Financial protection

In this chapter we will look at the diff...

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A whole of life plan is designed to pay out a lump sum benefit on death whenever this occurs, as long as the policy remains in place. It is a long-term insurance policy designed to last for the lifetime of the life assured.

Plans have traditionally included an investment component, which accumulates a cash value that the policyholder can withdraw or even borrow against; however, the value of most plans is very low in the first few years. Some newer plans now have no surrender value but offer the same flexibility of a whole of life plan. This can enable the insurer to offer lower premium rates and these policies are subject to the less onerous ICOBS regulations.

Whole of life plans are usually very flexible, in that the amount of the sum assured can be increased or decreased during the lifetime of the policy -&n...

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Plan review frequency will be written into the policy schedule at outset and both the premiums and sum assured can be increased or decreased during the life of the plan. The reviews are normally carried out after the first 10 years, then every five years and then annually as the life assured gets older. The factors that will be considered at plan reviews are mortality, expenses, investment returns and other relevant changes.

Whole of Life Assurance plans are available in several different formats, as discussed in the next sections.

What factors are considered at policy reviews for a whole of life plan?

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Non-qualifying, non-profit or guaranteed plan designe...

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The taxation of non-qualifying policies is covered in Chapter 5.

Term assurance is a simpler form of life assurance, where a lump sum or series of payments are paid on the event of death within...

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There are many different types of term assurance as summarised in the next sections.

Product Structure

The simplest form of term cover, providing a level sum assured for a fixed term of the policy

There will be a minimum term, usually one year, but specialist policies can be shorter

The prem...

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If the product has reviewable premiums, these could increase during the term to reflect the provider’s claims and mortality experience

Medical evidence and underwriting will often be required

Product Structure

Sum assured reduces each year by a fixed or variable amount

Typically used to protect a decreasing debt. The decision on whether to use a fixed or varia...

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Medical evidence and underwriting will often be required

Product Structure

The sum assured increases throughout the term

Premiums usually increase by a similar amount

Annual increase...

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Medical evidence and underwriting will often be required

Product Structure

Convertible term assurance is a level term assurance with an option which enables the assured to convert it, at any time during its existence, to a whole of life or endowment assuran...

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Medical evidence and underwriting will often be required at outset but not usually on any subsequent conversion

Product Structure

A term assurance with a term of (say) five years at the end of which the policy can be renewed for a further five years and again thereafter for an overall specified length of time

The policy can b...

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The premiums on the new policy will depend on age at time of renewal. Holders of earlier policies may have difficulty renewing on similar terms

As with other life assurance, there is no surrender value if the policy is cancelled

The definition of an "inter vivos gift” is a gift made between the living.

Product Structure

A decreasing term assurance designed to cover the inheritance tax (IHT) that may be due if a life...

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Points to consider

Not much need for this type of term assurance except for the specific requirement to protect a possible IHT liability

Only needed to cover the value of the PET which exceeds the donor’s nil rate band

Family income benefit is a term assurance which, following the death of the life assured, pays the beneficiary income instalments, rather than a lump sum

These are paid to the beneficiary for the remainder of the policy term

The sum assured reflects the amount of income required for a specified term at outset

* For example, if the client wanted &poun...

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If a lump sum is needed it may not be allowable. Even if it is, a commutation factor is likely to reduce the cash equivalent of the annual income. If a lump sum is likely to be required, a standard term assurance plan is more appropriate

Medical evidence and underwriting will often be required

Points to consider

Pension Term Assurance (PTA) uses the pension schemes legislation to provide life cover in the form of a term assurance;

There is no requirement to pay contributions towards a pension - the premiums can be for life assurance cover

However , following the March 2007 Budget, tax relief on the premiums was withdrawn for new arrangements, effectively killing off new PTA;

Existing PTA policies taken out before 6 April 2006 and those applications received before 14 December 2006 and 13 April 2007 continue to enjoy tax relief on the premiums. However, in all cases the policy must have been in force prior to 1 August 2007

If the policy benefits are increased or the term is extended, the tax relief is lost

Test your knowledge on the previous Term Assurance sections - Stephen has a policy that promises to pay a series of lump sum payments for the remaining duration of the policy term in the event of his death. What type of plan has Stephen most likely taken out?

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Recent developments in the financial protection sector have seen the introduction of Multiplan policies. Th...

