READ THROUGH 4.4.6 AGAIN . Chapter 4 - (8 MARKS) Life Assurance Flashcards

Question

exam: Questions in the R05 exam are often scenarios, based around the different types of financial protection policies available. You must select the most appropriate policy for the given need.

Answer 1

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

Answer 2

A form of term assurance that lasts until the life assured reaches 100years old It is an alternative to whole of life assurance. Obvs it can cause issues if the person exceeds 100years old

Answer 3

Known as Pension Term Assurance (PTA) This type of policy offered customers the ability to take out life assurance as part of pension planning, and IN THE PAST received tax relief on premiums, making costs less expensive. Now it is commonly offered through an employer where the life assurance benefit provided is known as ‘death in service’ Individuals could also have pension term assurance linked to their own personal pension policy... NOW Private PTAs taken out prior to 14th December 2006 retain premium tax relief Private PTA taken out on or after 14th December 2006 do NOT retain premium tax relief (read 4.2.3 to find out why) THIS DOES NOT APPLY TO EMPLOYER SCHEMES. EMPLOYER SCHEMES STILL RECEIVE TAX RELIEF FOR CONTEXT: Advisers should check with a client’s policy provider to confirm the details on a case-by-case basis as whether they receive tax relief or not is an important factor

Answer 4

Endowments are policies that provide a combination of life cover benefits, if death occurs during the term, plus a potential investment return at the end of the term. Premiums are invested monthly into funds selected by the policyholder. These could be with-profit or unit-linked funds Endowments were traditionally used in line with interest-only mortgages.

Answer 5

Funeral plans (marketed as 'over 50 plans'): For those only wanting a lump sum to to cover funeral costs Low sum assured and premiums and guaranteed acceptance as it has simplified underwriting (or none). If death occurs in the first 2 years there is no pay out but premiums are refunded

Answer 6

Also known as ‘universal’ life plans. Normally 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. Have lower charges and less chance of cover overlap but can be more complex to set up.

Answer 7

They are single premium, non-qualifying whole of life plans with low protection but high investment value. The life cover element is usually 101% of the bid value of any units – so, it is ‘return of fund’ plus an extra 1% (so very low protection) Any investment gain is potentially subject to income tax (not CGT even though it is a 'gain')

Answer 8

These are policies that generally provide a lump sum payment on death, under the requirements of the Income Tax Act 2003. Policies must satisfy certain criteria, which include: SEE IMAGE They are provided by an employer for employees through group life assurance policies. Premiums are paid by the employer and paid out to beneficiaries via a trust arrangement.

Answer 9

Continued on another flash card

Answer 10

ICOBS = Insurance Conduct Of Business Sourcebook (think, ONLY INSURANCE) COBS -= Conduct of Business Sourcebook ICOBS = policies with no investment element, known as pure protection policies. For example, most term assurance plans COBS = Policies with an investment element. E.G a unit linked or with profit endowment.

Answer 11

ICOBS = contains policies with NO investment element, known as pure protection policies. For example, most term assurance plans COBS = Contains policies with an investment element. E.G a unit linked or with profit endowment. Remember: A policy with no surrender value is subject to the Insurance: Conduct of Business Sourcebook rules (ICOBS). Saying this, this does not include Long Term Care protection, which is ALWAYS subject to COBS rules.

Answer 12

policy purpose term cover required over flexibility the need for increases in future cover levels monies available to pay premiums, i.e. affordability view around premiums, i.e. ‘would prefer to pay the same’ or ‘happy with future potential rises’ investment element required?

