Chapter 4

Question 1

What are the 3 parties to a life assurance policy?

Answer 1

The assured
The life assured
The life office

Question 2

What is meant by “the assured”?

Answer 2

The individual couple, or company taking out the policy are known as the assured

This means that they are the policy owners, have applied for the cover by completing an application form and are likely to be paying the premiums required ( but not always)

Other terms used that have the same meaning include policy owner or proposer

Question 3

What is meant by the life assured?

Answer 3

This is the individual or group of individuals upon whose death the policy will pay out the cash lump sum benefit
The life assured and the assured are usually the same, but this is not always the case such as in business protection needs

Question 4

What is meant by the life office?

Answer 4

Someone has to assess, accept and charge for the risks involved and this is the role of the life office or insurance company
Using the application form completed by the assured the life office through its underwriting team will assess the risks and decide whether these are acceptable and if so on what terms

Question 5

What events during a persons life journey may give rise to life assurance requirements?

Answer 5

Buying a property with the help of a mortgage
Loans for car or property purchases
Providing an income on death for your spouse, registered civil partner, and dependents to ensure their financial security
Protecting a business and its liabilities
Covering an inheritance tax liability

Question 6

What is terminal illness benefit?

Answer 6

Terminal illness benefit allows for life assurance cover to be paid in advance of death if the individual is diagnosed with an incurable disease, where medical opinion is that life expectancy is less than 12 months

Question 7

How is the terminal illness benefit usually written?

Answer 7

Commonly written as a rider on life policy
This means that it will not be paid in addition to the life cover, but as an accelerated death benefit, i.e., before the individual has died

Question 8

What happens once the terminal illness benefits has been paid?

Answer 8

Once payment has been made, the policy will cease
If the individual does not die within 12 months, no refund will be required

Question 9

Is terminal illness benefit available as a separate policy?

Answer 9

This cover is not available as a separate policy
It is commonly available either for no extra charge or a small, additional premium on many life policies
Cannot be added in the last 18 months of any policy with a term

Question 10

What are the benefits of terminal illness benefit?

Answer 10

Can be used for any purpose, which could mean the chance to take off experiences on a bucket list before death, rather than more conventionally sensible options
It will be available to both the individual and their family to plan in advance how to best provide financial security required

Question 11

What could be a drawback of the terminal illness benefit?

Answer 11

The individual may be too ill to be able to make any decisions regarding this lump sum payment at the time, so I cannot make the best use of this advance sum of money

Question 12

How does terminal illness benefit relate to taxation?

Answer 12

Income tax free and inheritance tax free but will form part of the estate of the deceased so may increase inheritance tax liability on their death

Question 13

What is an own life life assurance policy?

Answer 13

This is where the assured and life assured are one and the same
This is more likely to be used on a policy such as critical illness cover, or a policy that covers both death and critical illness cover

Question 14

When is an own life basis more common?

Answer 14

More common with personal protection needs
Also known as single life basis
Could be used when a couple have different requirements and wish to meet those needs

Question 15

What is meant by a life of another life insurance policy?

Answer 15

This is where the assured and life assured are not the same
This is most used in business protection

Question 16

Give an example of a life of another basis? (Virgin company)

Answer 16

Imagine the company virgin and it’s founder Richard Branson
If Richard died, virgin‘s profit and share price are likely to suffer, and a replacement would need to be found, which could take time
Virgin the company therefore have insurable interest in Richard Branson their founder
A life of another life assurance policy could be taken out, with virgin as the policy assured and Richard as the life assured

Question 17

Give a life of another life assurance policy example (family)?

Answer 17

Imagine a couple have divorced and one ex spouse pays maintenance to the other, who is mainly responsible for bringing up their children
This ex-spouse would have insurable interest in the one paying maintenance, and could take out a policy as the assured, with the maintenance payer as the life assured

Question 18

What is a joint life first death policy?

Answer 18

This basis is usually used for family protection policies, to cover a couple where suitable life assurance is required if either were to die, to provide financial support to the survivor
The death benefit is paid out when the first life assured dies
Only one payment of the life cover would be made and then the plan would cease

Question 19

What is a drawback of a joint life first death policy?

