CII R05 Life Insurance Products — Questions and Answers
Question 1: What is the key difference between a whole of life policy and a term assurance policy?
- Whole of life pays out only on death within a specified term
- Whole of life guarantees a payout whenever death occurs, whereas term assurance only pays out if death occurs within the policy term (Correct answer)
- Term assurance builds up a cash value over time
- Whole of life policies cannot be placed in trust
Correct answer: Whole of life guarantees a payout whenever death occurs, whereas term assurance only pays out if death occurs within the policy term
A whole of life policy provides cover for the entire lifetime of the life assured and will always pay out a death benefit. Term assurance only pays a benefit if the life assured dies within the specified term of the policy.
Question 2: Under a decreasing term assurance policy, which of the following best describes how the sum assured changes over the policy term?
- It increases annually in line with inflation
- It remains level throughout the term
- It reduces over the policy term, typically to zero by the end (Correct answer)
- It decreases only if premiums are missed
Correct answer: It reduces over the policy term, typically to zero by the end
Decreasing term assurance is designed so the sum assured reduces over the policy term, typically reaching nil at the end. This mirrors a repayment mortgage where the outstanding balance decreases over time, making it suitable for mortgage protection.
Question 3: A family income benefit policy differs from a standard level term assurance because it pays the benefit as:
- A single lump sum on diagnosis of a critical illness
- A regular tax-free income from the date of death until the end of the policy term (Correct answer)
- A lump sum at the end of the policy term regardless of whether a claim is made
- Monthly instalments for a fixed period of 25 years from date of death
Correct answer: A regular tax-free income from the date of death until the end of the policy term
Family income benefit pays a regular income from the date of the life assured's death until the end of the original policy term. The income payments are generally tax-free as they are treated as instalments of capital rather than income.
Question 4: Which of the following is a characteristic of a unit-linked whole of life policy?
- Premiums are guaranteed never to increase
- The policy has no investment element
- The sum assured is linked to the performance of an underlying investment fund (Correct answer)
- The policy automatically converts to an annuity at age 65
Correct answer: The sum assured is linked to the performance of an underlying investment fund
Unit-linked whole of life policies allocate premiums to investment funds. The value of the policy and the level of cover depend on the performance of those underlying funds. Premium reviews may result in increased premiums or reduced cover if fund performance is poor.
Question 5: What is the primary purpose of a relevant life policy?
- To provide an employer-funded personal pension
- To provide death-in-service benefits for employees outside of a registered pension scheme (Correct answer)
- To replace state bereavement benefits for self-employed individuals
- To fund critical illness cover for company directors only
Correct answer: To provide death-in-service benefits for employees outside of a registered pension scheme
A relevant life policy is a death benefit only policy taken out by an employer on the life of an employee. It provides death-in-service type benefits outside of a registered pension scheme. Premiums are typically a tax-deductible business expense and the benefit is paid free of inheritance tax via a discretionary trust.
Question 6: Under a joint life first death policy, when is the benefit paid?
- On the death of the last surviving life assured
- On the first death of either life assured (Correct answer)
- Only if both lives assured die within the policy term
- On the tenth anniversary of the policy
Correct answer: On the first death of either life assured
A joint life first death policy covers two lives and pays out the sum assured on the first death. After the claim is paid, the policy ceases and the surviving life has no further cover. It is commonly used by couples to protect a mortgage or provide for dependants.
CII R05 Life Insurance Products
What is the key difference between a whole of life policy and a term assurance policy?