonus can then be used for deposit when exchange contracts

Question 8

Identify the potential drawbacks of Sanjeev and Maya using a Lifetime ISA to save for their house deposit.

Answer 8

 Limited contribution of £4,000 per annum
 Penalty on withdrawal for reason other than house purchase /
retirement
 Must hold for one year to obtain bonus
 Restricted use
 Property price must not exceed £450,000
 Charges
 Limited number of providers
 Additional admin – may need to set up other vehicles as well

Question 9

State 5 benefits of Sanjeev and Maya taking out a repayment mortgage rather than an interest only mortgage on their new property.
NB While the case study looks like questions are likely to be focused around saving for a deposit and potential use of a Lifetime ISA, we could also be asked about mortgage types and mortgage protection, so we’ve included questions on these too so you’re fully prepared.

Answer 9

 Cheaper, pay less interest over term, no cost for investment products
 Level of debt / interest rate risk reduces over time
 No investment risk / market timing issues/ shortfall risks
 Peace of mind
 Few interest only mortgages on the market/easier to remortgage

Question 10

State 5 advantages and 5 disadvantages of Sanjeev and Maya taking out an interest-only mortgage, rather than a repayment mortgage.

Answer 10

Advantages
 Potential growth on investments
 Reduced outgoings to lender / more disposable income
 May repay early
 Can access investments if needed
 Tax efficient investments available / matches high ATR
Disadvantages
 Investment risk / increased total interest costs / interest rate risk
 Shortfall risk / no guarantee of repayment
 Temptation to withdraw funds
 Needs advice / monitoring / fees and charges
 Limited choice of lenders / harder to remortgage

Question 11

State the key differences between a personal income protection insurance policy and a mortgage payment protection insurance policy for Sanjeev and Maya.

Answer 11

 IP can pay an income up to retirement, MPPI maximum pay-out typically 2 years
 IP benefit linked to salary, MPPI typically linked to mortgage costs (although may be linked to salary or a fixed amount)
 IP covers accident and sickness, MPPI covers accident, sickness and unemployment
 IP deferred period 4 – 104 weeks, MPPI 30 – 180 days
 IP may pay out multiple claims, MPPI typically won’t renew after a
claim, or, if it does, premium may be very expensive
 IP greater underwriting, MPPI limited underwriting
 IP expensive, MPPI relatively cheap

Question 12

Recommend and justify the actions you would take in relation to Sanjeev and Maya’s financial aim of buying their new home.

Answer 12

 Earmark sufficient funds for emergency fund
 Determine exactly when deposit will be required and how much is needed
 And any additional costs associated with house purchase
 Current cash flow analysis
 If affordability allows, maximise Lifetime ISA contributions to £4,000 in this tax year and until desire deposit achieved
 Funds invested will benefit from tax-free income
 And Government bonus
 Boosting amount available for deposit
 Cash Lifetime ISA appropriate
 To ensure funds are available at the right time and without a loss
 Any other available funds into pension for Maya
 To benefit from tax relief
 And boost income in retirement
 Repay debt (if any)
 To reduce their costs / increase disposable income
 Make them more attractive borrowers to a mortgage lender
 Avoid getting into any further debt
 To improve their credit score by the time they come to take out their
mortgage

Question 13

Recommend and justify the actions you would take to arrange for adequate protection to be in place for Sanjeev and Maya’s new mortgage.
Again, the case study does seem focused more on the deposit, but there will be a need for mortgage protection hence covering this off here.

Answer 13

 JL1E decreasing term assurance with CIC (if repayment)
 JL1E level term assurance with CIC (if interest only)
 To protect the mortgage in the event of death / critical illness
 In the most cost effective way
 Sum assured to match property value
 To cover full mortgage
 Term to match length of mortgage
 To cover full term
 Mortgage payment protection insurance
 To protect monthly repayments in the event of Sanjeev and Maya
being unable to work through illness
 Benefit equal to monthly mortgage repayments
 To cover full amount
 Term to match length of mortgage
 Alternatively, if affordability allows
 Income protection insurance
 To cover mortgage and household expenses / standard of living
 Maximum benefit (50-65% salary)
 Paid tax-free
 Term to expected retirement / mortgage term
 Own occupation
 To provide widest cover
 Deferred period to match any sickness cover provided by employer
 To keep costs down
 Indexation
 To keep pace with inflation
 Guaranteed premiums
 To ensure affordability
 Permanent cover
 Cannot be cancelled by insurer providing premiums are paid

Question 14

Identify what should be covered in a review relating to Sanjeev and Maya’s financial aim of purchasing their property.

