9 points
mnemonics
- PASTE
- Product
- Assured
- Sum
- Term
- Extras
- Under Extras is TWIG
- Trust
- Waiver
- Indexation
- Guarantees
State the additional information a financial adviser would require in order to advise Tom and Sally in relation to having adequate protection arrangements in place?
NEED
* Do they want a lump sum or regular income/amount that would be adequate for Tom and Sally’s need
* Do they want to be protected for longter illness and/or on diagnosis of a critical illness
* What level of cover would Tom and Sally need to maintain the children’s life style, to cover childcare costs and university costs
* What sports do they participate in and are any of them dangerous and hazardous
* What is the term they required or do they want cover up to retirement
* Do they wish to include indexation to protect the value of their benefit
* Full health details and family history as well as previous health problems
* How do they feel about NHS waiting times and would they like to recieve medical attention quickly
* What are their views on inflation
GOT
* Do they wish to take account of their employer 3 months full pay and 3 months half pay when calculating their protection needs or shortfalls
* Did they have any special terms applied to their mortgage protection LTA or exclusions
* Are they able to add CIC to their existing policy or convert their polcy to decreasing term to match their mortgage
* Is the existing LTA policy in Trust
* Have they earmarked any of their existing savings and investments for their protection needs
FILL
* what is their budget or affordability for this need
* Where is it in theirr order of priorites in comparison to their other needs and objectives
* Are they able to get family help if they were ill or diganosed with a critical illness?
* Do have LPA set up so that non ill spouse can act on behalf of the other
* Is Tom nominated as beneficiary on Sally’s deferred pension
* The age Tom and Sally would expect Amelia and Noah to be financially independent, is this when they finish univeristy or when they find a new job?
Identify the factors that a financial adviser should consider when establishing a suitable suite of financial protection products to meet Tom and Sally’s requirements for adequate protection in the event of premature death, serious and long-term sickness.
- Inadquate cover currently, cover all death benefits/life cover
- DIS and sickpay dependent on stability of employer and staying with that employer, not portable
- Sick pay benefits 3 months full pay and 6 months half pay
- Amount of capital willing to use to provide for children
- Amelia and Noah are financially dependent for at least 5 years which is when Noah is 18. However, Tom and Sally are also wanting to assist with uni costs which could extend some sort of dependency to up to 8 years
- Level and type of cover required
- Tom and Sally’s income and expenditure.
- Suitable term
- Tom and Sallys affordability, they have alot of disposal income in excess of £3,000
- Their state of health, sport as hobby, hazardous or dangerous
- Upto date wills and nomination forms
- Existing mortgage protection level term, ability to swith add CIC or change to decreasing
- Unlikely to qualify for DWP benefits due to level of assets
- Security of employment
- Family support available
Family income benefit
- Family income benefit
- Pays out a regular tax free income on death of the life assured
- Policy can be two single policies - Means will provide more protection, as a regular tax free benefit on either Tom or Sally dying or on both of their death
- Sum assured should be what is agreed amount with Tom and Sally as maintaining the childrens standard of living on either of their death or on both of their death. This will provide benefit to the children so that their standard of living does not fall.
- Term chosen should be what is agreed with Tom and Sally where the children are no longer financially dependent. This will ensure the children will recieve a regular income until an age where they can be financially independent
- Indexation should be included - To protect the value of income levels from inflation and allow the children to maintain their standard of living. Can select RPI or CPI
- The policy should be put into Trust - so that it is outside both Tom and Sally’s estate for IHT purposes and allow Trustees/guardian/executors to access the funds without waiting for probate
- Waiver of premium - This should be included to ensure the premiums continue to be paid in event of Tom or Sally having an accident or sickness and protection continues
- after a deferral period which is in line with Tom and Sallys employer sick pay benefit of 3 month full pay and 6 months half pay
- Continues till the policy ends, event of a claim or death
- The premiums should be gauranteed - So that both Tom and Sally know the cost of the policy and budget
Income Protection
- Income protection - recommended for Tom and Sally as single policies
- Should be based on t 50 to 65% of their salary - pays out a tax free regular income in event of either Tom or Sally are unable to work due to accident, sickness or diability
- Deferral period aligned with Tom and Sally’s employer sick pay benefits of 3 months full pay and 6 months half pay
- The split deferral would have one level of benefit paid after 3 months deferral and then the remainder of the cover would kick in after a further 6 months after the full pay from their employer ceases.
