Faq's

As the name suggests, whole-of-life assurance is designed to cover the policyholder for the duration of their lifetime. Provided that premiums are maintained, and the policy remains in force, it will pay out the amount of life cover in the event of the death of the policyholder, whenever that death should occur. The overall benefit of this type of assurance is that it provides peace of mind.

This policy is designed to last for as long as the person is living. A premium is paid monthly and, when the policyholder dies, a lump sum is paid out to the family or beneficiaries of that person. It is a simplistic but valuable scheme, although not used as much as term assurance because whole-of-life assurance is a considerably more expensive form of cover. This is because the insurer knows that they will have to pay out at some point during the policy.

It can be used both in personal and business situations, and for certain taxation reasons/purposes:

• To cover expenses on death of the assured.
• To give a tax-free legacy.
• To protect dependants against loss of financial support in the event of the death of a major income generator/breadwinner.
• To provide funds that can be used for the payment of inheritance tax.

Premiums may be payable throughout life or limited to a fixed term (such as 20 years) or to a specified age (such as 60 or 65).

If you choose a limited premium, the minimum term is usually ten years.

Due to the fact whole-of-life assurance (as opposed to term assurance) will certainly pay out at some point, life companies build up reserves to enable pay-outs when the policyholder dies. This enables insurers to offer surrender values on whole-of-life policies should they be cancelled by the client during their lifetime. These figures are generally quite small in relation to the original sum assured.

When the person takes out the policy, they must ensure they have the means to maintain payment of the premiums both during their working life and after retirement. Failure to keep up with payments will result in cancellation of the policy and there will be no return of any money. The cost is calculated using a series of factors relating to the individual, such as age, lifestyle and health, and what type of cover is required.

In the early years of a policy, the surrender value is often less than the premiums paid. This is to emphasise the fact that whole-of-life policies are protection policies as opposed to an investment scheme, even though they have often been used for investment purposes.

Increasing term assurance is where the assured sum rises yearly by a fixed amount or percentage of the original figure. This particular type of policy is useful for when temporary cover of a certain fixed amount is needed, but where that cover needs to increase to take into account some of the decrease in purchasing power caused by inflation.

This type of assurance also gives you the option to renew the existing policy at the end of the initial period for the same sum as previously, without any requirement to provide further evidence of your medical condition.

The new term will be of the same length as the initial term and includes a new renewal option. There is, however, a maximum age limit, typically 65, which means the policy is no longer available from then onwards. The premium for the new policy is based on the policyholder’s age at the date when the option for renewal is exercised.

Both renewable and increasing term assurance are similar to the renewable policy, with an added option to increase by a specific sum upon renewal.

The increase is typically either 50% or 100% of the previous sum assured with, again, no requirements to provide evidence of the medical condition of the assured person.

You will find that some providers offer a combination of renewable, convertible and increasing term assurances.

A period of time known as the deferred period will elapse between the start of the illness or injury and the point at which benefits begin to be paid. Common deferred periods are 4, 13, 26, 52 and 104 weeks. The minimum four-week deferred period is to prevent multiple claims for minor complaints such as colds or flu.

A self-employed person, who may well suffer loss of income after being unwell for a very short time, should opt for a shorter deferred period. An employee may wish to opt for a longer deferred period, especially if they have sickness benefits paid by their employer. If this is the case, the deferred period should be set to match the date on which the employer’s sick pay ceases to be paid out. The longer the deferred period chosen, the cheaper the premium.

These benefit levels are set so that the person is unable to receive a higher income when they are not working than they could from actually working. The highest benefit amount payable from an IPI policy varies between each provider, but is normally in the range of 50% to 75% per cent of pre-disability earnings. If the provider allows a benefit level towards the top of this range, they will be more likely to make a deduction to allow for any benefits the claimant might have made. These limits apply to total benefits from all IPI contracts held by the individual.

Benefits are paid pro-rata if illness means that a person can still work, but unfortunately earns less than they did before their illness or injury. They might be able to work part-time only, or be on a lower salary than before, for example.

Cover is permanent in that the insurer cannot cancel the cover simply because the policyholder makes numerous claims. IPI used to be commonly known as ‘permanent health insurance’.

The policy can be cancelled, however, if the party involved fails to keep up payments or takes up a dangerous job or hobby.

Some policies will allow benefits to be index-linked (either before or during a claim). The rate of increase may be fixed, sometimes 3% to 7% depending on the circumstance, or based on a published measure of inflation. Benefits are normally paid until death, return to work, or retirement, or whichever occurs first.

The benefits are tax-free where income protection insurance is taken out on an individual basis. IPI can be arranged by an employer on a group basis, and in this case the income is taxable.

The employer will pay the premium which is a tax-deductible business expense. From the employee’s point of view, the premium paid by the employer is not taxable as a benefit so they do not have to pay tax or NI on the premium, provided that the employer has discretion as to whether to pay the proceeds to the employee.

In practice, the employer does have such discretion and pays the proceeds to the member involved. The scheme member then pays tax and National Insurance on the proceeds.

An alternative option to income protection insurance (IPI) is Accident, sickness and unemployment insurance (ASU) plans. They are a type of general insurance that is usually used to keep up payments for mortgages should illness, accident or loss of employment prevent the holder from earning a living. A level of income equal to the usual monthly mortgage repayments is paid for a limited period, typically a maximum of two years. Additional cover can sometimes be added to cover other essential costs.

Lump sums may be paid in certain situations (death, disablement, and loss of a limb) and, as with IPI, there will be a deferred period (normally a month) which must elapse before the payments can commence.

These plans should be viewed as short term to protect mortgage payments rather than as providing total protection of an earned income.

These policies would be more accurately described as accident, sickness and redundancy insurance, as they do not offer protection from unemployment when the insured is released from their employment, or resigns voluntarily. The policy will often include the following restrictions:

• Any redundancy that the applicant had reason to believe was pending when they took out the policy will be excluded;
• The applicant must have been actively and continuously employed for a specified minimum period prior to starting the plan;
• No benefit will be payable if redundancy occurs within a specified period from the start of cover;
• A person may have to have been employed for a minimum period either before they can take out this type of plan or before the unemployment cover becomes valid.

All benefits from an ASU are free of tax, but there is no tax relief on contributions regardless of whether the plan is arranged on a group or personal basis.

Should the scheme be established on a group basis, any employer contributions will be allowed as an expense against corporation tax. Any employer contribution will be classed as a benefit in kind, however.

ASU policies are renewable each year at the discretion of the insuring company. This means that the insurer could increase premiums if a policyholder makes a large volume of claims, or might even withdraw the cover completely.