Answer 13

Read 4.3 for context

Answer 14

Indexation: Sum assured increases or decreases inline with an index without the need for underwriting. It means the spending power of the sum assured is kept constant. Guaranteed Insurability Option: Sum assured increases inline with certain customer life events such as moving home, having children etc without any underwriting. premiums will increase as a result and it is only available for those ages 18-59

Answer 15

‘Guaranteed premiums’ or ‘standard cover’ is where higher premiums are paid from the start, but these should be able to continue at that level throughout the policy term whilst maintaining the level of cover required. ‘Reviewable premiums’ or ‘maximum cover’ is where the client pays lower premiums initially, but after the first plan review the customer is likely to be faced with a couple of options such as Pay the same premiums but reduce the cover or Increase premiums to maintain the same level of cover or do nothing. Some customers would prefer a set premium that they pay, either for a specified term or the whole of their lives. Others prefer the option of paying less to start with and then, once the policy is reviewed, paying more through premium increases as a result of this review. This is something that must be taken into consideration when recommending a product

Answer 16

To remember this just remember that maximum cover polices are where units are in at a rate where cover can be provided for 5-10 years. After which, premiums will need to increase to keep the same sum assured OR the sum assured will need to reduce to maintain the same premium. NO INVESTMENT VALUE IS BULIT UP. Standard cover: Where the premiums paid should be sufficient to maintain the sum assured for the life of the policy (and are therefore 'guaranteed' REMEMBER: Both term and whole of life policies offer either a guaranteed or reviewable premium basis. Whole of life plans offer a choice between standard and maximum cover.

Answer 17

Where the premium is insured against the risk of the assured becoming ill or disabled. Has 6 month deferred period where premiums are paid Following deferred period, premiums are waived by provider but cover remains

Answer 18

A policy with no surrender value would be subject to the Insurance: Conduct of Business Sourcebook rules (ICOBS) This does not include Long Term Care protection, which is ALWAYS subject to COBS rules.

Answer 19

‘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’

Answer 20

All common sense but remember one is that any hazardous activities will likely be included, such as scuba diving

Answer 21

Moratorium: Any pre-existing conditions that the life assured has suffered from in the 5 years before the application, will not be covered under the new policy for the first 2 years. (This is more likely to be the version in your R05 exam) Or that less underwriting is carried out at application stage, and more when a claim is made. Both definitions can be used in the same policy, such as Private Medical Insurance Simplified Underwriting: Means there is little, or no, underwriting carried out on the policy. For example, because it is an employer sponsored Free cover: where no underwriting is required Full medical underwriting: Just means the policy has in-depth underwriting For Higher-risk policies such as CIC. Pre-existing conditions exclusion: Where the provider states, in advance, that they will not pay out for any previous conditions the life assured may have suffered from in the last five years for he entire term of the policy. It is most common with private medical insurance policies Continuing previous medical exclusions: This is also known as CPME. Where an underwriter applies the same terms as previously given on a former policy. This is common where cover is being transferred from one provider to another.

Answer 22

Data Subject Access Requests (DSAR) Previously known as Subject Access Requests (SAR's) Must be actioned within 1 month Only administration costs can be levied

Answer 23

An EU legislation that sits parallel to the GDPR. It covers rules relating to the processing of data by data controllers for law enforcement purposes. It protects citizen’s rights to data protection whenever personal data is used by criminal law enforcement authorities for law enforcement purposes.

Answer 24

Once an underwriter has assessed an application, a decision must be reached regarding the terms that will be offered to the applicant. An underwriter may require a ‘second opinion’ from a senior underwriter or chief medical officer (CMO) before coming to any decision if it is a complex case Once a decision has been reached, either standard or special terms will be offered.

Answer 25

1) Apply a 'premium loading' - Where the underwriter adds an extra charge to the premium 2) Apply an 'extra mortality rating' - Where the premiums are increased by a certain percentage. 3) giving an ‘age rating’ or ‘loading’ where the life assured is deemed older than they actually are. For example, a 40 year old applicant may be given a 10 year + age rating, so is classed as a 50year old. 4) adding a ‘policy debt’ Where an amount is deducted from any claim payment. This 'debt' reduces over a period of 5 years. Effectively the sum assured is lower for first 5 years of policy. 5) postponing a policy - Where a policy is postponed until a certain event occurs such as an operation being carried out. 6) declining the policy - If risks are too high

Answer 26

If an applicant is given a ‘loading’ or ‘age rating’ it means the insurer deems them to be a higher age than they actually are

Answer 27

REMEMBER: One common misconception is that a company’s advert, glossy prospectus brochure, or enquiry form in a newspaper is the ‘offer’. This is not the case. These are all termed ‘an invitation to treat’. The first actual offer in a financial services contract is the completion of the proposal form which will be considered and formally acknowledged at a later date by an acceptance letter. This acceptance letter is by law a counter-offer with the proposer accepting by paying the first premium, or by signing a direct debit.