Answer 19

This can cause future problems, as the survivor would have no cover remaining
It is also not as comprehensive as two single life policies but it is often used as the premiums are cheaper
Divorce can also often cause issues

Question 20

What is a joint life second death life assurance policy?

Answer 20

This basis provides a life assurance payment once both lives assured have died
It is predominantly used for mitigating inheritance tax, which is a tax levied on an estate and certain gifts, usually at 40% rate on death
The estate will not be paid until any tax due is paid, and many beneficiaries do not have the monies to pay the tax
A trust is almost always used, to ensure the life assurance payment passes outside of the estate so that the policy proceeds do not increase an inheritance tax bill by increasing the value of the estate

Question 21

What is a continuation option with regards to employer sponsored cover?

Answer 21

The employee can continue the cover if they leave employment

Question 22

What kind of life assurance is available through employer cover? How much can be provided?

Answer 22

An employer can provide life cover as part of a pension scheme
Currently up to £1,073,010 could be provided tax-free on death pre-age 75
It has become increasingly common for employers to provide cover through expected group life schemes

Question 23

What seven conditions must an expected group life scheme include?

Answer 23

Payment of a lump sum benefit on death of the life assured before age 75
Benefits must be calculated in the same way for each individual covered
Only a refund of premiums can be paid if the policy is cancelled
Only sums and benefits can be paid under such a policy
Benefits may only be paid to an individual or charity
Nothing can be paid to a life assured or any connected person, on the death of another life assured
Tax avoidance cannot be the main reason for this insurance

Question 24

What are the three generic types of life assurance available to customers?

Answer 24

Whole of life
Term assurance
Endowment

Question 25

What are the two elements for life assurance policies? Explain both

Answer 25

Protection element-designed to be paid out on specific events such as death or critical illness Investment element-designed to provide funds at a future date for specific events, or to fund long-term protection requirements

Question 26

What is the use of an investment element in a life assurance policy?

Answer 26

Any investment elements can build up reserves which can help with policy reviews and avoid the need for premium increases

Question 27

What are the two main assumptions an insurance company makes in pricing premiums

Answer 27

How many of us will die each year What provided costs will be

Question 28

What is a whole of life policy?

Answer 28

A whole of life policy is a long-term life assurance policy which pays out a lump sum on death, whenever that may occur, and may build a cash surrender value overtime

Question 29

Name three different types of whole of life policies

Answer 29

Non-profit With profits Low cost Unit linked Universal

Question 31

What is a nonprofit whole of life policy?

Answer 31

In this type of policy, there is a fixed sum assured and a fixed premium The assured does not participate in any profits of the life office

Question 32

What is a with profits whole of life policy?

Answer 32

The policy benefits from two types of bonus annual and terminal Annual bonuses are awarded taking each years life office profits into account Terminal bonuses look at profits over the whole period the policy has been held for The payment on death will therefore be the full sum assured plus bonuses.

Question 33

What happens if a customer stops a with profits whole of life plan early?

Answer 33

A discretionary charge, known as the market value reducer can be applied, to existing policyholders This charge ensures bonuses paid are fair, bearing in mind the life office’s expectation was that this policy would run for the whole of the assured’s life and not be stopped earlier

Question 34

What is a low cost life assurance plan?

Answer 34

This is a hybrid plan, which combines a with profit investment base with a decreasing term assurance With profit bonuses are added to a basic sum assured, that is less than the guaranteed sum assured The payment on death will be the greater of the guaranteed sum assured or the basic sum assured plus bonuses

Question 35

What is a unit-linked life assurance plan?

Answer 35

A unit-linked plan is one where premiums by units in a unit-linked fund Unit units are then cancelled each month to pay for the cost of cover, mainly mortality charges The payment on death will be the greater of the bid value of units, or the guaranteed sum assured

Question 36

What is a universal life assurance policy?

Answer 36

A universal policy is unit-linked with added bolt on options, such as critical illness cover, accidental death benefits, and income protection cover

Question 38

What are the unit-linked whole of life features?