Private medical insurance:

Private medical insurance (PMI) is a protection plan that provides cover for the cost of private medical treatment, removing the dependence on NHS care. The range of cover normally provided includes reimbursement of charges such as:

• In-patient, including accommodation, operating fees, nursing fees, medication, hospital transport;
• Medical and surgical fees including surgeon’s and anesthetist’s fees, radiology, pathology, etc.;
• Out-patient including consultations and home nursing care.

If you have a treatable condition, then this type of cover pays for your healthcare costs. It covers overnight stays, outpatient treatment, tests/diagnostics, aftercare etc. so long as it is part of the agreement in the contract. Health insurance covers the cost of medical treatment for conditions such as digestive system related issues and back pain, to name two. This is because these particular ailments are most likely to have a quick response to treatment and are among the most frequent claims.

It is possible to find policies that offer further benefits such as the payment of a daily rate, if treatment is delivered within an NHS hospital involving an overnight stay.

Whilst there are a multitude of policies to select from, you will find that the basic plans offer the cover of essential treatments, the more comprehensive policies can include chiropody or acupuncture. To summarise, a sum is paid on a monthly basis to the insurance company, and the company pays any fees incurred, including stays in hospital and surgery (if required).

PMI can be arranged on an individual basis or as part of a group scheme from an employer. The way in which benefits are paid varies between providers. Some will offer a 100% refund of charges with payment direct to the healthcare provider, while others impose a ceiling on the amount that can be reclaimed in any one year.

As health insurance covers the cost of private medical attention, people take out this type of cover because they can receive faster consultations and treatment, and this can be carried out in both private and NHS hospitals.

Premium rates depend on a variety of factors, which may include:

• Type of hospital – treatment in postgraduate teaching hospitals in London is more expensive, for example, and is reflected in higher premiums;
• Location – this is mainly because the cost of medical care varies throughout the country (larger cities, such as London are again considerably higher);
• The standard of accommodation available to the patient within the plan.

A further factor is the type of scheme that is taken out. To give an idea, many providers offer a budget scheme, which may limit a patient’s choice of hospital, or require treatment on the NHS if the waiting list does not exceed a maximum period of, say, six weeks. Any limitations on the range of cover provided will reduce the premium payable. This may take the form of a financial limit or cap on the amount of benefit that is provided, or limits on the range of treatment covered.

Another significant factor is the age of the person. The risk of disease or illness increases with age and, as a consequence of this, so does the probability of a claim being made under the terms of the plan.

EXCLUSIONS – PMI

PMI cover will not be provided for any pre-existing medical conditions or the costs of:

• Routine dental treatment;
• Routine maternity care;
• Routine optical care (such as provision of spectacles or lenses);
• Chiropody;
• The treatment of self-inflicted illnesses, for example, drug use/abuse and alcohol;
• Cosmetic surgery.
• Alternative medicines and remedies.

Taxation of Premiums and Benefits

Premiums are themselves subject to insurance premium tax, but benefits are paid out free of tax. Employers who contribute to PMI on behalf of their employees are able to claim the cost as a deduction against corporation tax, as above.

Employer contributions are regarded as a benefit-in-kind as far as the employee is concerned, and are therefore taxable.

Long-term care insurance

Long-term care insurance (LTC) is the provision of funds to meet the costs of care that may arise along the way, when a person is no longer able to perform competently some of the daily basic actions involved in looking after themselves.

Long-term care insurance policies are no longer sold. They were used to provide a regular form of income to meet the cost of nursing home fees, or for home care to those no longer able to take care of themselves properly for reasons such as a disability or old age. The needs of an individual would have to be discussed with an advisor to ensure that needs are met with the cover provided.

The need for this cover has increased because:

• Families are less able to take care of elderly relatives than perhaps they were in earlier generations (maybe because they live further away from each other, there are restrictions on their time, or because their accommodation is unsuitable);
• People are living longer these days;
• Expectations of quality of life in later years are higher;
• There are worries or concerns about the standard of care that the state and the NHS can realistically be relied upon to provide.

The amount of benefit paid out from an LTC plan is dependent on the level of care required by the person insured.

This is established by looking at the person’s ability to carry out a number of activities of daily living (ADLs) such as dressing, preparing food, feeding, washing, moving from room to room, using the toilet, etc

Each insurer has its own definitions of what constitutes an inability to carry out any of the above. Many follow the definitions laid down by the Association of British Insurers. The higher the number of ADLs that cannot be performed without assistance, the greater the amount of care required and, ultimately, the higher the level of benefit paid. Usually, insurers require that the insured person must be incapable of performing at least two or three of the above before a claim can be made.

A person might just need basic assistance with dressing and with preparing and eating meals and need not be in a nursing home to receive LTC benefits. In this situation, they might need a carer coming in at certain points during the day specifically to help the person carry out those tasks.

Pre-funded care and Immediate care are the two types of insurance policy available.

Immediate care plans are for when the person didn’t have cover in place but found themselves needing care immediately. An annuity can be purchased using a lump sum, which then would be used to make the necessary payments for the care required.

Pre-funded care plans are such whereby the person pays premiums into a plan whilst they are still in good health, to prepare to cover the cost of home care or nursing home fees if and when needed. Pre-funded premiums can be paid as a lump sum, monthly or annually, and benefit levels and premiums are frequently reviewed.

Due to the fact that policies are long term plans, they don’t require yearly renewal like household and car insurance policies do. However, the contributions being made may not continue to be enough to maintain the benefits, so a review once every five years would be put in place to ensure that adequate cover is maintained.

Benefits will be tax free if paid direct to the care provider for an annuity purchased for immediate long-term care needs. The annuity must have qualified as an immediate needs annuity when it was taken out. So, in other words, the benefits from an ordinary purchased life annuity cannot be paid tax-free purely because they are being used to fund long-term care.

If any part of the annuity benefits are paid to anyone other than the care provider, or for any purpose other than for the care of the person protected under the policy (including payments that may be due on the death of the protected person), the interest element of that section of the benefits is taxable. Where an immediate needs annuity is generated on a ‘life of another’ basis, the benefits can still be paid tax-free, provided that they are paid directly to the care provider and are used solely for the care of the person protected under the policy.

If the long-term care policy is prefunded, benefits are also tax-free. So, for example, where there is no annuity but, instead, premiums are paid to an insurance firm out of tax-paid income to insure against possible future occurrences for prefunded long-term care policies, benefits can be paid direct to the care provider or to the person protected.

An all-risks policy (sometimes referred to as extended contents cover) indemnifies the policyholder for damage, loss, or theft of items that are frequently or occasionally taken out of the home.

Cover is normally divided into two categories:

• Unspecified items – these need not be specifically named or listed, but each item must have a value below a specified amount;
• Specified items – these items are above the single-item value limit and are individually listed.

The policyholder must take reasonable care of the property at all times in both cases.