Answer 14

 Amount saved
 Suitability of savings accounts bearing in mind their objectives
 Whether they have stayed out of debt
 Whether they can afford mortgage repayments
 Whether they can afford mortgage protection
 Changes in housing market
 Changes in tax/legislation

Question 15

Identify the factors that should be taken into account at future reviews for the couple’s mortgage protection cover.

Answer 15

 Affordability
 Current level of mortgage repayments
 Changes in need for income / capital
 Current interest rates competitive
 Redemption penalties
 Change in employment status
 Change in State benefits
 Change in date at which mortgage will be repaid
 New products/legislation/tax/economic conditions etc.

Question 16

What additional information would you require to advise Maya on the affordability of making pension contributions?

Answer 16

 Income and expenditure?
 Essential and discretionary expenditure?
 Willing to carry out cash flow analysis?
 Willing to use a Lifetime ISA to benefit from government bonus?
 Willing to use a Lifetime ISA and redirect excess savings to meet
protection / retirement needs?
 Is Maya willing to opt in to her workplace pension?
 And make regular contributions if affordability allows?
 Affordability of contributions based on cash flow analysis
 Fund choices available under workplace pension?
 Capacity for loss?
 Pension fund charges?
 The extent to which she’d be prepared to rely on their other assets?
 Would she nominate Sanjeev as beneficiary of death benefits?
 What would she like to happen after first / second death?

Question 17

Outline to Sanjeev and Maya why it might be difficult for Maya to afford pension contributions based on their current circumstances.

Answer 17

 Sanjeev’s salary is significantly lower than it will be when he qualifies
 They are saving for a house deposit
 £500 each a month is a large sum
 May be unexpected costs
 Loss of employment/long-term illness/change in family situation/
lack of financial protection
 Stated they expect affordability will be an issue

Question 18

Explain to Maya how she can go about opting in to her employer’s workplace pension scheme and any restrictions that might apply.

Answer 18

 She can request to re-join the scheme
 The request must be in writing, e.g. letter or an email
 The request must signed by the employee submitting it / personally emailed by the employee.
If Maya has previously opted out in the last 12 months, the employer is not required to opt her back in
 If she opted out more than 12 months ago, her employer is required to opt her back in
Her employee’s enrolment status will be assessed, based on her age and earnings at the time of their request.
If Maya takes no action, her employer will automatically re-enrol her 3 years after she initially opted out

Question 19

Comment on the suitability of a workplace pension’s default fund for Maya.

Answer 19

 Maya can forget about the pension
 Employers and scheme trustees have a regulatory obligation to
ensure their default fund remains appropriate for their scheme
 Charge cap applies
 Not tailored to Maya’s needs, chosen to meet the needs of the
average scheme member.
 If it’s a lifestyle fund, may be designed for annuity purchase rather
than flexible access
 Cautious asset allocation
 Maya is a high risk ATR
 May favour UK rather than global securities
 May not invest in alternative asset classes
 May not react to market events (aim for smooth return)
 Don’t take account of age on joining

Question 20

Explain to Maya why a multi-asset fund may be suitable for her retirement needs

Answer 20

 Provides diversification across all asset classes / geographical spread
 Potential for growth / protection against inflation
 Correlation of assets controlled
 Reduces volatility/risk
 Actively managed / professional management
 Rebalances regularly
 Risk rated to match ATR
 Access to specialist investments

Question 21

Explain to Maya the benefits of making pension contributions to her workplace pension.

Answer 21

 Tax relief
 PCLS
 Tax efficient fund
 Potential for growth
 Greater income in retirement
 Discipline / pound cost averaging
 Flexible options in retirement
 IHT efficiency
 Intended beneficiary can be nominated / flexible death benefits
 Fund choice can match ATR
 Matching contributions are available
 Salary sacrifice may be available
 Lower charges
 Deducted from salary

Question 22

Explain to Maya how ‘pound-cost-averaging’ from investing regular contributions could be suitable for her pension arrangements.

