Financial protection

In this chapter we will look at the areas of...

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Whilst we all face the same types of financial risks, the degree to which each client will have a need for protection will depend upon their own unique set of circumstances. It is therefore important to assess the client’s c...

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Why do clients have different protection needs?

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The unexpected death of the family’s main breadwinner can cause serious financial hardship for the survivors if there is no financial protection in place.

In most cases, it is likely that income will stop immediately and the family may face a severe reduction in their standard of living. It may be difficult for the surviving spouse to earn sufficient income to maintain the family. This could be because of the needs of dependent children, or they may not have the skills, experience or qualifications to attract the level of salary required.

It is also essent...

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Where a dependent is reliant on more than just financial support but has other needs, such as an elderly relative or a disabled child, then the protection need is likely to last for their entire lifetime.

What impact would the type of education required for dependent children have on protection planning?

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It is not just the death of the family’s main breadwinner that can cause financial hardship. A debilitating illness or serious injury can also have a huge impact on income and lifestyle. The risk of being unable to work due to sickness or incapacity is statistically much higher than death before retirement. For each individual of working age who dies, 14 will have been off work for more than six months. As with death, there may also be the same types of cost considerations where a non-working spouse is incapacitated.

There is no way of knowing when an illness or disability will str...

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Redundancy is also very likely to result in a sudden loss of income. The loss of income could be short or long-term depending on the individual’s ability to obtain alternative employment.

What impact do employee sick pay schemes have on the need for protection against long-term illness?

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The impact of not having sufficient income to meet essential outgoings will have both immediate and long-lasting effects.

In addition to the general day-to-day costs of living, the ability to continue ...

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The capacity to maintain financial protection products may be severely reduced

Other financial planning objectives may have to be scaled back or discarded altogether

Some individuals may wish to preserve the value of the estate they pass onto their beneficiaries by providing for any inheritance tax (IHT) payable on their death. Where an individual dies with assets in excess of the nil rate band applicable at the date of death, the excess assets will be subject to IHT at death rates, currently 40%.

Posthumous tax may also be payable on gifts made during the individual’s lifetime:

Potentially Exempt Transfers (PETs) may become retrospectively chargeable to inheritance tax where the donor does not survive 7 years from the date of the gift. Where the value of the PET when added to the individuals cumulative total exceeds the nil rate band applicable at date of death, then inheritance tax of up to 40% may be payable on the excess. Taper relief may be available to reduce the tax charge depending on how long ago the PET was made, and tax is payable by the recipient ...

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From April 2017 an additional main residence nil rate band is being phased in. In 2023/24 this is set at £175,000. This can be used when a main residence is passed to direct descendants on death. The relief is available to anyone who has downsized or ceased to own their home after 7 July 2015 and assets of an equivalent value are passed to direct descendants on their death.  For estates with a net value of over £2 million, this additional nil rate band will be withdrawn at a rate of £1 for every £2 of excess over the £2 million threshold.

The current rates of both the nil rate band and residence nil rate band have been frozen until 5 April 2028.

When would inheritance tax be payable on a potentially exempt transfer?

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Protection planning concepts apply equally well to businesses as they do for individuals. This is particularly relevant for small businesses where the business owner’s personal wealth is tied inextricably with the business venture.

The death of a shareholding director can create a capital need for the business. There may be a requirement to buy out the deceased director’s shares from ...

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Chapter 10 covers these issues in greater detail.

Why would a bank want to re-assess credit arrangements in the event of the death of the managing director of a small firm?

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The breakdown of a long-term relationship will have an impact on existing policies and future protection planning needs, and as such should be a prompt for a review.

It is likely that the assets and liabilities of the marriage or civil partnership will be re-distributed, and protection needs will therefore change. Some cover that was previously in force may no longer be appropriate, e.g. joint life policies may no longer be appropriate and may need to be amended or repl...

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Angela received maintenance from her ex-husband. What are the implications for Angela if he dies, and what possible financial planning options are available to her?

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When assessing the need for financial protection, all of the client’s existing assets, policies and liabilities need to be taken into account.

Assets should be considered in terms of the type and liquidity, as well as the potential for use in addressing any income or capital needs. A client’s main residence would not be easily accessible as a sale or capital raising (i.e. re-mortgage) would take time (if possible at all), whereas cash held on deposit is availa...

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It is essential that where cancellation or replacement is recommended, this is only when it is in the client’s best interests.

What are the possible implications on long-term financial planning needs if investments are cashed in to meet short-term needs?

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Whilst state benefits are intended to support only the basic standard of living, and in most cases would not be sufficient to sustain the client&rsquo...

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State benefits are considered in greater detail in chapter 3.

This course will not cover employee benefits and pensions in detail, but it is important to refer to them as sources of financial protection. A client’s protection needs may already be fully or partially met by the benefits payable by their employer:

S ick pay arrangements - the employer may continue to pay salary for a set period during illness or other incapacity

Income replacement plans - these may provide longer-term protection for employees

Death in service schemes can provide a lump sum death benefit, usually a mult...

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The amount of - and eligibility for - employee benefits must be included in any financial planning exercise, as the benefits could be substantial and greatly reduce the cover required.

The one disadvantage is that the benefits will cease when the individual leaves employment, and it may be expensive or difficult to replace these, especially if the individual’s health has deteriorated. In addition, the employer may withdraw the benefits at some time in the future.

What are the advantages of employee benefits?

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Life Assurance - provides a lump sum, or a series of lump sum payments on the death of the life assured

Income protection insurance (IPI) - provides a regular income where the life assured is unable to work due to sickness or injury

Critical illness cover (CIC) - p...

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Private medical insurance (PMI) - providing for the cost of medical expenses

Cash plans - providing small lump sums for vaarious medical treatments or on a 'per day' basis for a hospital stay

It is possible for different types of cover to be included within one product, for example, life insurance can also include critical illness cover.

This revision test (opens in a new...

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