If you are a tenant in a rented property, the homeowner will have insurance to cover the building, but this does not cover your possessions. There is a policy commonly referred to as Tenant’s Contents Insurance, which covers the items belonging to the tenant only. It is important that the value of the contents is calculated correctly because that will be the sum paid out, should something happen. The tenant must include any items stored in the garage, shed or attic.

Lending is said to be secured when the borrower grants the lender the right to take possession of a named valuable asset if they (the borrower) fail to keep up repayments on their loan. If repayments are missed (and the matter cannot be resolved in any other way) the lender can then sell the asset to retrieve the money owed.

Security for a loan does not have to take the form of a property itself, contrary to expectations. With commercial loans, the loan might be secured against business equipment or premises. Financial assets such as shares or other investments may also be used in these situations, should the lender want to prevent or reduce any loss.

With regards unsecured borrowing, however, the lender does not have that reassurance or guarantee of an asset that they can sell to recoup the loan if the borrower fails to repay it. The lender has to rely entirely on the borrower’s agreement to repay. For this reason, unsecured borrowing is a greater risk to the lender, and rates of interest on these types of loans tend to be higher than those for secured loans.

With a repayment mortgage, the borrower makes monthly repayments to the lender, which consists partly of capital repayment (the original amount borrowed) and partly of interest on the total amount borrowed. The higher the interest rate (for any given mortgage amount and term) the higher that monthly repayment will be.

The repayment is calculated so that it is evenly spread throughout the whole term of the mortgage. Therefore, if interest rates do not change over the term, the repayment will stay the same each month. However, if interest rates do increase or decrease, then the monthly repayment increases or decreases correspondingly, or there is the option to extend or shorten the mortgage term appropriately.

Proportions of capital and interest do vary throughout the term. At the start, when most of the original amount borrowed is outstanding, most of the monthly repayment is only paying the interest on the loan. Later on, when more of the capital has been repaid, the interest proportion of the repayment reduces and a larger segment of the repayment goes towards repaying the capital.

Providing that all the repayments have been made on time, and that repayments have been adjusted accordingly to changes in the interest rate, the mortgage will be repaid in full at the end of the term.

If the borrower passes away before the end of the mortgage term, there are two options: either repayments must still be made, or the loan has to be repaid in full. The borrower needs to ensure they take out life assurance cover to make sure these conditions can be met.

An interest-only mortgage means that monthly payments made to the lender are solely for the purpose of paying interest on the loan, not ‘capital’ (the original sum borrowed, essentially). The capital amount outstanding therefore does not decrease at all. Therefore, the monthly payments are lower than those for a repayment mortgage. However, the borrower still has to repay the original amount borrowed at the end of the term regardless.

In 2014, the FCA’s Mortgage Conduct of Business (MCOB) rules relating to interest-only mortgages changed following the Mortgage Market Review. New rules were introduced following concerns that borrowers were being encouraged to take out a mortgage of more than they could afford to realistically pay back, and were able to arrange an interest-only mortgage without being required to make arrangements to fund the repayment.

An interest-only mortgage can only now be started if the lender has obtained evidence that the borrower has a credible way of repaying the capital amount. A credible repayment strategy would be, for instance, regular savings guaranteed to provide the borrower with the sum needed to repay the mortgage in full at the end of the term. Lenders must now also contact the borrower at least once during the term of the mortgage to ascertain whether there have been any changes, and that the repayment strategy remains in place – meaning that the borrower still has the potential to repay the capital. Popular methods of funding interest-only mortgages include endowments, ISAs and pensions.

Many lenders stopped offering interest-only mortgages to new borrowers in response to these changes. More recently, lenders have started offering interest-only mortgages once more.

When an interest-only mortgage is taken out, the two main issues to be addressed are: putting in place a funding mechanism or structure to repay the debt at the end of the term; and ensuring there is enough protection to enable the amount to be repaid should the borrower die before the end of the term.

There are multiple ways interest can be charged to the mortgage account for both types of mortgage (repayment and interest-only). For example, some lenders charge interest on an annual basis, some on a monthly basis, and some on a daily basis.

Generally speaking, it is the lender who decides how interest is charged, although this can vary between different mortgage products or services.

Mortgage lenders will generally offer a range of different interest rate options or ‘mortgage products’, such as fixed rate and variable rates, as well as the facility to defer the interest or take an interest payment break or ‘holiday’.

Notes on Technical Terms

Variable rate:

• Monthly payments rise and fall in line with changes in interest rate.
• It is hard to predict what future payments will be, therefore making budgeting quite difficult.

Discounted rate:

• The Interest rate is discounted from the standard variable rate (SVR).
• There may be penalties for early repayment.

Fixed rate:

• The Interest rate is fixed for a specific time period (typically between one and five years) then reverts to the variable rate (SVR).
• This makes it easier for borrowers to budget.
• There may be a significant standard arrangement fee, and penalties or restrictions on switching to another lender.

Capped rate:

• The interest rate is variable within a specified upper limit (the cap).
• This allows borrowers to budget within set parameters.
• Borrowers can benefit from falls in interest rates (as far as any collar limit set, i.e. a minimum level).
• Products that also have a specified lower limit are called ‘cap and collar’ mortgages.

Base-rate tracker:

• Interest moves up and down in line with changes in bank rate.
• Please be aware that a tracker mortgage is not at the same rate as the bank rate – the lender’s rate will be a little higher in most cases.

Flexible:

• The flexibility to overpay, underpay and/or take payment holidays without incurring penalties or charges.
• Interest is usually calculated on daily basis.
• Options can include current account and offset mortgages.

Low start:

• Repayment mortgages with lower payments to start, during which capital is not repaid.
• These are suitable for borrowers keen to keep outgoing payments low in the early years.
• Higher payments will be required after that initial period to make sure repayment of capital is taking place.

Deferred Interest:

• The interest payments are deferred until later down the line.
• This suits borrowers who might expect their income to increase over the term of the mortgage.
• Not suitable for those who borrow a high proportion of the property value, because of the ongoing increased risk of ‘negative equity’.

Flexible mortgages:

These mortgages give the borrower some flexibility to change their monthly payments to suit the person’s ability to pay, as well as the opportunity to pay off the mortgage more quickly. Although there is no exact or precise definition of a flexible mortgage, it is generally considered that such a product should offer the following basic features as standard:

• The facility to make overpayments at any time without incurring an early repayment charge;
• The interest is calculated on a daily basis;
• There is a facility to underpay, but only within certain limits set by the lender;
• The facility to take a payment holiday, again within boundaries laid out from the start.