- the regular tax free payments would cease on either recover and return to work, death or end of policy
- Own occupation basis, so that its easier to make a claim and provides the widest cover
- Term should be to Tom and Sally’s intended retirement age - To ensure they are protected whilst of working age
- The cover should be indexed link - To protect the value of benefits and to maintain spending power, protect from inflation eroding the value over the longterm
- The policy should include waiver of premium - So that Tom and Sally’s premiums are covered in event of accident or longterm sickness and claiming the policy benefits and ensures the cover can continue
- The premiums should be guaranteed - So that both Tom and Sally know exactly what their premiums are going to be and they can budget for this and ensures long term affordability
- Other feature that would be a common feature included in policies
- proportionate beneft - continue to recieve a reduced monthly benefit if they return to work at a reduced capacity or different role
- Rehabilition benefit - Where Tom or Sally are going back to do the same job but on a reduce hours basis, phased return and receive reduced motnhly benefits
- gauranteed insurability option, where due to major change in circumstance such as increase in salary, getting a bigger mortgage, another child allows Tom or Sally to increase their benefit without further medical underwriting or evidence
Limitations of income protection
- Prevents the insured person from being better off by claiming the policy benefits than by working
- Benefits are paid gross
- Maximum that can be paid is between 50 to 65%
- The limit operates regardless of the nominal benefit i.e will not pay out if extended period of employer benefits are paid - overinsured
- Also applys to indexation plans - If salary does not increase in line with RPI will be over insured and wont be able to recieeve the full benefits - overinsured
- Many policies will deduct basic level of state disability benefits e.g statutory sick pay
- Policy can affect certain means tested benefits
- Maximum age linked to SRA, as getting older and more likely to have health issues and make a claim
- Plans that run to SRA will be expensive
- However, most likely be linked to expected retirement age
- Should consider when mortgage repaid and children become financially independent
CIC vs IPI
- Tax free lump sum vs Regular tax free income
- Diagnosis of listed critical illness vs Unable to work due to accident, sickness or incapacity
- Survival period of 14 to 30 days vs Deferral period to suite or align with employer benefits
- Not related to earnings vs Earnings linked benefits of 50 to 65% of earned income
- Not linked to occupation vs Linked to occupation
- Options on who can be covered single/joint life first death/LTA or DTA VS single life only
Recommend and justify protection for debt
- Single/Joint life first death, Level/Decreasing term assurance - This will pay out a tax free lump sum in event of death
- For the amount of loan outstanding - To repay the mortgage
- The term should be till the end of the mortgage term - To ensure all mortgage borrowing is repaid
- Waiver of premium should be included - To protect the premium in event of accident or sickness and allows the premiums to continue to be paid and cover being in place
- Guaranteed premiums - To ensure the premlum doesnt change and allow Tom and Sally to budget and ensure longterm affordability
How would income protection recommendation change if it was to protect a mortgage debt against long term incapacity to work through illness or injury
- IPI plan recommended for Tom and Sally each - to provide tax free monthly payment to repay their debt in unable to work due to longterm disability
- Benefit level 50 to 65% of income or maximum available
- Term until retirement age - To ensure Tom and Sally are protected whilst they are working age
- Deferred period should be stepped - in order to coincide with Tom and Sallys employers 3 months full pay and 6 months half pay benefits
- Own occupation if available - best chance of claim and widest claim
- Guaranteed premiums - to ensure longterm affordability and budgeting
Recommend and justify CIC
RECOMMEND
* Level CIC
* for two single life plans -
* Covering medical fees, house adjustments and any associated costs that could impact Tom and Sally’s standard of living
* Term till retirement age
JUSTIFY
* Pays tax free lump sum
* on diagnosis of critical illness on specifiied list of critical illnesses
* after a survival period of 14 or 30 days
* To ensure protection whilst of working age
PMI
BENEFITS
* Fast track NHS waiting list
* Treatment times and location are chosen by the policy holder
* Private rooms available
* Payments made from provider directly to hospital
* Can cover whole family