Answer 28

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. They must both disclose all material facts and take reasonable care not to make a misrepresentation.

Answer 29

Material facts are any that would or may be relevant to the contract. For the APPLICANT: The applicant (assured) must answer the application form and any other questions honestly, truthfully, and completely. This is their ‘duty of disclosure’. FOR THE INSURER: The insurer (life office) must disclose all the key details about the policy, what it does and does not cover and what the terms are in much the same way.

Answer 30

The policy has started. ie, the point at which the insurer assumes the liability for potential claims under the policy. When a policy is placed on risk, it means that the insurance coverage becomes active and the insurer is now responsible for covering any claims that occur within the scope of the policy from that moment forward.

Answer 31

1) Reasonable (also known as ‘innocent’) Where the cust acted reasonably and honestly even though they have not fully disclosed all materials facts. For example, the cust genuinely did not realise that some information about their medical history would be relevant. An example is failing to disclose an earlier minor operation in relation to a cancer claim under a terminal illness benefit policy. RESULT: Claims will be met in full. 2) Careless Where the cust didn't take sufficient care and should have realised that the information given was incomplete. This could be an individual suffering from skin cancer and not disclosing this at application stage, and later claiming on the policy for another form of cancer. RESULT: Some of the claim will be paid but not all. This is called a proportionate remedy, i.e. a proportion of the claim will be met. The life company will look at what they would have given if all material facts were known to them from the outset. 3) Deliberate or reckless (without care) Where the cust should have known both that the information they had provided was incomplete and incorrect, and that it would be relevant to the underwriting of the policy. RESULT: The claim will not be paid. NOTE: If the non-disclosure resulted from actions of an agent of the insurer: the claim would still be valid! Context: The bottom line with these new rules is that both parties must still tell the truth in relation to disclosure of material facts, but a minor infringement will not lead to loss of all benefits paid on a claim like it did in the past

Answer 32

Where not all material facts were given at application stage This could affect any claim depending on the type of non disclosure whether -Deliberate or reckless (without care), -Careless -Reasonable (honest mistake)

Answer 33

This is the principle that the assured must suffer a financial loss, potentially, on the death or disability of the life assured. A financial interest in the life assured must exist. You cannot simply insure the life of someone you do not know, otherwise all sorts of issues are likely to occur… Automatic insurable interest, where it does not need to be proven, exists in the following situations (see image) NOTE: One situation where insurable interest rarely exists is between a parent and their child. Unless, that is, you are the fortunate parent of a child actor, making millions that you manage on their behalf.

Answer 34

Jon would need to prove this insurable interest because their relationship doesnt fall under any category that allows automatic insurable interest

Answer 35

An individual is not classed as having contractual capacity if: they are aged under 18 they are mentally ill they are drunk or under the influence of drugs

Answer 36

They show, for each age, the number of deaths and the number of people still alive. Mortality rate is the statistical chance of dying at a given age. Rates are calculated by individuals called actuaries. Mortality tables give insurers a good indication, based on statistical data over the last few hundred years, of how many deaths are likely to occur year by year in relation to different age groups. These can be used to predict claims with a degree of accuracy.

Answer 37

A trust is a legal arrangement where one party, the settlor, makes a gift of assets (e.g., a life policy) and creates a legal structure to hold these assets of behalf of another party, the beneficiaries. These assets are then looked after by trustees.

Answer 38

Settlor Original owner of the asset, i.e. the person giving up the asset as a gift, also sometimes called the ‘donor’. They must be at least 18, and of sound mind. They select the trustees and decide who the beneficiaries should be. Trustees These are the legal owners of the asset held in trust. They must be at least 18, and of sound mind. They own the asset temporarily and control the asset for the term of the trust. They have instruction to pass the asset to the beneficiary in the future. The trustees will understand settlor wishes and requirements. The appointment is usually for the life of the trust, but a trustee can resign. The trustees deal with insurers regarding policy claims. Beneficiaries These are the long-term intended recipients of the asset. They have ‘beneficial or equitable ownership’ of the asset. They can take action against trustees who do not act in their best interests. They may not be entitled to trust assets until a certain age, e.g. 18 or 25. They may only ever be entitled to income rather than the capital outright (known as interest in possession) FOR CONTEXT: For bare/absolute trusts the beneficiary has IIP because they have a right to the trust assets. Ie, it will be transferred to them at a certain age no matter what. However, beneficiaries in flexible/discretionary do NOT have IIP because they have no right to the assets - the trustee chooses how the assets are distributed.