Two key benefits of these features are as follows:

• The mix of a daily interest calculation and occasional/regular overpayments will result in considerably less interest being paid overall, and the mortgage term being reduced.
• The ability to reduce monthly payments (or suspend them completely) for a limited time will be helpful for someone experiencing temporary financial problems. In these circumstances, a borrower may be able to borrow back overpayments made earlier in the term.

Many lenders are now offering flexible mortgages with a fixed, discounted or capped rate for an initial, interim period. Early repayment charges do not usually apply to these products, but an arrangement fee may be chargeable and, in some cases, a particular insurance product must be purchased from the lender at the same time.

Most flexible mortgages will allow the borrower to draw down further funds as and when required, although the lender will have set a limit on total borrowing at the commencement of the agreement.

Flexible mortgages involve a much simpler administrative process than is usual when dealing with further advances. The way in which the mortgage deed is generally worded for flexible mortgages is such that all additional funds withdrawn, within the limit on total borrowing, will automatically take priority over any other subsequent or further charges registered against the property.

A popular version of the flexible mortgage is the current account mortgage. Current account mortgages are a type of offset mortgage. They enable the borrower to carry out all of their personal financial transactions simply within a single account.

The account is able to accept salaries and other income, pay standing orders and direct debits, etc., in exactly the same way as a standard current account. The borrower will be provided with a debit card as per usual.

The combination of salary income and the calculation of interest on a daily basis considerably reduces the amount of interest payable and therefore also the term of the mortgage.

An alternative is the offset mortgage. These mortgages require the borrower to have savings or other accounts with the lender, and enables the interest payable on such accounts to be offset against the mortgage interest charged. For instance, if a borrower has an offset interest-only mortgage for £90,000 and £35,000 in a savings account with the lender, they can opt to waive payment of interest on their savings, enabling interest to be charged on a net loan of £55,000. This calculation is repeated on a daily basis.

Even the more complicated offset mortgages can enable the borrower to offset interest payable on various savings accounts against interest charged on their mortgage, and on any other loans they hold with the lender.

CASHBACK:

Cashback is an incentive offered by many lenders to their customers. A lump sum is paid to the borrower immediately on completion of their mortgage. This might take the form of a fixed amount or a percentage of the advance itself.

Generally, the lower the loan-to-value ratio (commonly abbreviated as LTV), the higher the cashback, as the risk of the lender losing money is reduced, and a lower LTV makes the borrower more attractive to the lender. For example, the cashback may be 3% of the advance for an LTV ratio of up to 80 per cent, and 2 per cent for a higher LTV ratio.

Some or all of the cashback would have to be repaid if the loan is repaid within a specified period.

Discounted rates and cash back may be used as loyalty bonuses or as a way of tempting clients away from competitors. Paying the borrower’s legal fees is another offer commonly made to encourage the borrower to switch to a different lender while incurring the minimum by way of costs.

Loan-to-Value (LTV) Ratio

The amount of the loan in relation to the value of the asset used for security is represented as a percentage. To give an example on a mortgage loan of £80,000 against a property valued at £100,000, the LTV is 80 percent.

Shared ownership:

Typically arranged by housing associations, shared-ownership schemes help people on lower incomes to become owner-occupiers, even if they cannot afford a standard mortgage by themselves.

Shared-ownership schemes enable a borrower to buy a percentage of the property and then pay rent on the remaining. For example, a borrower can purchase a 25% stake in a property, funded by a mortgage, with the option of buying further 25% in the future. As the homeowner increases their share in the property, the mortgage element increases and the rental element goes down.

This process of increasing the mortgage element is sometimes known as staircasing. Be aware that not all lenders offer mortgages for shared-ownership arrangements.

Equity, in mortgage terms, is the excess of the market value of a property over the outstanding amount of any loan or loans secured against it. Equity release plans are designed to enable homeowners who do not have a mortgage on their property to release some of the equity or cash in the property in order to provide capital, or to supplement their income. A homeowner with a small mortgage might also be eligible; the existing mortgage would have to be paid off as part of the agreement. Most schemes are available only to people over a certain age, commonly to those over 60 (and may have a minimum age of 70).

A lender will usually be prepared to lend anything up to a maximum of 55% of the property value for a lifetime mortgage, depending on the borrower’s age at the time. Most lifetime mortgages are on a fixed-rate (the standard lifetime rate) and take into account the fact that the term of the loan is completely unknown.

No regular payments of capital or of interest are made. Instead, the interest is added to the loan (it is ‘rolled up’). When the borrower passes away or moves house, the property is sold on, and the mortgage loan plus rolled-up interest is repaid to that lender. If there are any proceeds remaining once the loan has been repaid, the borrower, or their estate, receives that remaining balance. If the property is owned jointly, the mortgage continues until the second person dies or vacates the property.

A lifetime mortgage can also be arranged on a ‘drawdown’ basis. The lender agrees a maximum limit that they will lend, and the borrower can borrow an initial minimum loan then subsequently draw down further lump sums as they wish, subject to a minimum withdrawal, most typically £2,000 to £5,000. Interest is charged on the amount outstanding in the same way, but this time is rolled over rather than paid each month.

Most lenders also provide a ‘no-negative-equity’ promise, which means that the borrower cannot owe more than the value of the property when the loan is due to be repaid.

The benefit of this type of loan over a standard lifetime mortgage is that interest only accrues on the amount actually lent, so the borrower has some degree of control, and the debt will not increase as rapidly. It will allow the borrower to provide an annual ‘income’ while maintaining control over the rate at which the debt builds up.

Home reversion plans involve the homeowner selling a percentage of, or their entire, house, flat or other property, to the lender. The person(s) still have the right to live in the house, rent-free, until their death(s) or until they go into permanent residential care. At that point in time the property is sold, and the lender receives a share of the proceeds equivalent to their share of the ownership. Basically, if they owned 40 per cent of the property, they would receive 40 per cent of the proceeds from the sale.

With all secured loans, the borrower offers something that has value as security for the loan so that, should they default, the lender can sell that asset (or, in financial speak, ‘realise the security’) and be paid back from the proceeds.

The most common form of secured personal lending is the mortgage loan for house purchase, the security being a first charge on the borrower’s private place of residence.

When property values increase significantly, some people borrow against this increased equity in their home. They might, for example, take out a further loan from their existing mortgage lender, arrange a second mortgage from a different lender or re-mortgage for a bigger amount. The loan is then used to fund purchases such as lifestyle changes.

Most secured lending, therefore, is secured on the house, even where its purpose is not directly or indirectly related to house purchase or improvements on the property.

A legal right to have first call on a property if a borrower defaults on repayment of a mortgage loan.

A legal call on a property after all the liabilities to the holder of the first charge has been met and settled.

Second mortgages

These are created when the borrower gives the property as security for a second time while the first lender still has a mortgage secured on the property.