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Terminal illness benefit can be added to a term assurance or whole of life plan and will pay out the sum assured prior to the death of the policy holder if they are diagnosed with a terminal illness. Some providers automatically include terminal illness on all policies at no extra charge, while others offer it for a small additional premium.

Terminal illness benefit should not be confused with critical illness benefit, as although both pay out on the diagnosis of an illness, the eligibility criteria are very different. A terminal illness is defined as an illness...

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The accelerated payment can help ease financial hardship caused due to the illness and provide a lump sum to contribute towards payment of care and allow the claimant some comfort in their final months

If the claimant survives beyond the expiry date of the policy the terminal illness benefit does not have to be repaid but no further benefit is payable

It does not usually apply in the last 12 to 18 months of a policy

What is the main difference between critical illness and terminal illness benefit?

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In previous chapters, we have discussed why a need for life assurance may arise, such as paying off outstanding debts, providing an income for the surviving family, covering the cost of caring for dependents and providing for the payment of tax.

It is important to establish who needs to be insured. Policies can be written in a variety of different ways depending on the individual needs of the client:

O wn Life is where the life assured is insuring their own life for the benefit of others e.g. surviving spouse or other dependents

Life of another basis is where the life assured and the policyholder are two different people. It is suitable where an individual has an insurable interest in the life of another person such as a divorced spouse insuring their former spouse to protect maintenance payments or where a business owner insures the life of a key individual within the business

Joint life first death will pay out the benefit only once, even though there are...

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Only the sums and benefits in 1 to 3 above can be paid or conferred

Any benefits may only be paid to, or applied on behalf of, an individual or charity entitled to them

No benefit can be paid directly or indirectly to a life assured or a person connected to a life assured on the death of another life assured

Tax avoidance must not be the main or one of the purposes of the insurance

The removal of the lifetime allowance may mean that the popularity of EGL policies could reduce.

Important consideration also needs to be given to the destination of the benefits and whether the policy should be written in trust.

Neil and Heather are married and wish to make provision for an inheritance tax liability when their estate is passed onto their children. They have mutual Wills leaving everything to each other and then to the children. On what basis should they set up a whole of life plan and why?

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As indicated in the previous sections, there are a wide range of policy types and options available and it is important to ensure that the plan selected contains the right options to meet the client’s needs and objectives.

Consideration should be given to the amount of flexibility that is required both now and in the future. A client’s needs are unlikely to remain static throughout their lifetime and changes to their personal and financial circumstances will undoubtedly have an impact on their financial protection needs.

Whole of life p...

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To benefit from the additional benefits included it is important to ensure regular client reviews are undertaken. Some providers may include a specific timescale for claiming increases under guaranteed insurability options, and for example failure to claim within the given timescale may mean that the option to increase is lost.

Name an event that could lead to an increase of the sum assured under a guaranteed insurability option.

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All premiums received from life assurance clients are paid into a common fund from which the insurer also pays out claims. When setting the premium rate, the insurer needs to be sure that the value of the fund is sufficient to pay out any claims, otherwise the insurer would have to sell assets to make up the difference.

The insurer’s actuaries use mortality tables to predict the number of claims an insurer is likely to have in a year and this information is then used to set an appropriate premium rate.

The mortality rate can also be described as “the proportion of deaths in a population or to a specific number of the population”. Current and previous mortality tables can be found on the National Statistics website or by typing “English Life Tables no 17” into a search engine. The most relevant information found in the mortality tables are...

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The effect of interest will depend on the term of the policy. Interest would have little impact on a short term such as a year but would be effective over a longer term such as a 25 years. The actuary would also have to make assumptions about future trends in interest rates and mortality.

What would be the natural premium for a female aged 40 with a mortality rate of 0.000993 for a sum assured of £50,000?

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The pure premium as described above will solely provide the cost of expected claims; however, in calculating the actual premium to be charged the insurer will take account of expenses and other cost adjustments, as follows:

The main expenses incurred would include:

The cost of hiring and maintaining a workforce

Accommodation

IT, administration and regulatory cost...

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Most of these costs are incurred at the start of the policy, but as the costs of life cover are spread over the term of the plan the large initial costs incurred in setting the plan up will also be spread over the term. A policy charge may also be added, which is effectively a handling charge.

What are policy loadings?