Answer 38

Provide a pre-agreed sum assured, with no end date, so cover is permanent Can offer a mix between life cover and investment into a unit-linked fund Units are purchased with premiums, then cancelled for charges such as mortality costs The first plan review usually takes place after 10 years, and then every five years thereafter There is a choice of cover types

Question 39

What are the cover types for a whole of life unit-linked policy?

Answer 39

Maximum cover-where the premium is fixed for the first 5 to 10 years and then, when reviewed, it is likely to have to rise to maintain the current sum assured, or the sum assured will reduce to maintain the premium Standard cover -premiums paid should be sufficient to maintain the sum assurance for the life of the policy Guaranteed cover - no real investment but there may be a surrender value

Question 40

What are the policyholder options at a plan review?

Answer 40

No action required-cover can be maintained for premium paid Increase premium to maintain cover required Decrease cover amount if premium increase is not affordable Do nothing but accept the policy may cease before death occurs

Question 41

What can a whole of life policy be utilised for?

Answer 41

Family protection Inheritance tax planning Funeral planning-over 50s plans Business protection (less likely)

Question 42

How can a consumer compare costs on different whole of life providers?

Answer 42

By comparing the reduction in yield percentage

Question 43

What does term assurance do?

Answer 43

Pays a lump sum series of lump sums (the sums assured) on death within the term The term is established at outset Benefits can level or they can decrease or increase overtime There is usually no investment element

Question 44

Name five different types of term assurance

Answer 44

Level Renewable Convertible Return of premium Decreasing Increasing Term 100 FIB Unit linked Reviewable

Question 45

What are the reasons for use for level term assurance?

Answer 45

Known payment on death during policy term Fixed premium and sum assured Unpaid premiums lead to policy lapse Used with IO mortgages

Question 46

What are the reasons for use for renewable term assurance?

Answer 46

Renewable option on policy expiry date, usually before age 65 No health evidence required when exercising the option-guaranteed insurability Premium is likely to increase when option exercised, due to being older Used by individuals concerned about their health and insurability

Question 47

What are the reasons for use for convertible term assurance?

Answer 47

Level term with a convertibility option during, or at the end of, the current term so benefits from guaranteed insurability Option to convert whole of life or endowment policy Premiums will be calculated at conversion-likely to increase Is used by individuals concerned about their health and insurability

Question 48

What are the reasons for use for return of premium?

Answer 48

Has the standard term assurance policy terms, but in addition, repays the premiums paid if the life assured survives to maturity More expensive premiums as a result Technically a combination of term assurance and endowment

Question 49

What are the reasons for use for decreasing term assurance?

Answer 49

Fix premium Sum assured decreases each year Can have a shorter premium payment term compared to policy term Often used as mortgage protection assurance with repayment mortgages

Question 50

What are the reasons for use for increasing time assurance?

Answer 50

Annual cover increased by set percentage, or index-linked No new health evidence required-guaranteed insurability Premiums increase annually due to age Used by individuals wanting their cover to keep in pace with inflation to maintain buying power

Question 51

What are the reasons for use for term 100 policies?

Answer 51

Written to age 100 as an alternative to whole of life policy potentially less expensive Greater longevity could cause problems

Question 52

What are the reasons for use for family income benefit?

Answer 52

Cover a set term, but the sum assured is paid in annual tax-free instalments that commence on the death of the life assured, rather than a lump sum Payments can be level or increasing Regular payments, made monthly quarterly or annually

Question 53

What are the reasons for use for unit linked term assurance?

Answer 53

Can offer a mix between life cover and investment into unit-linked fund Units are purchased with premiums, then cancelled for charges such as mortality costs Any investment value can help with plan reviews and avoid future premium increases

Question 54

What are the reasons for use for reviewable term assurance?

Answer 54

Virtually all policies are reviewable as there is a lot of provided guesswork going on Frequency of reviews depends on term of policy Provider will review two main areas-how many claims have been paid out and what their costs have actually been

Question 55

What was pension term assurance?

