CII R05 Financial Protection — Questions and Answers

Question 1: For a shareholder protection arrangement to work effectively at the point of claim, which document is essential alongside the life assurance policy?

A letter of wishes from each shareholder filed with the insurer
A share sale agreement or cross-option agreement setting out the mechanism for transferring shares (Correct answer)
A certified copy of the company's memorandum of association
Written consent from the company's bank or lender

Correct answer: A share sale agreement or cross-option agreement setting out the mechanism for transferring shares

A legal agreement (cross-option or share purchase agreement) is essential to confirm the agreed valuation method and the rights and obligations of all parties when shares need to be transferred on death.

Question 2: What is the primary reason for writing a life assurance policy in trust?

To reduce the monthly premium
To increase the sum assured
To allow the insurer to invest the premiums more effectively
To ensure proceeds are paid outside the estate, avoiding probate and potential IHT (Correct answer)

Correct answer: To ensure proceeds are paid outside the estate, avoiding probate and potential IHT

Writing a life policy in trust means the proceeds are owned by the trust, not the deceased's estate. This avoids the delay of probate, potentially avoids inheritance tax, and allows for quicker payment to beneficiaries.

Question 3: A self-employed client wants income protection. Which factor is MOST important when determining the appropriate level of cover?

Their net profit or drawings from the business, as this represents their personal income (Correct answer)
The number of employees they have
The value of their business premises
The turnover of their business

Correct answer: Their net profit or drawings from the business, as this represents their personal income

For self-employed individuals, the appropriate level of income protection cover is based on their share of net profit or regular drawings from the business, as this represents their actual personal income. Business turnover is not relevant as it includes costs and overheads. Insurers typically require evidence of earnings via tax returns or accounts.

Question 4: An insurer applies an 'exclusion' to a protection policy. What effect does this have?

It means the policy will only pay out for the excluded condition
It delays the start of the policy by 12 months
It increases the sum assured for the excluded condition
It removes cover for a specific condition, activity, or circumstance — no claim will be paid if the excluded event causes the claim (Correct answer)

Correct answer: It removes cover for a specific condition, activity, or circumstance — no claim will be paid if the excluded event causes the claim

An exclusion removes cover for a specific condition, activity, or circumstance identified during underwriting. If the insured event is caused by or related to the excluded item, the claim will not be paid. For example, a back condition exclusion means no claim will be paid for incapacity caused by back problems, though claims for unrelated conditions remain valid.

Question 5: A group income protection scheme is arranged on a 'self-insured' basis. What does this mean?

Employees are responsible for their own medical evidence
The employer meets the cost of claims themselves rather than transferring risk to an insurer (Correct answer)
The insurer does not perform underwriting on the scheme
Each employee pays their own premiums

Correct answer: The employer meets the cost of claims themselves rather than transferring risk to an insurer

A self-insured (or self-funded) group scheme means the employer bears the financial risk of claims rather than transferring it to an insurer. Large employers sometimes do this to retain the savings if claims are low.

Question 6: What is the difference between 'own occupation' and 'any occupation' definitions in income protection insurance?

Own occupation means unable to do your specific job; any occupation means unable to do any job at all (Correct answer)
Own occupation pays more; any occupation pays less
There is no meaningful difference between the two
Any occupation definition is more generous to the claimant

Correct answer: Own occupation means unable to do your specific job; any occupation means unable to do any job at all

Own occupation is the most generous definition — the policyholder qualifies for benefit if unable to do their own specific job. Any occupation requires inability to do any job whatsoever, making it much harder to claim.

Question 7: A decreasing term assurance policy is most commonly used to cover which type of debt?

Student loan
Repayment mortgage (Correct answer)
Interest-only mortgage
Credit card debt

Correct answer: Repayment mortgage

Decreasing term assurance mirrors the outstanding balance of a repayment mortgage, where the sum assured reduces over time in line with the reducing capital balance.

Question 8: A critical illness policy may include a 'waiver of premium' benefit. What does this provide?

Continued policy cover without the need to pay premiums if the policyholder is unable to work due to incapacity (Correct answer)
A refund of all premiums paid if no claim is made
An automatic increase in the sum assured each year
A reduction in premiums after the policy has been in force for five years

Correct answer: Continued policy cover without the need to pay premiums if the policyholder is unable to work due to incapacity

Waiver of premium is an optional benefit that ensures the policy remains in force without the policyholder having to pay premiums during a period of incapacity. Typically, there is a deferred period (e.g., 13 or 26 weeks) before the waiver begins, and the policyholder must meet the definition of incapacity specified in the policy.