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The role of the underwriter is to assess and measure the risk exposure to the Life Office and determine whether that risk is acceptable to insure. Underwriters can either decline the risk or increase (i.e. load) the premium to reflect the higher risk. In addition, they may restrict the circumstances under which a claim would be paid by stipulating exclusions within the policy.

Different types of policy are underwritten in different ways to reflect the specific risks, e.g. the factors which are relevant when assessing life cover will be different for those which affect the risks associated with income protection or ...

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It is important to note that this is the total cover, so includes all existing cover and any other concurrent applications

If the age of the life assured and/or the sum assured is more than these limits, the underwriter is likely to ask for a General Practitioner’s Report or a full Medical Examiner’s Report

What is the role of the underwriter?

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In some circumstances, additional evidence is required to assess the risks of a case, which could be because of answers given on the application form about health or lifestyle or may be automatically required automatically due to the size of the sum assured or the age of the applicant.

General Practitioner’s Report

If further medical evidence is required, one of the most important pieces of information will be a General Practitioner’s Report

This will contain details from the GP of the applicant’s medical history and request any additional facts that may assist in assessing the risk of the application

The life office will pay a fee to the GP for supplying this information

Medical Examiner’s Report

Normal practice is for a life office to request a General Practitioner’s Report prior to asking for a medical examiner’s report

A medical examiner’s report may be requested because the age and/or health of the life assured or level of the sum assured is such that one is required

The examination is usually arranged with an independent doctor on the insurance company’s panel

Female applicants can insist on being examined by a female doc...

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Hazardous sports and pastimes

Hobbies which have a high risk of accidental death as a side effect will also affect the underwriter’s decision. Obvious hazardous sports would include motor racing, motorbike racing, climbing, diving, boxing, kickboxing, karate, etc.

Financial underwriting

In addition to medical evidence the underwriter may also ask for financial information to assess the appropriateness of a high sum assured. This is usually when underwriting business protection cases to ensure that the sum assured is not excessive but can also be relevant for personal protection not connected to a mortgage or loan or when underwriting a policy for inheritance tax.

For protection products, tele-underwriting is becoming more common as it allows for shorter application forms and a quicker processing time. With ‘big-T tele-underwriting’ most questions are asked in a telephone interview and with ‘little t tele-underwriting’ only supplementary questions are asked. Tele-underwriting is often carried out by qualified nurses.

What are the two medical reports that an underwriter may request?

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The purpose of this Act is to give applicants the right to view medical reports relating to their application for life assurance.

The Act applies to general practitioner's reports, specialist and hospital reports, medical examinations and disability and death claim reports

The individual then has three choices: give consent, withhold consent or  insist on seeing a copy of the report prior to it being forwarded to the life office. Where this is the case, the medical attendant must not return the form until the individual has seen i...

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* Any aspect of the report can be withheld if it discloses information about another individual

* A detail that may reveal the identity of another person who has supplied information on the individual may also be withheld

Other related Acts which protect the proposer and life assured

Access to Health Records Act 1990

Disability Discrimination Act 1995

The Data Protection Act 1998

What is the purpose of the Access to Medical Records Act 1988?

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The main elements of the Act are:

General data processing ...

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Empowering the ICO to bring criminal proceedings for offences where a data controller or processor alters records with the intention of preventing disclosure following a Subject Access Request (SAR)

What amount of fine can be levied by the ICO for the most serious data breaches?

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GDPR applies to data controllers and processors, who have broadly the same definitions as under the previous Data Protection Act 1998 in that the controller says how and why personal data is used and the processor acts on the controller’s behalf. Under GDPR, processors now have specific legal obligations, for example, a firm must keep records of personal data and processing activities, and firms have significantly more leg...

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Under GDPR, individuals have enhanced rights, these are the right: 

to be informed

of access

to rectification

to erasure

to restrict processing 

to data portability

to object in relation to automated decision making and profiling

Firms are now expected to put into place comprehensive and proportionate governance measures and to report certain types of data breach to the relevant supervisory authority and the individuals affected. The transfer of data outside of the EU is now restricted to ensure that individuals are not having their levels of protection decreased.

Once the underwriters have collected and assessed all the relevant information they will now be able to make a decision on whether they accept the proposal for insurance. They can:

Accept the application on stand...