Answer 55

This type of policy offered customers the ability to take out life assurance as part of pension planning, and receive tax relief on premiums, making costs less expensive In 2006 the government introduced new legislation around simplifying the pension markets which allowed individuals to contribute premiums of £3600 a year and provide death benefits of up to £1.8 million on death pre-retirement

Question 56

How has the amount of death benefits on death pre-retirement changed?

Answer 56

Originally £1.8 million Decreased several times Replaced by the lump sum death benefit allowance Removed with effect from 2024/25 tax year

Question 57

What happened to pension term assurance after April 2006?

Answer 57

Pension term assurance taken out prior to 14th December 2006 retained premium tax relief as long as no changes were made to policy’s cover level or term Abolished future pension term assurance except for employer plans No tax relief on pension term assurance taken out on or after 14th of December 2006 or policies put on risk after 1st August 2007

Question 58

What are endowment?

Answer 58

Endowments are policies that provide a combination of life cover benefits, if death occurs during the term, or a potential investment return at the end of the term if the policyholder survives Premiums are invested monthly into funds selected by the policyholder

Question 59

How were endowment traditionally used?

Answer 59

Traditionally used with interest only mortgages Borrower pays interest to lender and endowment premium to insurer, in the hopes that at the end of the term there will be sufficient investment value to repay the mortgage

Question 60

Name four additional types of life assurance outside of term, whole of life, and endowment

Answer 60

Funeral plans Multi plan Bonds Relevant life policies

Question 61

What are funeral plans?

Answer 61

These plans offer a low sum assured and premiums, guaranteed acceptance and simplified underwriting Usually little or no payout if death occurs in first two years Appeal to individuals just requiring a lump sum to cover funeral costs

Question 62

What is a multi plan policy?

Answer 62

These policies are generally set up on a single life basis and can include different types of cover in addition to life assurance such as critical illness cover income protection and unemployment cover Also known as universal life plans

Question 63

How are bonds different (opposite) to most life policies?

Answer 63

For most life policies the protection element is greater than the investment element A bond is the opposite It is much more of an investment with a far smaller protection element

Question 64

What is the technical term for an investment bond? What is the life cover element usually?

Answer 64

Single premium, non-qualifying whole of life plan Life cover element is usually 101% of the bid value of any units-return of funds plus extra one percent

Question 65

What kind of tax can an investment gain made on a bond be subject to?

Answer 65

Income tax

Question 66

What are the two unique features a bond has in relation to income tax?

Answer 66

5% of the original investment can be withdrawn tax deferred Top slicing can be used to reduce income tax liability

Question 67

What is a relevant life policy?

Answer 67

These are policies that generally provide a lump sum payment on death, under the requirements of the income tax act 2003 Must satisfy certain: payment of a lump sum benefit on death of the life assured under 75, no facility to build up surrender value and policy payments must be made to an individual, registered charity or trustee Usually provided by an employer for employees through group life assurance policies

Question 68

What are the two main sections from the FCA handbook that are related to protection policies?

Answer 68

Insurance conduct of business source book (ICOBs) Conduct of business source book (COBS)

Question 69

Which policies fall under ICOBS?

Answer 69

No investment element Pure protection policies, i.e. most term assurance

Question 70

Which policies fall under COBS?

Answer 70

Has an investment element-eg unit linked ,with profit endowment

Question 71

What is indexation with regards to life policies?

Answer 71

This is where the sum assured is linked to an index such as the RPI or the CPI Sum assured increases annually as do premiums Could also fall-deflation Sum assured increased without need for underwriting

Question 72

What are guaranteed insurability options?

Answer 72

Sum assured can be increased if certain events occur to the life assured This could be getting married, having kids, moving jobs, etc Increases usually restricted to a maximum monetary amount Not underwritten at time of increase, but premium is likely to increase

Question 73

How can the sum assured be increased outside of preplanned options?

Answer 73

Some assured can be increased ad hoc Prompted by reviewing personal circumstances and needs with a financial advisor Likely to require underwriting

Question 74

What is meant by guaranteed premiums or standard cover?