Question 9: The Association of British Insurers (ABI) model definitions for critical illness cover include a core set of conditions. Which of the following is included in the ABI core conditions?

Carpal tunnel syndrome
Cancer (excluding less advanced cases) (Correct answer)
Type 2 diabetes
Chronic fatigue syndrome

Correct answer: Cancer (excluding less advanced cases)

The ABI Statement of Best Practice includes cancer as one of the core critical illness definitions, though it typically excludes less advanced cancers such as early-stage non-invasive cancers, certain skin cancers, and carcinoma in situ. The ABI core conditions also include heart attack, stroke, and other serious conditions.

Question 10: A person earns £50,000 per year. What is the maximum income protection benefit they would typically be able to insure?

£45,000 per year (90% of earnings)
£25,000 per year (50% of earnings)
£37,500 per year (75% of earnings) (Correct answer)
£50,000 per year

Correct answer: £37,500 per year (75% of earnings)

Income protection insurers typically limit the benefit to around 50–65% of pre-incapacity earnings (some up to 75%), ensuring the policyholder retains an incentive to return to work. 75% of £50,000 is £37,500.

Question 11: In the context of life assurance trusts, what is the 'reservation of benefit' rule?

If the settlor retains a benefit from the trust property, the gift is ineffective for IHT and the assets remain in the estate (Correct answer)
Beneficiaries must be at least 18 to benefit from the trust
The insurer reserves the right to contest the trust arrangement
Trustees must reserve 10% of the proceeds for the settlor

Correct answer: If the settlor retains a benefit from the trust property, the gift is ineffective for IHT and the assets remain in the estate

Gift with reservation of benefit rules mean that if the settlor retains any benefit from assets placed in trust (e.g., could still benefit from a life policy), HMRC treats the assets as still in the estate for IHT purposes.

Question 12: Which of the following best describes a 'with-profits' whole of life policy?

The sum assured is fixed throughout the policy's life
The policy only pays out if a specified illness is diagnosed
Bonuses are added to the sum assured based on the insurer's investment performance (Correct answer)
The premiums reduce annually based on market conditions

Correct answer: Bonuses are added to the sum assured based on the insurer's investment performance

With-profits policies share in the insurer's investment profits through reversionary bonuses added annually and a terminal bonus on claim, enhancing the original sum assured.

Question 13: How are benefits from a personally held income protection (permanent health insurance) policy taxed when paid to the policyholder?

Benefits are taxable as earned income
Benefits are subject to a 20% flat rate tax
Benefits are paid free of income tax (Correct answer)
Benefits are subject to National Insurance contributions

Correct answer: Benefits are paid free of income tax

Benefits from a personally held income protection policy are paid free of income tax, as the premiums were paid from post-tax income. This is the reciprocal tax treatment — no relief on premiums in, no tax on benefits out.

Question 14: Which type of term assurance automatically renews at the end of each term without the need for fresh medical evidence?

Decreasing term assurance
Renewable term assurance (Correct answer)
Convertible term assurance
Level term assurance

Correct answer: Renewable term assurance

Renewable term assurance gives the policyholder the option to renew the policy at the end of each term without providing further medical evidence, though at rates reflecting the new age.

Question 15: Under an income protection policy, what is the significance of the 'benefit basis' being 'indemnity' rather than 'agreed value'?

Indemnity basis pays more than agreed value at claim
Indemnity basis pays based on actual earnings at the time of claim, which could be less than the insured amount (Correct answer)
There is no difference at time of claim
Agreed value requires medical evidence at claim; indemnity does not

Correct answer: Indemnity basis pays based on actual earnings at the time of claim, which could be less than the insured amount

On an indemnity basis, the benefit is limited to the actual earnings at the time of claim. If earnings have fallen since the policy was taken out, the benefit will be reduced accordingly. Agreed value locks in the benefit at the time of application.

Question 16: Under a discretionary trust, who determines how the life assurance proceeds are distributed among beneficiaries?

The settlor, in their will
The beneficiaries themselves by majority vote
The trustees, using their discretion (Correct answer)
HMRC, based on the beneficiaries' tax positions

Correct answer: The trustees, using their discretion

Under a discretionary trust, the trustees have discretion to decide how, when, and to whom the proceeds are paid from among the class of potential beneficiaries, giving maximum flexibility.