The new lender takes a second charge on the property whilst the original lender retains the deeds and its charge takes priority over subsequent charges. This means that, in the event of a sale due to default, the original lender’s claim will first be met in full (if possible) and, if sufficient surplus then remains, the second mortgagee’s charge will also then be met.

Lenders will, naturally, only offer a second mortgage if there is sufficient equity in the property and, since second mortgages represent a higher risk to lenders, they are likely to be offered at higher rates of interest than first mortgages as standard.

Advisers must ensure that any advice offered is suitable and client-focused, based on the client’s circumstances, experience, needs and objectives. This requirement was first engineered through legislation by the Financial Services Act 1986, and continues to run under the Financial Services and Markets Act 2000.

In order to develop a factual portfolio of the client, most, if not all, advisers will complete a comprehensive fact find using extensive searches online and through paper-based methods. Prior to embarking on a fact find, fees for the services provided to the client must be disclosed and agreed.

To gather appropriate information, it is necessary to ask questions in respect of the client’s:

• Existing and future needs;
• Ability to provide for these needs;
• Attitude towards providing for them;
• Existing financial situation;
• Objectives;
• Knowledge and experience of investment (if relevant). This will support an assessment of the client’s capacity to understand and accept the risks involved in investment.

The following basic information is needed:

• Personal and family details including full name, address and telephone number.
• Date and place of birth – dates of birth for all those included in the fact find. (The client’s place of birth may be important for underwriting).
• Marital status – if the client is in a relationship, both partners should be involved in the financial planning process, since the decisions made will often affect both partners. Some clients, however, prefer to keep their financial affairs separate from their partner.
• Family details – the client’s family details are important for a number of reasons – there may be family members who are, or will be, financially dependent on the client;
  • The client may become the beneficiary of gifts or trusts
  • The client may wish to become a donor, now or in the future
  • There may be an opportunity for referrals to family members in terms of marketing opportunities.

The most important group of family members is usually the dependants. In order to give appropriate advice about protection against death and disability, as well as about savings for education fees, it is necessary to know their ages (this may include children from previous relationships where appropriate).

Employment status (employed, self-employed, unemployed or retired). It may be necessary to delve deeper and establish basic information about business arrangements if the client is a director or a partner. It also helps to know whether their status is part-time/full-time, temporary/permanent, as well as obtaining details of the client’s profession or trade.

Income and benefits – it is frequently useful to establish an exact breakdown of income by its component parts (for example basic, commission, bonus, etc.), as well as the average level of overall earnings (or net profits in the case of self-employed clients). An adviser must also establish the exact nature of benefits provided, e.g. private medical insurance, company cars, pension and/or death-in-service details (where applicable), subsidised loans, etc.

Previous and/or additional employment – details of previous employment (especially if the client has a preserved pension entitlement), profit-related pay schemes, share-option schemes, details of any further employment. It can be useful to obtain payslips, P60s, tax returns and notices of tax coding as well.

Income and expenditure –looking at a client’s income and expenditure makes it possible to identify more easily the implications of premature death on the family income and spending. It may also be possible to ascertain any surplus income that could be used to fund the purchase of any recommended additional products.

Calculating a household’s income is usually straightforward, but a reliable breakdown of clients’ expenditure can be more tricky. Certain items are easily determined: for example, those paid by standing order, such as rent and household bills. It is usually more difficult to identify or ascertain how much is spent on food and drink, holidays or cars.

Assets

The adviser should acquire details of all a client’s assets, from their home (if they own it) to all bank and savings accounts. Depending on the type of asset, the following details are required:

• Ownership (whether it is a single ownership or jointly owned)
• Purpose of the investment/Type of investment, e.g. property, deposit in a bank account, pension policy or fund/size of original investment and date
• Current value and/or projected future value/rate of return (if applicable)
• Type of return, typically capital growth or income, and whether that return is fixed, guaranteed or variable
• Tax status of the investment or other asset
• Options available and/or penalties
• Sum assured and/or lives assured and maturity dates
• Name of the organisation providing the asset.

Liabilities

The following information should be obtained in relation to a client’s borrowing:

• The lender;
• Amount of loan;
• Balance outstanding/Original term and term remaining;
• Type of loan, whether it is secured or unsecured (and, if secured, on what asset);
• Amount of monthly or other periodic payment;
• Rate of interest;
• Repayment method;
• Protection of capital or payments.

Clients are frequently not aware of the details of the arrangements into which they have entered. It is an adviser’s obligation to obtain this information, and clients should be asked to bring all the details and documentation they have when attending the meeting.

Completion of the first two sections of the fact find (Personal/family details and their financial situation) involves gathering fact-based evidence about tangible items and people involved.

The client’s outlook, plans and objectives are often more intangible. Here, your aim would be to find out ‘why?’, ‘how?’ or ‘when?’ and to discover the client’s thoughts and feelings about what they have, what they want, and how they wish to proceed from a financial point of view. These are known as soft facts.

Clients often have a broader range of financial needs than indicated at first approach, perhaps with only one particular need in mind initially. In order to give the most appropriate advice, advisers must be aware of the possible range of needs that clients might have – and must be able to recognise those needs, even where clients themselves are not aware of them – and make the client aware of options available that do not pose a risk.

Every client is different in terms of their requirements but, in general terms, an adviser should first seek to ensure that there is adequate protection of their lifestyle in the event of illness or death.

Retirement planning might then be the next priority, as it is effectively protecting income for a time when a person either does not want to, or is no longer able to, work. Once the client’s current and future positions are established and protected, attention can then turn to enhancing the portfolio through planning for savings and investment.

Term Assurance:

If you’re looking for simple straightforward life assurance, Term Assurance means you get the benefit of total protection for a limited period of time with absolutely no element of investment involved. For this reason, it is also the least expensive type of insurance.

The ideal product that meets the need for protection against premature death is Term Assurance. It is, in essence, a policy that provides cover over a certain amount of time – and this is called the policy term.

Usually, the cost of the premium for this particular item is quite low; however, you may find that it contains a high expense loading and an allowance for adverse selection.

Term Assurance can be used both for your family and for your own personal protection, as well as for a wide range of business scenarios. The reasons you might want to use it in business includes key person insurance, which protects your business against loss of profit in the circumstance of the death of a key member of the organisation, and partnership insurance schemes or enterprises, which enable the buyout of a deceased partner’s share(s).

This style of assurance provides the person with life cover for a previously agreed period of time. Should the policyholder die during this time, the policy will pay out a lump sum, thus providing a safety net or level of security for those dependent on the individual.