Answer 22

 Savings discipline
 Benefit from volatility – more units are bought in a falling market
 Avoids market timing risk, e.g. investing lump sum before a crash
 Suitable for long-term investment
 Contributions can be flexible in line with income from new business
 Enables higher risk funds to be purchased
 Average cost of purchase evens out

Question 23

Identify the key drawbacks for Sanjeev of using a passive equity tracker fund within his pension.

Answer 23

Pros
 Adds diversification to his overall portfolio  Potential for growth / inflation protection  May be in line with ATR
 May be in line with need for growth
 No currency risk
 No regulatory risk
 Should be able to switch easily
 With no tax implications as in pension wrapper
 Won’t be included in estate on 1st death as pension fund
 Can be kept out of 2nd estate if remains within pension wrapper  Income and gains tax-free as in pension wrapper
 Pension fund so fully protected in event of default

Cons
 Not actively managed
 No opportunity to outperform index
 Will perform poorly in falling market
 Tracking error
 Will underperform index after charges  Lacks diversification of asset classes  Single geographic sector risk
 Miss out on actual dividend yield
 No access prior to age 57

Question 24

Identify the main factors you would discuss with Sanjeev and Maya if your task was to establish and agree their risk profiles.

Answer 24

 Need to understand their capacity for loss/how much of a loss they could bear without jeopardising their objectives/lifestyle
 Other income/capital available
 Timescale of investment
 Appetite for risk/how much loss the couple is prepared to take
 How much of their capital are they prepared to put at risk/how much
to keep in a secure area
 Assess the above separately for different objectives, and for each of
them
 Ensure both understand the risk characteristics of the selected
investments
 Discuss volatility/explain investments can rise and fall
 Explain that risk is a feature of all asset classes e.g. inflation risk of holding cash, FSCS risk
 How much risk the couple need to take/what investment return is required to achieve objectives,
 The couple’s previous investment experience/knowledge

Question 25

Outline the steps you would follow when completing the individual risk profiling assessments for Sanjeev and Maya.

Answer 25

 Explained the purpose of the risk profiling tool to Sanjeev and Maya
 Completed a risk questionnaire/series of questions including Sanjeev
and Maya’s capacity for loss
 Used computer software/manually/to produce a risk-
rating/score/results
 Risk rating suggests a suitable asset allocation/an efficient frontier
model
 Discussed the results with Sanjeev and Maya and agreed a suitable
risk profile for each of them

Question 26

State five benefits and five drawbacks of using a risk-profiling tool to assess Sanjeev and Maya’s individual ATRs.

Answer 26

Benefits:
 Simple/understandable/consistent/repeatable process/objective
 Helps Sanjeev and Maya to understand/consider risk
 Separate risk profile for each client/objective established/attitude to
risk can change over time
 Assists with appropriate asset allocation
 Identifies the maximum loss tolerance/risk and reward

Drawbacks:
 Sanjeev and Maya may not understand the terminology/questions
 Adviser may misinterpret the results/different tools give different
results
 May not establish capacity for loss
 Different objectives/clients may have different attitude to risk/may not
consider timeframe
 May not take into consideration their investment
experience/behavioural finance/emotion
 Cannot be used in isolation/further discussion needed
 It does not consider taxation issues or charges
 Based on historic data
 Only relevant for that particular moment

Question 27

Identify and explain in detail the key client-specific factors that you’d take into account when assessing Sanjeev and Maya’s capacity for loss.

Answer 27

 As a couple they have an adequate emergency fund, though not much excess wealth
 Affordability is an issue at present
 They are saving for a deposit
 At the expense of Maya’s pension contributions
 They are expecting an increase in Sanjeev’s income
 But we do not know when
 They can tolerate some loss / volatility in their investments in the
longer term
 They have many years to go before retirement
 There is no mortgage as yet and no apparent debt
 They are reliant on their earnings for income
 No employer sick pay
 They do not have income protection
 Only Sanjeev has DIS
 Neither has CIC
 Neither has PMI
 No information on their health, but both working so assume OK
 They are married and have a will
 They have no children / are not planning on having children in the
foreseeable future

Question 28

Identify the benefits and drawbacks of using each of the following to help the couple retire:
Option 1 – Pension plans
Option 2 – A portfolio of collectives
Option 3 – A portfolio of ISAs
Option 4 – Lifetime ISA