Answer 74

Higher premium paid from the start, but should be able to continue at that level throughout the policy term whilst maintaining the level of cover

Question 75

What is meant by reviewable premiums or maximum cover?

Answer 75

Client pays lower premiums initially, but at the first plan review first with a couple options Pay same premiums but reduce cover Increase premiums to maintain the same level of cover

Question 76

What is meant by waiver of premium?

Answer 76

This is where the premium is insured against the risk of the assured of being ill or disabled In such an event premiums must be paid for first six months-deferred period But then premiums will be waived by the provider whilst the cover continues

Question 77

Which type of protection is always subject to COBS rules?

Answer 77

Long-term care protection

Question 78

What is the definition of underwriting?

Answer 78

The process of evaluating the risks of insuring a particular person and using this information to set a premium price for the risk being undertaken

Question 79

What is meant by continuing previous medical exclusions?

Answer 79

Known as CPME Underwriter applies the same terms as previously given on a form of policy Common when cover is transferred from one provider to another

Question 80

What are other risk assessment tools are available for an underwriter after the application stage? Name 4

Answer 80

GP report Data subject access request Paramedical Tele underwriting interview Medical Health questionnaire Health screening

Question 81

What is a GP report? Why is this useful in the underwriting process?

Answer 81

Written report from applicants own general practitioner Relatively inexpensive option that does not involve the applicants time Underwriter can review this report for any additional risks

Question 82

What is a data subject access request? Why is this useful in the underwriting process? Why is this currently under review?

Answer 82

The applicant request a copy of the own medical records, which are then sent to the insurer Requested by applicant themselves and saves on cost More detail than a GP report Currently under review due to data protection issues

Question 83

What is a paramedical? Why is this useful in the underwriting process?

Answer 83

Short medical questionnaire plus some basic tests such as measuring height and weight Undertaken by a nurse a lower cost than using a GP

Question 84

What is a tele underwriting interview? What are the two types? What are the benefits?

Answer 84

Underwriter or nurse driven telephone interview involving additional medical questions Big T - process used instead of medical questions on the application form Little T - questions in addition to medical questions on the application form Shorter application forms, faster underwriting, less non-disclosure and lower costs

Question 85

What is a medical? Why is this useful in the underwriting process?

Answer 85

Examination which includes measuring height and weight, taking blood pressure readings and blood sample Carried out by applicants own GP or doctor provided by insurer To check risks involved and ensure premiums charged are for risks

Question 86

What is a health screening? How is this useful for the underwriting process?

Answer 86

Non invasive test such as saliva swabs or urine test carried out by a nurse, pharmacist, or other non-GP individual Provides underwriters with information about the applicant in a cheaper fashion than in other ways

Question 87

What rules are the storage and processing of data governed by?

Answer 87

Data protection act 2018 GDPR Law enforcement directive

Question 88

What is the law enforcement directive?

Answer 88

Piece of EU legislation that sits parallel to GDPR

Question 89

For whole of life and term assurance policies where there is perceived additional risk what options does an underwriter have available to them? Name three and briefly describe.

Answer 89

Applying a premium loading - an extra charge is applied to the premium usually expressed as a cost per thousand pounds of cover Giving an extra mortality rating - a higher premium is charged by way of a certain percentage increase being applied Giving an age rating - nationally making the life assured a certain number of years older Including a policy debt - an initial amount that will be deducted from any claim payment Postponing a policy - for example till after birth Declining a policy - too many risks underwriter may decline

Question 90

Which policies are more strenuously underwritten and why?

Answer 90

Income protection and critical illness cover pose the biggest risk to an insurer so are more strenuously underwritten

Question 91

What are the three main conditions of financial protection policies with regard to contract law? Explain these

Answer 91

Offer -an offer must exist-the application form completed by the proposer Accept - the offer must be accepted e.g. the applicant agrees to the terms (this may be done by making the first payment) Intention - there must be an intention to contract -this is often in the small print

Question 92

Who is the contract between for a financial protection policy?

Answer 92

Between the proposer (the person applying for the contract) and the insurer As long as insurable interest exists, the life assured does not have to be one of these parties to contract

Question 93

What is considered the offer in a financial services contract?