Key Features of Term Assurance

• The term of the policy can range from anything from a few months to 40 years or more; but for terms that end after the age of 65, it may be advisable to take out a whole-of-life policy instead.
• The assured sum is payable only if the death of the assured party occurs within a specified period of time (the term).
• If the life assured party survives the full term covered, the cover then ceases and there is no return of premiums.
• There is no surrender value or cash-in value at any point during the term.
• If premiums are not paid within a certain time after the due date (normally 30 days) the policy lapses, and the cover ceases and has no value. Most organisations will allow reinstatement of payments within 12 months, provided that all outstanding premiums are paid up to date and evidence of continuing good health is provided.
• Normally, premiums are paid annually or monthly, although a single premium payment (a sole payment to cover the entire term assured) is also permitted.
• Premiums are usually ‘level’, so the same amount is paid each month or year, even if the assured sum varies across different years.

With regard to level term assurance, the assured sum remains the same throughout the term. Premiums are normally paid each month or each year, although it is possible for single premium payments to be made.

Level term assurance is frequently used when a fixed amount would be required upon death to repay a constant, fixed-term debt, such as a bank loan. This can also be used to provide family cover in certain circumstances: for example, the term may run until children have finished their full-time education. If it is used for this purpose, the policyholder must be aware that the amount of cover in real terms will be worn down or eroded by the effect of inflation.

With decreasing term assurance, on the other hand, the sum will reduce to nothing over the term of the policy. Premiums could be payable throughout the term, or limited to a shorter period such as two-thirds of the term itself. This kind of policy can be used to cover the outstanding amount on a decreasing debt.

A mortgage protection policy/assurance is the most common use of a decreasing term assurance, being used to cover the amount outstanding on a mortgage repayment scheme. The sum assured is calculated in a way that it remains equal to the outstanding amount on the term, based on a specified rate of interest.

The sum assured, just like the mortgage itself, decreases at a slower rate at the start of the term than it does towards the end.

When using a whole-of-life policy to provide funds likely to be required to pay inheritance tax on the death of a married couple/civil partners, it is common to use the type of policy that is guaranteed to pay out when the second person dies. This is commonly known as a ‘last survivor or joint-life second death’ policy.

A Joint-Life Second Death (JLSD) Whole-of-Life Plan is established in order to pay out upon the death of the second person attached to the policy. Assuming all premiums have continued to be paid throughout the term, the insurers will pay out upon the death of the original surviving partner. This is commonly used to meet potential liabilities for Inheritance Tax.

The reason for this is that, in most family situations, the estate of the first of the spouses to die is passed over to the surviving partner free of IHT, and the IHT only becomes due when the surviving partner dies and the estate is passed on to the remaining family or beneficiaries.

JLSD is typically less expensive than a common Joint-Life First Death insurance scheme, as there is less of a risk to the insurance company. Alternatively, taking out two single policies means that a lump sum can be paid out on both deaths when they occur.

Whole-of-life policies issued on a unit-linked basis are commonly referred to as ‘flexible whole-of-life’ and the flexibility lies in the fact that a variable combination of life cover and investment content are on offer.

With this plan, there is a choice between a minimum guaranteed insurance and a maximum level of cover designed to meet the needs of the person. Subject to certain conditions, changes can be made within the minimum and maximum level of cover required from the initial agreement. The premiums are allocated in unit form and cancelled in order to meet insurance costs on a monthly basis. You will find that levels are reviewed every ten years as standard, but with the exception of more frequent reviews depending on the age of the person(s) to whom the policy relates.

Key Features:

Flexibility is afforded through the method of paying for the life cover by cashing in units at the initial bid price:

• The policyholder pays premiums of an amount that they deem affordable.
• Those premiums are then used to buy units in the opted fund(s) and the units are then allocated to the policy.

The policyholder can select the level of benefits that they wish to have:

• If a higher level of cover is needed, a larger volume of units will be cashed monthly, and a corresponding lower number will remain allocated to the policy. This results in the investment element of the policy (which depends on the number of units involved or included) being lower.
• On the other hand, a low level of cover means fewer units are cancelled and the policy offers a correspondingly higher level of investment.

If the policy’s value is too low to maintain the figure required, there is a choice to reduce the level of cover on offer or possibly increase the premiums. Also, it is possible in some cases that the policy may expire before the death of the policyholder and hold no value. It is possible that some premiums on whole-of-life policies may stop at a previously set age (for example 85 years of age) although the cover may carry on until the person actually passes away.

Other options are frequently available. These include options to take income, a list of benefits (for adjustment of death benefits automatically) and the ability to add another person to the assurance.

Although there can be a high level of investment involved with a whole-of-life assurance, this should not be thought of as a savings scheme, but more as an adaptable protection plan should there be a change of circumstances.

There are usually three main levels of cover on flexible whole-of-life policies offered by most companies, although there is usually an option to choose other levels in-between:

• Maximum cover – you will find that this option is normally set at a level that cover can be maintained for 10 years. After that period, all units would have been used up and increased premiums will need to be paid if cover is to continue.
• Minimum cover – this level of cover is maintained at whatever is the minimum requirement for the policy to remain as a qualifying one, and the number of units attached to the policy builds up to a significant investment element.
• Balanced cover – for a given premium, this level of cover is expected by the company to be able to be maintained throughout the policyholder’s lifetime.

The provider will make an assumption or estimate about the growth rate of unit prices in the future in order to calculate various levels of cover.

Whatever the situation, the initial life cover is guaranteed for a certain period of time, most likely 10 years. Beyond that stage, the company has the right to increase your premiums or conversely reduce your cover to take into account any increase in costs, or to allow for unit prices not rising as quickly as first predicted. The death benefit is then guaranteed until the next review point.

Reviews after this are usually undertaken at five-yearly intervals, or sometimes annually with older policyholders, and further adjustments may be made. The need for this action is the price that individuals or companies may have to pay for the flexibility of the system. The reviews are of benefit to the client(s) because they can lead to the discovery of possible shortfalls at an early juncture, and thus be rectified before a situation could become problematic.

The flexibility of this kind of unit-based whole-of-life assurance can occasionally be extended further by adding a range of other benefits and options to the policy. In this case, the policy is collectively known as universal whole-of-life assurance.

Adjustable life insurance is another term for universal life assurance, and is called so because it offers flexibility and freedom to increase or reduce a person’s death benefit and pay premiums at any given time or amount once there are funds in the account. Of course, this is subject to certain limits and conditions, as you would expect. When a payment is made to the universal plan, a portion of it goes into an investment account and any interest gained is then credited into the policyholder’s account, which can increase the cash value.

Typically, most of the additional benefits will be at extra cost, meeting the additional cost by cashing more units.

If the policyholder’s circumstances change, the death benefit can be adjusted (sometimes with the need of a medical) and premiums lowered. Provided there are enough funds available in the account, the person can use the cash value previously mentioned to meet the payment of the premiums.