Answer 28

Option 1 - Pension
Benefits
 Tax relief at highest rate on own contributions
 Matching contributions may be available from employer
 If salary sacrifice is available, save income tax and NICs
 Fund grows in tax-free environment, 25% taken as PCLS
 Contributions can reduce income tax payable
 Access to professional fund management
 Remaining 75% taxable withdrawals gives opportunity to use
personal allowance
 And creates ‘income’ for ‘normal expenditure exemption’ under IHT
mitigation
Drawbacks
 No access to benefits until 57
 75% taxable as earned income
 Annuity would not match ATR
 FAD / UFPLS fund remains exposed to stock market
 Annual allowance charge effectively limits tax relief on contributions

Option 2 – Collectives
Benefits
 CGT AEA of £6,000 (2023/24) available
 Can switch to ISA over time/ move lump sums into pensions
 No limits on contributions / withdrawals / access
 Professional fund management / diversification
 Use dividend / personal savings allowances
Drawbacks
 No tax relief on contributions
 Possible CGT liability
 CGT AEA is falling next year
 All income is taxable
 Dividend allowance is falling next year
 Time taken to switch to ISAs / manage tax liabilities
 No employer contributions

Option 3 - ISAs
Benefits
 Income and capital gains tax-free
 Fund grows in tax-free environment
 Access to wide range of funds to suit risk / diversify
 Professional fund management
 No limit on accessing funds
 No requirement to report income / gains to HMRC
 APS on death of 1st spouse
Drawbacks
 £20,000 annual limit on contributions
 No employer contributions
 May be tempted to access fund pre-retirement leaving a shortfall
 Included in estate for IHT purposes

Option 4 – Lifetime ISAs
Benefits
 Eligible due to being under 40
 25% government bonus (equivalent to basic rate tax relief)
 Income and capital gains tax-free
 Fund grows in tax-free environment
 Access to wide range of funds to suit risk / diversify
 Professional fund management
 Funds can be accessed penalty free at age 60
 No requirement to report income / gains to HMRC
Drawbacks
 £4,000 annual limit on contributions
 If either become a higher rate tax payer would not receive as much
tax relief as if they were to save into a pension
 No employer contributions
 25% penalty if access before age 60
 Included in estate for IHT purposes

Question 29

Recommend and justify the recommendation you would make in reviewing the affordability of pension contributions for Maya.

Answer 29

 To perform cashflow exercise
 To determine surplus income / identify where discretionary
expenditure can be cut back
 To use Lifetime ISA to fund deposit required
 Freeing up savings to be redirected into Maya’s pension
 Maya to write to her employer to request opt-in
 So she can contribute and benefit from tax relief
 Subject to affordability, Maya to contribute up to 6% of her salary
 To benefit from matching contributions from her employer
 And tax relief
 Maximising the potential for fund growth which will be free of tax on
income and gains
 And a larger income for the couple during retirement
 Pension assets are also free of IHT
 Obtain State pension forecast
 To confirm how much she will both receive and from when
 Any gaps to be plugged with Class 3 NICs if possible
 To maximise the amount of State pension that can be received

Question 30

State the factors an adviser should take into consideration when reviewing the affordability of Maya’s pension contributions.

Answer 30

 Changes in circumstances / objectives / lifestyle / health
 Changes in income and expenditure
 Investment performance / benchmarking / on track / asset allocation /
rebalance
 Change in ATR / capacity for loss
 Charges
 Use of tax allowances
 Tax changes
 Pension contributions
 ISA contributions

Question 31

What additional information do you need to help Sanjeev and Maya meet their protection needs?
(NB We covered mortgage protection under Financial Aim 1 so will not repeat that content here. Please refer back if you’d like to review the mortgage protection questions.)

Answer 31

 Level of income and/or capital required and for how long?
 Do they wish to protect their standard of living in the event of death as well as illness?
 Do they wish to protect any future mortgage in the event of death as well as illness?
 Would expenditure change at all in the event of death/illness?
 Confirmation that the only other protection cover they have is Sanjeev’s DIS
 Is the DIS cover under trust?
 Has Sanjeev nominated a beneficiary for DIS cover?
 Entitlement to State benefits?
 Willingness to use pension funds as death benefits?
 Has Sanjeev nominated a beneficiary for his pension fund?
 Willingness to use other assets, or downsize in future?
 ATR and capacity for loss in relation to this objective?
 Affordability / budget to be spent in providing solution?
 Smoker status / hazardous hobbies that would impact underwriting?
 Does their will reflect their current wishes?
 Who will look after their estate in the event of second death while
Sanjeev’s nephew is still a minor?