Answer 39

A settlor can also be a trustee, to retain an element of control over the asset. A settlor can also be a beneficiary in some cases; however, this is unusual as any tax benefits would be lost (because they are benefiting from the asset)

Answer 40

The trustees hold the trust property on behalf of a beneficiary until a certain time, such as reaching age 18. When the beneficiary reaches the age of capacity (18) they have an absolute right to the assets of the trust which is why it is called an absolute trust after the beneficiary reaches 18 Transfers into an absolute/bare trust are classed as potentially exempt. ie no inheritance tax is paid upfront, and if the settlor survives for seven years post transfer there will be no IHT liability at all. It is called a bare trust when the beneficiary is below 18 and it is called an absolute trust when they are older than 18

Answer 41

It is a variation of an absolute/bare trust It allows the beneficiaries to access trust assets any time between age 18 - 25. Up to age 18, it is treated as a bare trust, from age 18 it is a discretionary trust.

Answer 42

This is a trust created for minor children, or individuals who are either mentally or physically disabled. It is a type of absolute trust.

Answer 43

These are created by an act of parliament or statute. They are a form of absolute trust They have the advantage of being simple and protecting trust assets from creditors but have a disadvantage in that beneficiaries are limited to a spouse and children. ANSWER : This trust can only be used with single-life policies.

Answer 44

This is a trust where one or more beneficiaries have an ‘interest’ in trust income or capital. A common example is where a spouse, is left a ‘life interest’ in part of the estate, with the children inheriting these assets on their death. The children in this example are commonly called the ‘default beneficiaries’ or the ‘remainder men'. Therefore, both the spouse and children have an interest in possession.

Answer 45

This is a power of appointment trust where no one has a specific interest in possession. Instead there is a list of potential beneficiaries but it is up to the trustees ti distribute it accordingly Transfers into a Discretionary Trust are classed as chargeable lifetime transfers (CLTs). This means that there could be both an inheritance tax liability upfront (20% rate) plus another 20% on the death of the settlor.

Answer 46

Transfers into an absolute/bare trust are classed as potentially exempt transfers. Transfers into a Discretionary Trust are classed as chargeable lifetime transfers (CLTs). Means 20% IHT upfront plus another 20% on death of the settlor.

Answer 47

Probate is the legal process by which a death is registered, and an estate is distributed, either in line with a valid will or the laws of intestacy. Assets that are in trust are not part of the estate, and therefore do not have to wait for this process to be finished which, in certain cases, can take a long time

Answer 48

Once the trust is set up, the settlor cannot directly access trust assets for their own benefit. It can be a complex process, and may involve costs and charges if a solicitor is used. The settlor will need to find individuals willing to act as trustees, which is a responsibility some are not keen on. Certain trusts (absolute) are difficult to alter, so do not cope well with changing circumstances Decisions will need to be made, and some people like to avoid these.

Answer 49

An assignment transfers legal ownership of an insurance policy from one individual(s) to another, using a legal document known as a deed of assignment. This means that when a policy is assigned, the assured changes, and is no longer the same original assured as when the policy was taken out. The life assured stays the same. An assignment must be whole, not partial. An assignment can be temporary or permanent, and can confer an absolute or a limited interest. assured = policyholder

Answer 50

The assignor: the individual assigning the asset or life policy. The assignee: the new owner, or the recipient of the assignment. REMEMBER: An assignment transfers legal ownership from one individual(s) to another and this can be used to transfer ownership of a an insurance policy

Answer 51

A permanent assignment: Where the transfer of ownership is permanent and absolute. Example: when individuals sell their insurance policies on the second-hand market to raise cash. A temporary, limited assignment: The opposite to above. Used in relation to mortgages and endowment policies. Context: As the mortgage is a form of loan, the lender requires some form of additional security, and a temporary assignment can be used for this reason. Once the mortgage is repaid at the end of the term, or earlier, the policy is then released from the assignment. This is known as equity of redemption.