Question 17: A married couple take out a joint life second death policy. What type of trust would be most appropriate?

Absolute trust
Discretionary trust
Split trust (Correct answer)
Bare trust

Correct answer: Split trust

A split trust (also called a flexible trust with split provisions) is ideal for joint life second death policies, as it allows the survivor's rights to be separated from those of the beneficiaries, ensuring the survivor can still access policy benefits during their lifetime.

Question 18: What is a key advantage of using a cross-option agreement rather than a binding buy and sell agreement for partnership protection?

A cross-option agreement removes the need for life assurance policies
A cross-option agreement avoids triggering the loss of Business Property Relief on the deceased's share (Correct answer)
A cross-option agreement always produces a higher payout on death
A cross-option agreement guarantees a fixed sale price for the partnership share

Correct answer: A cross-option agreement avoids triggering the loss of Business Property Relief on the deceased's share

Because a cross-option agreement creates options rather than a binding obligation to sell, HMRC is less likely to deny Business Property Relief on the deceased partner's share under s.113 IHTA 1984.

Question 19: What is 'domiciliary care' in the context of long-term care insurance?

Care provided in a residential nursing home
Care funded by the local authority
Care provided in a hospital setting
Care provided in the individual's own home (Correct answer)

Correct answer: Care provided in the individual's own home

Domiciliary care refers to professional care services provided in the individual's own home, such as help with washing, dressing, and meals, allowing them to remain at home rather than moving to a care facility.

Question 20: Income protection benefit payments received by an individual policyholder are treated for tax purposes as:

Tax-free capital payments
Tax-free if the deferred period is longer than 26 weeks
Earned income subject to income tax and National Insurance contributions
Taxable income subject to income tax under PAYE but not National Insurance contributions (Correct answer)

Correct answer: Taxable income subject to income tax under PAYE but not National Insurance contributions

Individual income protection benefits paid under a personally-owned policy are subject to income tax under PAYE but are NOT subject to National Insurance contributions. This is because the benefit is treated as income replacement rather than earnings from employment. The premiums for individual policies are not tax-deductible.

Question 21: Under FCA rules, what information must be provided to a customer before they take out a protection policy?

A detailed breakdown of the insurer's investment strategy
A key features document or product information document outlining the main features, risks, and costs (Correct answer)
The insurer's full annual report and accounts
A copy of the full policy terms and conditions signed by the chief underwriter

Correct answer: A key features document or product information document outlining the main features, risks, and costs

Before a protection policy is concluded, the customer must be provided with appropriate product information — typically a key features document or insurance product information document (IPID) — covering key features, exclusions, costs, and how to claim.

Question 22: What is 'proportionate benefit' in the context of income protection?

A benefit that increases in line with inflation
A partial benefit paid when the policyholder returns to work on reduced hours or lower earnings (Correct answer)
A benefit that reduces as the policyholder ages
A benefit that is proportionate to the severity of the illness

Correct answer: A partial benefit paid when the policyholder returns to work on reduced hours or lower earnings

Proportionate benefit (also called rehabilitation benefit) allows the policyholder to return to work part-time or at a lower salary and receive a reduced income protection payment to top up their reduced earnings.

Question 23: What happens at a premium review on a unit-linked whole of life policy if the fund value is insufficient?

The policy automatically lapses without notice
The insurer must continue cover at the same premium indefinitely
The policy converts to a term assurance with no further reviews
The policyholder may need to increase premiums or accept a reduced sum assured (Correct answer)

Correct answer: The policyholder may need to increase premiums or accept a reduced sum assured

At a premium review (typically every 10 years), the insurer assesses whether the fund value is sufficient to maintain the current level of cover. If fund performance has been poor, the policyholder may face increased premiums or a reduced sum assured to keep the policy in force.

Question 24: What is the primary purpose of family income benefit (FIB)?

To fund a pension on retirement
To pay a regular income to dependants for the remainder of the policy term following death (Correct answer)
To pay a lump sum on the policyholder's death
To provide critical illness cover alongside life cover

Correct answer: To pay a regular income to dependants for the remainder of the policy term following death

Family income benefit pays a regular income rather than a lump sum from the date of death to the end of the policy term, helping replace the deceased's earnings for dependants.