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Decline. This option is only used in circumstances where the application is deemed unacceptable under any terms

An insurer cannot know all the facts about a proposer’s state of health unless the proposer declares all the facts (in utmost good faith) to the insurer’s underwriters. Applicants are required to answer all questions asked honestly, truthfully and completely and where there is any doubt as to the relevance of a piece of information, this should be declared.

Many claims, have been declined because of non disclosure of a material fact, especially for crittical illness cover. Insurers are now required (under the ABI guidelines) to pay much more attention to how questions are asked and for the questions to be specific and detailed to avoid misunderstandingss as to the information they require. The Financial Ombudsman Service (FOS) also requires that insurers do not impose the strict interpretation of utmost good faith and make allowances for innocent mistakes. The burden of proof of non-disclosure lies with the product provider.

New ABI guidelines were introduced on 9 January 20...

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Source: ABI Guidance on Non-Disclosure and Treating Customers Fairly – January 2008

In January 2009, this guidance became a mandatory code by the ABI and The Financial Ombudsman Service for long-term protection insurance. The Insurance Act 2015, in force from August 2016, introduced changes to the duty of disclosure in commercial insurance contracts and the remedies available to insurers for fraudulent claims. The provisions of the Act now mean that employers taking out group policies have a duty to make a fair representation of the risk. The remedies available to insurers are now changed so that except where the breach of duty to make a fair representation is deliberate or reckless, proportionate remedies based on what the insurer would have done if full disclosure had been made will apply.

What are the three categories of non-disclosure under the ABI mandatory code?

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The legal principles of assignment

An assignment is the transfer of ownership of an asset from one person to another. It can be temporary or permanent and can confer an absolute or a limited interest. The ownership of life assurance policies is commonly changed by way of assignment and therefore it is important to understand the basic legal principles and how an assignment can affect claims and surrenders.

There are four main types of assignment:

Absolute assignment, including selling or gifting a policy

Assignment by way of mortgage

Assignment by operation of law on bankruptcy

Assignments by trustees (covered in Chapter 10)

Assignments can be made to a single or joint assignee(s) and where made on a joint basis it is important to ascertain whether it is on a joint tenancy or tenancy in common basis.

For joint tenants, on death of one tenant the ownership of the policy would automatical...

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To voluntary assignments, i.e. gifts or trusts

Between assignor and assignee based on the equitable principle that they are equally effected by the knowledge of the facts

Where there is evidence of blind wilfulness on the part of an assignee for value, where there is a suspicion that a prior notice of interest where the assignee deliberately refrains from making enquiries

It does not apply to mortgages for unlimited amounts. For example, where there is a second charge or further borrowing, the second mortgagee should make proper enquiries before taking a charge on the policy

Other provisions of the Act provide that assignments can be made by endorsements or by separate instruments.

What are the four main types of assignment?

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This is the complete transfer of a policy either by sale or gift. All interests are therefore vested in the assignee, which means that they effectively own the policy and are entitled to any claims made under the plan. Before completing an assignment, the assignee should contact the insurance company, check that premium payments are up-to-date and wheth...

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The whole policy must be assigned. Re McKerrell (1912)

The actual words used must be adequate to transfer the legal interest in the policy. Spencer v. Clarke (1878)

What is an absolute assignment?

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A lender may require a policy to be assigned to them in connection with a loan and used as additional security. The mortgage deed assigning the life policy will have the usual components in addition to:

A covenant by the mortgagor to pay premiums as they fall due and restore the policy if it lapses

A covenant that the policy is valid and that if it becomes invalid they will effe...

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To whom are the claim proceeds of a mortgaged life policy paid?

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Every life office will have their own claims procedures which will balance speed and efficiency in processing with due diligence. A claim will, in general, require:

Proof of title - producing the policy document and any deed of assignment. In the case of a death claim, a Grant of Probate (a grant of letters of administration in Scotland) is also required

Payment of all the premiums due - if some premiums have not been paid, a reduced claim might still be paid in some cases. In other cases, non-payment will cause the policy to lapse with no value (e.g. a term assurance policy)

Evidence of age and (if applicable) marital status - birth and marriage certificates will need to be produced if they were not supplied at the start of the policy

Death certificate - which should be the original document

Discharge form - duly completed and signed by the person with legal title

Maturity claims

These are fairly straightforward. If a policy has a value at the maturity date (e.g. an endowment plan) the life office will pay the maturity value to the policy owner on receipt of proof of title, policy documentation and completed discharge form.

