CII R05 Life Insurance Products 2 — Questions and Answers
Question 1: 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 policyholder may need to increase premiums or accept a reduced sum assured (Correct answer)
- The policy converts to a term assurance with no further reviews
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 2: A convertible term assurance policy gives the policyholder the right to:
- Switch to an income protection policy at any time
- Convert to a whole of life or endowment policy without further medical evidence (Correct answer)
- Reduce the sum assured to zero and reclaim all premiums paid
- Transfer the policy to a different insurer at the same premium
Correct answer: Convert to a whole of life or endowment policy without further medical evidence
A convertible term assurance allows the policyholder to convert to a permanent form of cover (whole of life or endowment) without providing further medical evidence. This is valuable if the policyholder's health deteriorates during the term, as they can secure lifelong cover at standard rates.
Question 3: An over-50s plan is a type of whole of life policy that typically:
- Requires a full medical examination before acceptance
- Has premiums that vary based on the policyholder's investment choices
- Offers guaranteed acceptance with no medical underwriting (Correct answer)
- Pays out a sum assured equal to ten times the total premiums paid
Correct answer: Offers guaranteed acceptance with no medical underwriting
Over-50s plans are non-underwritten whole of life policies that guarantee acceptance regardless of health. They typically have a moratorium period (often 12-24 months) during which only accidental death is covered. The sum assured is often modest and may be less than total premiums paid if the policyholder lives for a long time.
Question 4: A gift inter vivos policy is specifically designed to cover which liability?
- Capital gains tax on the sale of a second property
- The potential inheritance tax liability on a lifetime gift that falls within the seven-year rule (Correct answer)
- Income tax on pension drawdown payments
- VAT on business asset transfers
Correct answer: The potential inheritance tax liability on a lifetime gift that falls within the seven-year rule
A gift inter vivos policy covers the potential IHT liability on a lifetime gift (potentially exempt transfer) if the donor dies within seven years. The sum assured decreases over the seven-year period in line with taper relief, reflecting the reducing IHT liability as time passes since the gift was made.
Question 5: Which of the following statements about renewable term assurance is correct?
- The policyholder can renew the policy at the end of the term without further medical evidence, but at a higher premium reflecting their attained age (Correct answer)
- The policy automatically renews at the same premium indefinitely
- Renewal is only permitted if the policyholder passes a new medical examination
- The sum assured doubles on each renewal
Correct answer: The policyholder can renew the policy at the end of the term without further medical evidence, but at a higher premium reflecting their attained age
Renewable term assurance gives the policyholder the guaranteed right to renew the policy at the end of each term without further medical evidence. However, the premium on renewal will be recalculated based on the policyholder's attained age at that point, meaning premiums increase with each renewal.
Question 6: What is the main advantage of writing a life assurance policy under a trust?
- It doubles the sum assured payable on death
- It ensures the policy proceeds fall outside the policyholder's estate for inheritance tax purposes (Correct answer)
- It guarantees the premiums will never increase
- It removes the need for any beneficiary nomination
Correct answer: It ensures the policy proceeds fall outside the policyholder's estate for inheritance tax purposes
Writing a life policy in trust means the proceeds are paid directly to the trust beneficiaries rather than forming part of the deceased's estate. This means the payout is not subject to inheritance tax and does not need to go through probate, enabling faster payment to beneficiaries.
CII R05 Life Insurance Products 2
What happens at a premium review on a unit-linked whole of life policy if the fund value is insufficient?