Answer 52

Absolute: An absolute assignment is a complete transfer by through a gift or a sale. The assignor transfers all interests to the assignee(s). Mortgage: This is an temporary assignment related to a loan on a property. Once the loan and any associated interest is repaid, the assignment will cease known as equity of redemption. This assignment is usually through a mortgage deed Operation: This relates to bankruptcy proceedings where an individual’s assets can be assigned to the Trustee in Bankruptcy Trustees: Assets and life policy proceeds can be assigned to trustees. This is carried out in conjunction with a trust that the settlor has created. The most likely situation where this will occur is where a life policy has been taken out after a trust has been set up.

Answer 53

Servicing notice relates to life contracts It is when a policy is being assigned to a new owner The assignor must inform the insurer of this change, This act of informing the insurer is called ‘serving notice’.

Answer 54

Mortgagor (borrower) Mortgagee (lender)

Answer 55

False Providers cannot charge for assigning a policy. However, the assignor may incur fees from solicitors who must write up the assignment deed

Answer 56

This act regulates the assignment of life policies. It established some key rights and principles that apply both to an assignee (the recipient) and an insurer. These include: The principle of notice. This allows for a priority of claim over other interests or assignees that have not given notice. The right to ‘sue’ an insurer for policy proceeds and recover monies owed. The principle of ensuring insurers pay the correct individual(s) If this is not the case, they can be held responsible. To ensure priority claims are upheld over subsequent assignees.

Answer 57

The principle of notice is where an assignee informs an insurer that they are now the legal owners of a policy. They will need to prove this by providing a valid deed of assignment. 'Serving a notice' is what an assignor must do when a policy is being assigned to a new owner. They must inform the insurer (ie serve a notice) principle of notice = relates to assignee serving notice = relates to assignor

Answer 58

The term ‘sue’ here means ‘ask for the proceeds to paid’ not ‘sue’ as in take to court for damages etc. In otherwords, the assignee cannot ask for any proceeds to be paid until written notice of the date and assignment has been given by the insurer Once notice has been given, the assignee can then claim precedence over all other interests in the policy (possible claimants) that have not given notice For context: If an insurer makes a payment (to someone else) before such notice is provided, this is classed as a bona fide (legal) payment as how was the company to know that an assignment had taken place?

Answer 59

This means that someone may have an interest in a policy but, unless notice has been given, the claim can legally be paid to someone else. At the point of claim the assignee will have to ‘prove their title’ which means to produce documents that show they are entitled to the policy proceeds. These will include the deed of assignment and the policy documents.

Answer 60

Where no notice is sent but an insurer assumes an assignment has occurred because policy premiums are being paid by someone else A constructive notice is not legal proof of assignment, but it may prompt an insurer to begin checking who is entitled to what. Another example of where an insurer may feel an constructive assignment has occurred could be at the point of claim where the policy document is not produced by the claimant who states that "it has been lost"

Answer 61

It is evidence that a contract has taken place. It is issued to the assured once underwriting is complete, and the policy has been accepted and ‘put on risk’ (ie, the insurer will pay any claim going forward) A policy document contains the details of the contract, including specific information relating to the customer such as the name(s) of the assured and life assured, the term of the policy (if applicable, as it could be a WOL policy), the sum assured, and the premiums etc It also contains generic information relating to the policy, such as terms and conditions, and any standard exclusions.