Question 32

Identify any reasonable assumptions you might make in relation to Sanjeev’s and Maya’s financial protection planning.

Answer 32

 That Sanjeev’s firm will continue to provide the same benefits while he is in service / increase his benefits when his pay rises
 That company benefits will be lost if he leaves his employer
 They would like any debt to be protected against incapacity as well as death
 They will remain healthy
 Both would continue to work in the event that one or the other were to die or become ill
 They are willing to pay for financial protection cover where necessary
 If they have children in the future, the children’s dependency will cease when they leave full time education
 Their Wills reflect their current wishes
 They will make nominations for DIS / pensions as soon as possible if they haven’t done so already

Question 33

Comment briefly on the couple’s present position and identify any weaknesses relating to financial protection.

Answer 33

If Sanjeev or Maya were to die:
 Sanjeev has 2 x DIS of basic salary
 His pension would provide a return of fund
 No other life cover in place
 They are married
 Current account and deposit savings account held as joint tenants, survivor would inherit by the right of survivorship
 Remainder of estate subject to the Will and left to survivor
 No IHT payable on either death at present due to size of estate
 No income for either in the event of the other’s death
 Bereavement support payment at the lower rate would be available, but this is unlikely to be sufficient
 There is no mention of whether Sanjeev has nominated Maya to receive the DIS benefits / death benefits for their pensions
 If any lump sums are taken out of the pension environment, they will form part of the survivor’s estate on their subsequent death

If Sanjeev or Maya were unable to work through ill-health:
 No employer sick pay
 Entitled to statutory sick pay, but that’s around £100 a week and only pays out for 28 weeks maximum
 After that, may be entitled to employment support allowance / universal credit
 No income protection
 We do not know what their outgoings are, so we need to establish this, but it’s probably safe to assume that the couple’s standard of living would be severely impacted in the event of ill-health, as would their ability to repay any mortgage (assuming there is no mortgage payment protection insurance in place)
 NoCIC
 NoPMI

Question 34

State the factors a financial adviser should take into account when constructing a financial plan for Sanjeev and Maya’s protection needs.

Answer 34

 Sanjeev has 4 x DIS of basic salary, Maya has nothing
 Both pensions would provide a return of fund
 No mention of death benefit nominations for DIS or pensions
 No mortgage as yet, no debts mentioned
 No other life cover or CIC
 No employer sick pay for Sanjeev or Maya
 Neither has income protection
 NoPMI
 No unemployment cover
 The income required on death / illness of either Sanjeev or Maya
 Their current good health
 Their budget
 The term required
 Existing savings
 Entitlement to state benefits
 Married
 Wills in place
 ATR/capacity for loss

Question 35

State the benefits and drawbacks of Sanjeev’s DIS cover.

Answer 35

Benefits
 No cost to Sanjeev
 Not classed as taxable benefit (benefit in kind)
 Cover may increase over time as pay rises
 Benefits payable outside estate assuming written under trust
 No medical underwriting
 Benefits paid tax-free
 Provides valuable cover where the couple are otherwise under-
protected
Drawbacks
 No control over the amount of cover
 Cover most likely lost if change employer
 Employer could withdraw cover at any time
 Proceeds of 1st to die most likely to be in estate of 2nd to die if they
are not spent / placed under trust beforehand
 May not be enough to support Maya
 Death only – no CIC, limited income protection
 If enter salary sacrifice agreement / reduce hours cover may fall

Question 36

State the benefits of Sanjeev and Maya effecting a term assurance / family income benefit policy to protect their standard of living. (Tweak your answer as appropriate – FIB may be more appropriate given affordability is an issue)

Answer 36

 Tax-fee lump sum / ‘income’
 Select sum assured to match required standard of living
 Term to match needs
 Low cost
 Guaranteed premium
 Can be set up under trust where appropriate
 Indexation available
 Provides peace of mind
 Simple underwriting as both in good health
 Cannot be cancelled by insurer

Question 37

State the key differences between a personal income protection insurance policy and a critical illness insurance policy for Sanjeev and Maya.