The discharge form must be signed by the person with legal title and this is the only person that the insurer can legally pay the policy proceeds to.

Death claims

As mentioned above, proof of death and proof of title are essential before any claim can be considered.

Proof of Death

Proof of death is by way of an official Death Certificate, which is a copy of the entry on the Register of Deaths as per the Birth and Deaths Registration Act 1953. On...

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This has been confirmed by a case taken to the House of Lords, Hickman v. Peacy (1945), where two brothers were killed in a basement during a bombing raid in London.

Executors and administrators must also prove their right to make a claim and receive benefits. To do this, they should produce one of the following:

A grant of probate where there is a valid will or

A grant of letters of administration, where there is no valid will

In cases where the size of the estate and the sum assured are very small, e.g. a sum assured up to £5,000 and estate less than £10,000, the insurer may pay out the claim without a grant. However, this does expose them to a small risk that payment has not been made to the correct person.

Proof of Age

Proof of age can be proved on production of the original birth certificate. For married women, the marriage certificate is also required to link the married name to the birth name.

If the age of the claimant is incorrect, the premium charged will have been either too much or not enough. Where the age of the policyholder is older than previously advised, the insurer may reduce the claim accordingly (although practices vary between offices). Where the life is younger, the insurer may refund the difference between the premium paid and the actual cost, although again practices vary.

What documents can be used to prove title?

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It is a fundamental principle of insurance law that a person cannot benefit from their own criminal actor where, due to their own deliberate act, they cause the event they are insured against.

Where a policyholder took their own life while of sound mind, this caused a problem, because until the Suicide Act 1961, it was considered both a criminal and deliberate act and would have resulted in the non-payment of a claim. Most lif...

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It may not always be clear cut in either situation and therefore each case would have to be carefully considered. Where the claim is declined, the life office’s decision may also be legally challenged.

Why would an insurance company refuse a claim from a policyholder who has murdered the life assured?

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Where the policy document cannot be produced as proof of title, the life office will require a thorough search to be undertaken and if the policy document still can not be...

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Where a policyholder wishes to surrender or cash in a life policy, this would also be treated as a claim. The life office will have to go through all the steps of a claim regarding proof of title, to ensure that the surrender proceeds are paid to the correct party.

Where the policy is mortgaged, the discharge will need to be countersigned by the mortgagor unless the surrender is under ...

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What is an alternative option to the surrender of an endowment policy?

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A trust is a legal obligation where someone ( the settlor) gives away an asset to benefit others ( the beneficiaries) without passing over immediate full control to the beneficiaries. The asset  is instead legally owned by another person(s) ( the trustees) who hold the asset for the benefit of the beneficiaries in accordance with the specific terms set out in the trust.

There are three parties required to create a valid trust:

The settlor

The trustee(s)

The beneficiary or beneficiaries

Registration of trusts

When a trust is created, it has to be registered with HMRC’s Trust Registration Service (TRS). The information required depends on whether the trust is taxable or non-taxable.

Trusts of life policies are usually excluded from registration as express trusts during the lifetime of the life or lives assured. To qualify as exempt the policy (term or whole of life) must only pay out on death, terminal or critical illness or temporary or permanent disablement of the life/lives assured or to meet the costs of healthcare services.

If a policy has a surrender value, the trust could fall within the registration rules if it is surrendered and the cash is held within the trust. Trusts holding bonds will require registration if withdrawals are taken, as these payment represent pay-outs that do not fall within the above stated conditions. When an exempt policy pays out on death the trustees have two years...

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Trustees

The only basic requirements for trustees are that they are of sound mind and over 18. However, careful consideration should be given before appointing trustees, as they will in effect decide on the eventual destination of the trust benefits.

They should be aware of the settlor’s wishes. The settlor could leave the trustees a “letter of wishes”, giving some guidance as to what they would like to happen after their death. Consideration should also be given to the age and state of health of the trustees as they would need to be around after the death of the settlor to execute their duties. Where all the trustees have died their personal representatives can act as trustees or appoint replacements. However, this would add time and complication and is likely to delay the payment of any benefits.

Trustees should also be made aware of their legal obligations and the implications to them personally if these are not adhered to. Trustees can face criminal charges, fines and even imprisonment if their legal obligations are not met.

Trustees can resign or retire easily, but it is difficult to remove a trustee against their will. This could result in court action, time and expense.

What are the three parties required to create a valid trust?

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