These policies are life-assurance policies that combine life assurance and savings. Historically, they were often used as saving schemes and were very popular as a method of funding interest-only mortgages – because the savings side of the scheme could be used to build a fund for mortgage repayment, while the life cover provides a lump sum if the party borrowing dies during the mortgage term.

This is a policy that is bought through a life assurance firm. It is used as a savings plan which pays out a lump sum after a fixed period of time. The policy includes life insurance so that a lump sum is paid out should the policyholder die during the term. Some people use this type of policy for a specific savings plan or for general investment.

There are various types of these endowments, with plans varying according to the structure of the underlying investment.

As the policyholder, you choose the amount you want to save each month, and when you want the policy to end (mature). Based on these contributions, you’re guaranteed a certain pay-out, called an ‘endowment’ when the policy matures.

Endowment policies were once frequently used to pay off Interest-only mortgages; but not anymore as, quite often, the amount generated was not enough to pay off the required amount (endowment) when the policy matured. The endowment can be used for education fees and other costs such as living expenses. If the policy holder should die before the policy matures, the child will receive the death benefit and also still have money for university or college fees.

The range of investment structures offered in these products is similar to those for a whole-of-life plan:

• The difference between an endowment and a whole-of-life plan being that an endowment runs over an agreed term.
• If death occurs during the term, life cover (the guaranteed sum assured) is paid out, whereby if the policy runs for the full term and ‘matures’ an investment value is paid out instead.
• During the term, the policyholder keeps up payment of regular premiums.

Endowment life insurance policies guarantee a certain return on a fixed date, as long as payments are maintained monthly. The cash value isn’t counted against the child’s financial aid eligibility – what’s more, could this be the savings plan you’ve been looking for to help your child through college or University?

A non-profit endowment assures a fixed sum, which is then payable on maturity (when the agreed policy term ends) or upon earlier death; premiums are fixed for the term.

Establishing and maintaining a non-profit endowment fund can be a vital part of ensuring sustainability of a non-profit organisation. An endowment policy involves the investment of a sum of money (known as a corpus) and the corpus may not be drawn down at a future interval except in special circumstances, but various dividends and interest earned can be used for operational purposes.

Because this return is fixed and guaranteed, the policyholder is protected from losses due to unpredictable fluctuating stock market movements; but they are unable to share in any profits the company might make over and above those allowed for in calculating the premium rate (which is why it is referred to as non-profit). For that reason, non-profit policies are rarely used today.

There are subtle differences among endowments, whoch have legal and management implications. The types of funds can be broken down into three basic categories:

• Permanent Endowment
• Temporary Endowment
• Quasi-endowment

Endowments differ from non-profit reserve funds, which are savings used to fill holes in budgets, but are not restricted as to how and when they can be spent by a board or donor.

In an endowment, you will find that some or all of the money is restricted, and they are typically started by setting up a trust fund, gift or some sort of written document with the intention of gifting the fund to the beneficiary.

The founding document, such as the trust fund, will contain and list any restrictions laid out by the donor. If this is not the case, then the person must refer to the law set out by the state.

Similarly, to the above, a with-profit endowment has a fixed basic sum assured and a fixed regular premium. The premium, however, is higher than that for a non-profit policy of the same sum assured, and the additional premium entitles the policyholder to have a share in the profits of the life assurance company.

If the person invests a lump sum or saves regularly, using a life insurance policy, a with-profits fund may be opted for. The aim of this is to give you a return or dividend linked to the stock market but with less fluctuation than a direct shares investment. This involves a high level of complexity and is therefore not as popular as they were in the past.

The company divides its profits among policyholders by declaring bonuses periodically. These increase the value of the policy, and are payable at the same time and in the same circumstances as the sum assured.

With-profits policies are offered by insurers as a medium to long-term investment. The individual’s investment is added to a pot of money alongside other people’s ,and invested in the insurance companies with-profits fund, which is managed by a professional fund investment manager – who invests it in a variety of schemes such as shares, cash, bonds and property.

There are two types of bonus.

Reversionary bonuses – these are typically declared on a yearly basis and, once they have been allocated to your policy, they cannot be removed by the company, provided that the policy is held until the end of the term (or early death).

Some companies just declare a simple bonus, where each annual bonus is calculated as a percentage of the sum assured; others declare a compound bonus, with the new bonus being based on the total of the policy assured sum and the previous bonuses.

Most reversionary bonuses are placed at a level that they hope to be able to maintain for a significant period of time, in order to level out the short-term variations of stock markets. A trend of falling bonus rates over the last few decades means that bonus rates are considerably lower than they were in the 1980s and 90s.

Terminal bonuses –are bonuses that may be given in addition when a death or maturity claim becomes payable. Unlike reversionary bonuses, a terminal bonus does not become an actual part of the policy benefits until death or the point of a maturity claim, thus allowing the company to adjust or change the bonus rate – or sometimes remove the terminal bonus altogether. Terminal bonuses are intended to reflect the level of investment gains that the company has made over the term of the policy, so the rate of bonus can often vary according to the length of time that the policy has been in force. In the last few decades, many companies have reduced the amount given in terminal bonuses.

The running costs are deducted from the fund and the remainder (the profit) is then available to be paid to the investors, and a share of the annual bonuses are added to the policy.

The company attempts to avoid large changes in bonus sizes from one year to another by retaining some of the profits from good years in order to bump up the profits in the bad years, using a process called ‘smoothing’.

‘With-profits’ is the term is used to describe a policy that pays bonuses to the plan. When referring to mortgages, a full with-profits policy defines a policy set up with an initial sum assured that is equal to the mortgage debt. On death, or at the end of the term, the worst possible scenario is that the mortgage is fully repaid. If bonuses have been added then these will raise an additional sum over and above the mortgage when the policy pays out.

When your policy matures you may get what is called a “terminal bonus”, but it is advised to ask for further details about bonuses before buying the policy.

The amount of profit that is earned is dependent on the performance of the investments in the with-profit fund in most policies.

Once bonuses have been added they can’t normally be taken away. If you decide to surrender early, the insurer may apply a Market Value Reduction (MVR) or Market Value Adjustment (MVA) to the policy which may limit some or even all of the bonuses paid. During occasions such as a stock market crash, this is most likely.

The guarantees offered by a full with-profits policy results in higher premiums to be paid. A low-cost or minimum-cost endowment overcomes this obstacle by having a sum assured that is payable on death, whenever death occurs, that is made up of two elements – with-profits and decreasing term assurance.

This type of endowment usually has a 10-year term, which is the minimum qualifying term, with the policyholder making level and regular payments.

A guaranteed sum is paid out upon maturity or early death. Bonuses are added yearly at a declared rate; and upon maturity or early death (whichever comes first) a terminal bonus is added, calculated on a percentage of the total of the bonuses already allocated.