Answer 37

 IP pays regular income, CIC a lump sum
 IP pays out if unable to work through sickness, CIC pays out if
diagnosed with listed illness
 IP may pay out multiple claims, CIC only once
 Cover decreases over term for IP, constant for CIC
 IP linked to earnings, CIC is not
 IP has deferred period, CIC survival period
 IP based on own/any/suited occupation, CIC can have life cover /
TPD added
 IP individual policy, CIC may be joint and/or offer children’s cover
 IP greater underwriting
 CIC can be set up under trust

Question 38

State why an income protection insurance policy may be more suitable for Sanjeev and Maya than a critical illness policy.

Answer 38

 Multiple claims / wider cover
 Proportionate benefit available
 Indexation available
 Choice of deferred period
 Provides a regular income
 Own occupation available
 Houseperson’s cover available

Question 39

The couple are considering income protection or an accident, sickness and unemployment (ASU) policy to protect their income in the event of being unable to work. State 5 benefits and 5 drawbacks of using an income protection policy rather than an ASU policy for this purpose.
(NB If question is benefits and drawbacks of ASU compared to income protection you can state the opposite of the points below)

Answer 39

Benefits:
 Cannot be cancelled by insurer / can claim more than once
 Can claim for a longer period
 Own occupation
 Indexation of benefits
 Proportionate benefit
 Guaranteed premiums
Drawbacks:
 Usually more expensive
 Longer deferment period before receipt of claim
 Does not cover unemployment
 No lump sum cover / no cover on death
 Stricter underwriting

Question 40

Explain to Sanjeev and Maya how Statutory Sick Pay works.

Answer 40

 Pays just around £100 per week if too ill to work
 Paid by employer
 For up to 28 weeks
 Providing they are eligible to receive it (this generally means being an
employee, having paid sufficient Class 1 National Insurance
contributions and have been ill for at least four days in a row)
 It is not means tested
 It is subject to income tax and National Insurance
 After 28 weeks, may then be entitled to Universal Credit or
Employment Support Allowance

Question 41

Explain to Sanjeev and Maya how Employment Support Allowance works.

Answer 41

 Employees enter 13-week assessment phase after 28 weeks (once entitlement to SSP ends)
 Complete questionnaire and attend assessment centre – then work capability assessment divides into :
 Support group (unable to work)
 Work-related activity group
 Contribution based (taxable) or income-related (means-tested but not
taxable) versions available
 Payments stop at State pension age.

Question 42

Explain to Sanjeev and Maya how Bereavement Support Payment works and how much the survivor would be entitled to on first.

Answer 42

 Payable assuming survivor under State pension age
 Lump sum of £2,500 as no children under 20 in full time education
 Then maximum of 18 monthly payments of £100
 It is neither taxable nor means-tested
 Though it is NI dependent (deceased’s record)
 Must claim within 3 months of death to be eligible for all payments

Question 43

Recommend and justify one suitable protection policy for Sanjeev and Maya to provide a regular income in the event of them suffering a long-term illness or disability.

Answer 43

 Income protection – one policy each
 To cover household expenses / maintain standard of living
 Maximum benefit (50-65% salary)
 Paid tax-free
 Term to expected retirement
 Own occupation
 To provide widest cover
 Deferred period to match emergency fund available
 To keep costs down
 Indexation
 To keep pace with inflation
 Guaranteed premiums
 To ensure affordability
 Permanent cover
 Cannot be cancelled by insurer providing premiums are paid

Question 44

Recommend and justify the actions you would take to provide financial security for the couple in the event of serious ill-health.

Answer 44

 Critical illness policy (single or joint)
 Sum assured and term to match needs
 To pay make any adjustments to lifestyle/house/repay mortgage
 Paid tax-free
 Indexation
 To keep pace with inflation
 Guaranteed premiums
 To ensure affordability
 Waiver of premium
 To ensure premiums continue if sick.

Question 45

Recommend and justify a suitable product that meets the family’s protection need to cover the death of either client.

Answer 45

 Level term (or FIB)
 JL1D (or 2 SL policies for wider cover)
 Sum assured to replace lost income / expected outgoings
 To maintain standard of living
 Paid tax-free
 Term to expected date of retirement
 Indexation
 To keep pace with inflation
 Guaranteed premiums
 To ensure affordability
 Written in trust
 To ensure speedy payment / no impact on estate
 Waiver of premium
 To ensure premiums continue if sick

Question 46

Identify the factors that should be taken into account at future reviews for the couple’s protection cover.

Answer 46

 Whether they bought a property
 If Sanjeev qualifies and his income increases
 Changes in need for income / capital
 Change in employment status
 Change in State benefits
 If they have children in the future