Answer 93

The first offer is the completion of the proposal form, which will then be considered and formally acknowledged by an acceptance letter The acceptance letter is a counter-offer by law The proposer accepts by paying the first premium

Question 94

What is meant by the cooling off period in a financial services contract?

Answer 94

Usually 14 or 30 days that allows the applicant to cancel with any premiums paid being refunded These rules are contained in the financial service and markets act 2000

Question 95

What is meant by the term “utmost good faith” with regards to life assurance contracts?

Answer 95

“Utmost good faith” relates to the principle that both parties to the contract, the assured and the life office, are in possession of all the information they need to enter a contract The applicant must answer the application form and any other questions honestly, truthfully, and completely-this is the duty of disclosure The insurer must disclose all the key details about the policy, what it does and does not cover and what the terms are

Question 96

What is meant by “ the fair treatment of customers”?

Answer 96

The fair treatment of customers is a regulator initiative, started by the financial services authority and continued by subsequent regulators It’s core principles are about fair treatment of all customers, which include rules around transparency and disclosure

Question 97

What used to be the consequence of non-disclosure and how is this dealt with nowadays?

Answer 97

Claims were rejected by a life office, based on non-disclosure, if any facts were omitted from the underwriting process However, there was concern that these facts may not always have been material Now there are three categories-reasonable, careless and deliberate/reckless

Question 98

What is meant by reasonable/innocent with regards to non-disclosure? What happens in this case?

Answer 98

This is where the customer has acted reasonably and honestly, even though they may not have fully disclosed all material facts It may be the customer genuinely did not realise that this information would be relevant An example would be failing to disclose an earlier minor operation in relation to a cancer claim under a terminal illness benefit The claim will be met in full

Question 99

What is meant by careless with regards to non-disclosure? What happens in this case?

Answer 99

In this case the customer is deemed not to have taken sufficient care and should have realised the information was incomplete This could be an individual suffering from skin cancer and not disclosing it at the application stage and later claiming on the policy for another form of cancer In this case some but not all of the claim will be paid out -proportionate remedy

Question 100

What is meant by deliberate or careless with regards to non-disclosure and what happens in this case?

Answer 100

This is where the customer should have known both that the information they have provided was incomplete and incorrect and that it would be relevant to the underwriting of the policy In such cases, the claim will not be paid

Question 101

What are some new rules for insurers in the new ABI guidelines?

Answer 101

Not trawling through a customer’s medical records in the hope of discovering non-disclosure Asking solely for appropriate medical evidence when a claim is made If the non-disclosure resulted from actions of an agent of the insurer, the claim would still be valid

Question 102

What are the 6 situations where automatic insurable interest exists?

Answer 102

Own life Life of spouse or RCP Employer and employee Partners in a partnership Creditor and debtor Mortgagee and mortgager

Question 103

When is an individual not classed as having contactual capacity

Answer 103

Aged under 18 Mentally ill Drunk or under the influence

Question 104

What guarantees that insurers always have enough money to meet claims?

Answer 104

All policyholders pay premiums into a common fund from which all claims are met

Question 105

What are the 2 ways to calculate premium paid by a customer?

Answer 105

Natural premium system - Risk of death increases as we age, premiums rise as risk of death rises Level premium system- Policy holders effectively over pay early on and build a reserve in the pool. This means premium increases won’t need to be as steep when people get older and ensures elderly can still afford premiums

Question 106

Why might longer term policies have lower premiums with regards to interest?

Answer 106

Interest paid on premium invested can be substantial and premium will reduce as a reward The longer the contract the more interest will be paid on premiums

Question 107

What loadings are applied to the net premium to get the actual premium?

Answer 107

Loading to cover insurers expenses - employee salaries, underwriting costs etc Frequency loading - annual payment slightly cheaper than monthly

Question 108

What is a trust?

Answer 108

A trust is a legal arrangement where one party, the settlor makes a gift of assets and creates a legal structure to hold the assets on behalf of the beneficiaries The assets are then looked after by the trustees