4: Life Assurance Pt. 1

Question 1

What is meant by a “unit-linked” structure within a whole of life policy?

Answer 1

It builds up a cash value

Question 2

The FCAs ICOBS regulates which type of whole of life policy?

Answer 2

Protection only

Question 3

The FCAs COBS regulates which type of whole of life policy?

Answer 3

Unit-linked based

Question 4

What happens regarding pay out if an insured person of a funeral plan passes away within the first 12–24 months of the policy?

Answer 4

The full sum insured is only paid for accidental death; otherwise, premiums are usually refunded.

Question 5

Despite potentially limited value of a funeral plan, why do people opt for these plans? State 2 reasons.

Answer 5

Simplicity and guaranteed acceptance (no underwriting)

Question 6

What are the primary and secondary purposes of a single premium, non-qualifying, assurance (investment) bond?

Answer 6

Investment growth and then life cover

Question 7

Calculate the beneficiary pay-out if a client invested £50,000 into a single premium, non-qualifying, assurance (investment) bond which later grew to £85,000 before their death.

Answer 7

85,000 * 101% = £85,850

Question 8

What are the 3 main types of term assurance?

Answer 8

Level, increasing, and decreasing

Question 9

Which type of cover is designed to provide regular income payments to beneficiaries instead of a lump sum if the insured person passes away during the policy term?

Answer 9

Family income benefit

Question 10

With decreasing term assurance for mortgages, why is it that the higher the interest rate, the slower the year-by-year reduction in the sum
assured in the early years of the loan?

Answer 10

In a capital & interest (repayment) mortgage, borrowers make fixed monthly payments, but initially, a larger proportion of those payments goes toward paying interest, while only a small portion pays off the actual mortgage capital.

Question 11

In what way is family income benefit decreasing in nature?

Answer 11

Decreasing Pay-out Over Time – The earlier a claim is made, the longer the payments continue. If death occurs later in the term, fewer payments remain.

Question 12

Why is family income benefit typically cheaper than level term assurance, particularly when the sum assured is equal on both?

Answer 12

Because the pay-out decreases over time meaning less risk on the insurer

Question 13

Can family income benefit be used to cover the cost of mortgage payments?

Answer 13

Yes

Question 14

Emma takes out a 25-year Family Income Benefit policy that guarantees £2,000 per month to her family if she passes away. If she dies in year 5, her beneficiaries will receive £2,000 per month for 20 years. What would happen if she died in year 20?

Answer 14

£2,000 per month for the remaining 5 years

Question 15

Which type of life insurance policy is specifically designed to cover the inheritance tax (IHT) liability on PETs made during a person’s lifetime?

Answer 15

Gifts inter vivos term assurance

Question 16

What happens with premiums if the policyholder survives the term of Return of Premium Term Assurance?

Answer 16

All premiums are refunded

Question 17

How is Return of Premium Term Assurance classified for regulatory purposes?

Answer 17

It is treated as an investment under the COBS rules because it includes a pure endowment element equal to the premiums paid.

Question 18

Explain what is meant by convertible term assurance.

Answer 18

At any time during the term, the policy can be converted to a whole life or (in some cases) endowment assurance

Question 19

What are the potential outcomes of a reviewable policy?

Answer 19

Premium and/or sum assured could be amended after a set given period. Premium could go up, sum assured could come down!

Question 20

Prior to April 2006, it was possible for an individual to benefit from tax relief on term
assurance linked to a pension plan - what was this type of policy known as?

Answer 20

Pension term assurance

Question 21

What happens to the tax relief on a protected term assurance if the policy benefits are increased or the term is extended?

Answer 21

It will be lost

Question 22

What is the purpose of a Relevant Life Policy? Who pays for it, and who benefits?

Answer 22

It provides life cover for an employee, paid for by their employer. The pay-out must go to a beneficiary (individual or charity) or a trustee, ensuring it’s used appropriately.

Question 23

Up to what age can a Relevant Life Policy provide cover?

Answer 23

The insured person must be under 75 for the policy to pay out.

Question 24

Can a Relevant Life Policy be cashed in or surrendered for money?

Answer 24

No

Question 25

Apart from death cover, what else can a Relevant Life Policy provide?

Answer 25

Some policies also cover terminal illness or serious disability leading to retirement.

Question 26

What option may be available to an employee who leaves service regarding their Relevant Life Policy?

Answer 26

Providers may also allow an employee who leaves service to take a personal plan as a replacement, without the need for further underwriting.

Question 27

How is general insurance different from life insurance? Name examples of general insurance.

Answer 27

General insurance covers short-term risks, while life insurance provides long-term financial security, often after death. Examples of general insurance include: home, travel, and pet insurance.

Question 28

What is a multiplan (or menu plan)?

Answer 28

A single policy that allows a customer to include multiple types of cover, such as level term assurance, income protection, and critical illness cover, with the flexibility to adjust them over time.

Question 29

What are the advantages and disadvantages of a multiplan compared to single contracts?

Answer 29

Advantages: Multiplans can reduce charges, minimize overlapping cover, and offer greater flexibility for policyholders. Disadvantages: They can be more complex to set up than single contracts due to multiple cover types being combined.

Question 30

Can general insurance be included in a multiplan?

Answer 30

Yes

Question 31

What are the 3 ways in which a life assurance policy can be written under trust?

Answer 31

Own life, joint life, or life of another

Question 32

What happens when one person dies in a "Joint Life First Death" policy?

Answer 32

The policy pays out to the survivor and then terminates.

Question 33

What is a major disadvantage of a joint life first death policy?

Answer 33

The survivor may need ongoing coverage, because it terminates at first death.

Question 34

What specific financial need does a "Joint Life Second Death/Last Survivor" policy address?

Answer 34

It provides a lump sum after both partners die, often for inheritance tax liabilities.

Question 35

Emma wants financial protection for her children if she passes away. How should her life policy be set up to ensure they receive the benefit?

Answer 35

She should write the policy on her own life and place it in trust or name her children as beneficiaries

Question 35

How can a "Joint Life Last Survivor" policy be structured to avoid inheritance tax (IHT)?

Answer 35

It should be placed in a trust to ensure the pay-out is free from IHT and probate.

Question 36

Daniel co-owns a business with Olivia. To make sure he can buy out Olivia’s share if she passes away, how should his life insurance policy be structured?

Answer 36

He should take out a Life of Another policy, where he is the policyholder and Olivia is the life assured, ensuring the pay-out goes directly to him.

Question 37

Raj and Priya want a policy that provides a lump sum to the surviving spouse when one of them dies. How should their life insurance be structured to achieve this?

Answer 37

They should set up a Joint Life First Death policy, which pays out on the first death and then ceases.

Question 38

Alex and Sophie need a policy to cover inheritance tax, but only after both of them have passed away. How should their policy be set up?

Answer 38

They should arrange a Joint Life Second Death policy, ideally under a trust, so the pay-out covers IHT after both partners die.

Question 39

What is usually the best type of protection contract and basis of cover to protect a joint repayment mortgage?

Answer 39

Decreasing term assurance on a joint life first death basis.