Question 25: An employer pays the premiums for a group life assurance scheme (death in service). How are the premiums treated for tax purposes?

The premiums are an allowable business expense for the employer and are not treated as a benefit in kind for the employee (subject to HMRC approval) (Correct answer)
The premiums attract capital gains tax for the employer
The premiums must be paid from the employee's net salary
The premiums are a taxable benefit in kind for the employee

Correct answer: The premiums are an allowable business expense for the employer and are not treated as a benefit in kind for the employee (subject to HMRC approval)

Premiums paid by the employer for a registered group life assurance scheme are an allowable deduction against corporation tax as a business expense. Provided the scheme is set up under an excepted group life policy or registered arrangement, the premiums are not treated as a benefit in kind for the employee and do not generate an income tax charge on the employee.

Question 26: Which type of income protection policy covers inability to work due to ANY cause, including accident and sickness?

Accident and sickness policy
Accident only policy
Payment protection insurance
Permanent health insurance (Correct answer)

Correct answer: Permanent health insurance

Permanent health insurance (PHI), now commonly called income protection, covers inability to work from any cause — illness, injury or accident — and can pay until retirement age if necessary.

Question 27: What is the key distinction between income protection and an accident, sickness, and unemployment (ASU) policy?

There is no difference — they are the same product
Income protection only covers accidents while ASU covers all types of incapacity
ASU policies typically offer short-term cover (usually 12-24 months per claim) while income protection can pay until retirement age (Correct answer)
ASU policies are regulated by the FCA while income protection is not

Correct answer: ASU policies typically offer short-term cover (usually 12-24 months per claim) while income protection can pay until retirement age

The key distinction is the benefit payment period. Income protection is a long-term product that can pay benefits until the policyholder's selected retirement age (e.g., 65 or 68). ASU policies are short-term, typically limiting payments to 12 or 24 months per claim. ASU may also include unemployment cover, which income protection does not.

Question 28: What is the maximum benefit typically payable under an individual income protection policy?

75% of gross earnings with no deductions
100% of pre-incapacity gross earnings
Up to 60% of pre-incapacity gross earnings, less any state benefits and other income (Correct answer)
50% of net earnings after tax

Correct answer: Up to 60% of pre-incapacity gross earnings, less any state benefits and other income

Individual income protection policies typically limit the benefit to a maximum of 50-65% of pre-incapacity gross earnings, with 60% being the most common maximum. Benefits from other sources (state incapacity benefits, employer sick pay, other policies) are usually deducted to prevent over-insurance and moral hazard.

Question 29: A 70-year-old client has £200,000 in savings and is considering long-term care planning. Which of the following would you most likely recommend as a planning strategy?

Consider an immediate needs annuity now to lock in current health-based rates
Invest all savings in a pension to avoid care funding means testing
Spend all savings immediately so local authority funding applies
Consider a combination of self-funding and an immediate needs annuity purchased if and when care is needed (Correct answer)

Correct answer: Consider a combination of self-funding and an immediate needs annuity purchased if and when care is needed

For a 70-year-old with significant assets above the self-funding threshold, a common strategy is to use savings initially (self-fund) and purchase an immediate needs annuity if and when care is actually needed, providing certainty of lifetime funding at that point.

Question 30: What is the main tax advantage of a 'relevant life policy' for an employer?

The policy proceeds are always paid free of capital gains tax
Premiums count against the employer's annual investment allowance
Employees receive the death benefit entirely free of national insurance contributions
Premiums qualify for full corporation tax relief as an allowable business expense (Correct answer)

Correct answer: Premiums qualify for full corporation tax relief as an allowable business expense

Relevant life policy premiums are typically an allowable business expense, reducing the employer's corporation tax liability, provided the conditions set by HMRC are met.

CII R05 Financial Protection

The CII R05 Financial Protection exam assesses knowledge of life assurance, critical illness, income protection, long-term care, business protection, and state benefits, forming part of the CII Certificate in Financial Planning (RQF Level 3).

Questions

35 min

Time Limit

70%

To Pass

Checking for saved progress...

Exam Rules

You can skip questions and return to them later
Flag questions for review before submitting
No feedback shown until you submit the entire exam
Unanswered questions count as wrong — answer everything
10 pretest questions are mixed in and don't affect your score
Timer auto-submits when time runs out
Your progress is auto-saved every 30 seconds