* Chose from comprehensive, mid level or budge to suit affordability
DRAWBACKS
* Only acute illnesses are covered
* No chronic ilnesses or conditions
* Budget plan may have restrictions
* Excess paybale on all types of policies
* Expensive when compared to other types of protection policies
* Those on limited budget cost outweights the benefits
* Only access to PMI is usually through a generous employee scheme
* Advisers should help clients understand there maybe a need
Outline the areas where protection planning is necessary
- Replacement income if either Tom or Sally were to die to maintain the lifestyle for the suvivor and the children
- A lump sum in event of suffering a critical illness to maintain lifestyle, pay medical bills or adpat the family home
- Replacement income if either Tom or Sally were to have a long term accident or sickness to maintain their lifestyle
- Replacement income if Tom or Sally were made involuntary redundant
- Funds to pay for private medical treatment to return to work potentially faster
- Financial and welfare LPA arrangement to be in place if they were incapable of making decisions
Factors an advisor should take into account when contructing a plan to meet the needs identified
- Sick pay benefits of 3 months full pay and 6 months half pay by both Tom and Sally’s employers
- 40% of savings and investment in cash, accessible liquidity, emergency fund
- Access to assets e.g stocks and shares ISA and investment bond
- Budget available/affordability available disposable income
- No personal life cover
- No critical illness cover
- No redudancy cover
- No private medical insurance
- Period of depedency of the children
- Eligibility to state benefits
5 points
Explain to Tom and Sally why their existing employer death in service benefits may not be sufficient to meet their long term protection needs
- Death in service only covers 3 x salary insufficient
- Employer could change the terms of the cover and eligibility
- Benefits are fixed by the employer
- Only provides for death, no CIC or IPI
- Reduced benefit if salary sacrifice used
Explain to Tom and Sally the process of calculating a sum assured to cover their life assurance needs
- Total income needs to pay living expenses housing, house keeper
- Determin a lump sum for immediate neesds sucha s funeral, childcare costs
- Deduct any continuing income
- Establish a factor of 20 years
- Determine income requirements for short term needs
- Any extra income needed
- Deduct continuing income
- Establish factor e.g 10 years
- Deduct any lump sums avalable e.g death in service/savings
- Resulting in lump sum required
State 3 benefits and drawback of PMI
Benefit
* Quick access to medical treatment
* Choice of locations and time of treatment
* Avoid NHS queues
* Treatment can mean get back to work faster
* Can cover whole family
Drawback
* Excess to pay when making a claim
* Quite expensive
* Underwriting required, potential for exclusions
* Acute illness only
10 points
Explain to Tom and Sally why it is important to review their current protection arrangements
- No personal protection in place
- Two financially dependent children likely to be dependent for up to 8 years
- Mortgage protection on level term, mortgage debt is on a repayment basis and so cover mismatch
- Potential to assist with university cost
- No PMI
- Only employer DIS 3X salary lost if no longer with employer
- No income portection
- No CIC
- Cant access pension as too young
- Unlikely to recieve state benefits due to level of assets
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POA & Wills12
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Tax efficiency and suitability of savings and investments28
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Ethical Investment7
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Alternative Investments7
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Additional factfind questions1
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Solutions to Tom's ANI problem7
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Funding Unversity costs23
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IHT12
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Additional questions that can be asked on review2
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Pensons and retirement35
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Protection18
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Taxation4
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Repayment of debt13
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Financial planning12
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Risk22
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Investment Advice11
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Others7