Answer 62

The policy document is issued alongside a cancellation/cooling off notice, which is the customers legal right to change their mind

Answer 63

Yes, because it proves their title (ie, that they own the policy and they are entitled to the benefits of the claim)

Answer 64

The insurer will follow a set process before payment can be made. (This process also apply in the case of a surrender or where the policy is being used as security on a loan) The process is as follows: STAGE 1: A thorough search A thorough search must be made by the claimant so they look in any possible area that the document could be. If not found and the insurer is happy it's a genuine loss, then the insurer will do 1 of 2 things 1 option: Statutory declaration An insurer will require a statutory declaration to be executed. This is a written document, created with a solicitor or magistrate, which explains how the policy was lost and to declare that the policy has not been assigned or charged. (IMPORTANT. The insurer does this to protect itself from paying out a claim to the wrong person but not all insurer choose this option). NOTE: A lost policy document can be deemed to be 'constructive notice' because the insurer may feel that the claimant may know that a third party has an interest but wishes to avoid any payments being made to them. 2nd option: Not all insurers will insist on a statutory declaration. Instead, an insurer will require a legal indemnity from the claimant. This protects the insurer against any losses they might incur, as a result of paying out a claim without the presence of a policy document. NOTE: An indemnity cannot insure against further claims by an assignee, its sole purpose is to protect the insurer against any losses.

Answer 65

Because of the issues that could occur if the lost one was found, and two policy documents then exist. (2 people could potentially try to claim they own the policy) This can be overcome in a variety of ways: Issuing a new policy document which is stamped with the word ‘duplicate’ through it. Issuing a new policy document but with a different policy number

Answer 66

So the claimant can prove their title (ie, they are entitled to the benefits)

Answer 67

Remember: A claim can only be refused if the non disclosed fact related to the death. Ie the insurer cannot refuse a policy if they found out that the the person had a history of knee issues but they died from a heart attack If the person died because of their knee injury however, then the insurer could potentially refuse due to non discloser

Answer 68

Generally the policy will not pay the sum assured if the individual dies by suicide within the first 12 months of the policy but will do so after Also many policies will accept a claim if the individual was not of sound mind when they committed suicide (because its not really their choosing if they were not of sound mind) but many policies wont accept a claim if the individual was of sound mind

Answer 69

Presumption of death/circumstantial evidence is used For example, Individuals disappear or can be involved in accidents, such as plane disasters where no body is ever recovered, such as the Germanwings air crash in March 2015 where an Airbus A320 carrying more than 140 passengers crashed in the French Alps. No bodies were recovered due to the crash circumstances. In such cases, death may be proven by circumstantial evidence, such as written confirmation from an airline that the life assured was indeed a passenger on a plane that crashed.

Answer 70

If a couple die at the same time, say in a car accident, the older life is deemed to have died first, followed by the younger life.

Answer 71

This means that age was not formally checked at point of application, and therefore must be verified against the birth certificate at point of claim. In other words, Age is usually ‘admitted’ by sight of the individual’s birth certificate JUST remember that someones age is normally proven by their birth certificate

Answer 72

Only available to polices with a surrender value so (pure protection policies do not have this option) Where premiums stop, sum assured reduces and any life cover continues until the remaining investment value is used up. Policy ceases once investment value is exhausted. It is useful where premiums are no longer affordable but there is still a need for some life cover. An alternative to removing all cover and leaving the assured unprotected.

Answer 73

Increased risk. The longer an individual is underweight, the greater the risk of illness and death becomes.

Answer 74

A gift inter vivos policy is a seven-year decreasing term assurance plan, specifically designed to run alongside a gift classed as a PET to cover any potential IHT liabilities.

Answer 75

with no underwriting. Free cover is cover, usually through an employer, that is not subject to any underwriting.

Answer 76

Individuals have a higher chance of injury than death.

Answer 77

Legal and equitable. A trustee is the legal owner of a trust’s assets. A beneficiary has equitable or beneficial ownership.

Answer 78

There is no insurable interest. The most likely reason is that there is no insurable interest. This could be for a number of lower-level reasons, including the gift is within the father’s nil rate band and has not been made yet.

Answer 79

No tax as the assignment is not for money/monies worth. An assignment must be for money or monies worth to be classed as a chargeable event. Also, a chargeable event must occur for there to be a tax liability on assignment. Therefore, there will be no tax due.

Answer 80

Avoid successful claims on pre-existing conditions. A moratorium is used during the underwriting process. This means that any pre-existing conditions in the last five years are not covered for the first two years of the policy. This is to avoid successful claims for conditions that already existed at the point the policy was established.