These policies guarantee a death benefit equal to the mortgage, ensuring that it is protected fully. The basic with-profits sum assured is lower than the overall level of mortgage to be funded, meaning that full repayment is not guaranteed.

Bonuses are added over time with the target of building a sum equal to the mortgage by the end of the term. Until the with-profits sum assured plus the bonuses are equal to the mortgage amount, any shortfall on death of the life assured is made up by a decreasing term assurance.

A low-cost endowment policy is a lower cost version of the with-profits scheme. It combines decreasing term insurance with a with-profits endowment. The policy was introduced initially as a more affordable or cheaper way of covering loans for house purchases, with the death sum insured guaranteed to be equal to the loan. Whereas the term insurance element means a guaranteed repayment of the loan upon death, there is no guarantee it will upon maturity.

The amount payable on death is the greater of:

• The basic sum insured plus any bonuses added to the policy.
• The guaranteed death sum insured.

Once the initial sum assured, plus the bonuses, increase beyond the mortgage amount, the decreasing term assurance element stops. This policy is suitable for anyone seeking a with-profits plan but finding that the costs of a full with-profits plan to be prohibitive.

The basic insured sum increases yearly, along with the addition of bonuses, until the guaranteed death sum is overtaken. The term insurance element (the difference between the basic sum and the guaranteed death sum insured) decreases as the bonuses are added; and once the guaranteed death sum is met or overtaken, it will cease.

Unit-linked endowments are a type of investment where the premiums are invested into units of a fund that is unitised.

Unit-linked endowments work on a different basis to the above. When a premium is paid, the amount of the premium – minus an amount for expenses – is applied to the purchase of units in the chosen fund. These units build up over time, and at the maturity date the policyholder receives an amount equal to the total value of all units in the policy.

Units are converted into cash to cover the cost of the assurance. The policyholder is able to choose which funds their premiums are invested in, and to what proportion. The unit prices are regularly published, and the conversion value of the policy is the current value at that time.

Usually, unit-linked endowments also provide a fixed benefit sum if the policyholder dies before the end of the term. The cost of this cover is taken from the policy funds monthly by cashing in an appropriate number of units.

The plan’s value is determined by the value of the underlying units in it, which in turn depends on the investment returns produced by the fund itself. A fund manager will look after the endowment and select appropriate investments in which to invest the policyholders’ premiums. Unit-linked policies can produce higher returns than with-profits policies as this fund manager can be more daring when selecting investments. Unlike with-profits endowments, however, unit-linked policies do not provide any guaranteed minimum return at maturity, thus entailing acceptance of greater risk.

When a unit-linked endowment policy is to be used for a mortgage, the premium required is calculated as the amount sufficient to repay the mortgage at the end of the term if unit prices increase at a specified rate of growth. This rate of growth is usually set at quite a moderate level and is shown on illustrations provided at the start. Policyholders can choose which fund or funds they wish to use for their investment. Should the death of the policyholder occur before the end of the term, the full amount of the mortgage is protected. This is normally achieved by including a further variable term assurance plan which is adjustable in line with the value of the underlying units.

Your premiums buy units at the price offered in a unit-linked fund, or are split into units whereby the price increases in line with declared bonuses and doesn’t decline, or if units have been added they are not taken away. The qualifying policy is a contract. Upon the policyholder’s death the amount to be paid out is either the guaranteed insured sum or the bid value of the units, depending which is higher.

The growth rate is not guaranteed, and it is up to you as the borrower to ensure that the policy will provide sufficient funds to repay the loan at the end of the day. The company will review the progress of the policy periodically and, if necessary, inform the borrower of the need to increase the premiums (or make other provisions) should the policy not be on target. Most companies also provide a facility to switch to a cash fund, or some other similar vehicle, in order to protect the policy from sudden market dips towards the end of the term.

One possible advantage of these policies as a mortgage repayment vehicle is that, in a strongly rising market, the value of the policy may reach the desired or required amount before the end of the term. In that event, the policy can be surrendered and the loan paid off earlier, therefore saving on future interest payments.

Unitised with-profit endowments were introduced to combine the security of the with-profits policy with the greater possible reward given by unit-linked funds. As with unit-linking, premiums are used to purchase units in a fund; and the benefits paid out on a claim depend on the number of units in the plan and the current price of the units at that time.

Under this type of profits plan, each premium or contribution paid in is used to purchase individual units at a typical cost of £1.00 per unit. The value of the plan is increased annually as a result of bonuses being paid, or contractual payments in some situations. Depending on the terms of the specific plan, a final bonus may also be due.

The difference between this and a standard unit-linked policy is that the unit prices increase by the addition of bonuses. Like the reversionary bonuses on a with-profit policy, these cannot be taken away once added, meaning that unit prices cannot fall, and the value of the policy, if it is held until death or maturity, is guaranteed. If the policy is surrendered (for example, cashed in before its maturity date) a deduction is made from the value of the units. This deduction is referred to as a market value adjustment (MVA) and the size of it depends on market conditions at the time of the surrender.

If the policyholder opts to move to another type of plan or withdraw completely at a non-contractual point or before the term ends, the value may decline or be reduced to ensure equality to other persons involved in the With Profits Sub Fund. Depending on the terms of the particular plan, the unit prices may exceed £1.00 to allow for certain fees, expenses or charges incurred or that are applicable to these plans. The guarantees attached can be valuable and difficult to replace. It is often advised that a person seeks financial guidance before making any changes to the plan – such as switching, withdrawing or surrendering the plan.

Types of premiums available

The following types of income protection premiums are currently available – ‘reviewable’, ‘renewable’ and ‘guaranteed’.

Reviewable premiums – a reviewable premium means that premiums may start off quite low, but will be reviewed over time and may go up every few years or so. In some cases, the premium may be reviewable once a year, or every five years, to take into account ever-changing circumstances.

Renewable premiums – renewable premiums are similar to reviewable premiums, but every time the policy is due for review or renewal, the premium is reviewed, and the amount paid to the insurer may change.

Guaranteed premiums – can be more expensive than the other two options, but the premiums are therefore guaranteed for the life of the policy, which can be as long as 25 years.

A premium option waiver may also be provided, whereby premiums for the IPI policy are not required while benefits are being paid from the policy, but the policy cover carries on as normal.

Private medical insurance (PMI) is a protection plan that provides cover for the cost of private medical treatment, removing dependence on NHS care. The range of cover normally provided includes a reimbursement of charges such as:

• In-patient, including accommodation, operating fees, nursing fees, medication, hospital transport;
• Medical and surgical fees including surgeon’s and anaesthetist’s fees, radiology, pathology, etc.;
• Out-patient including consultations and home nursing care.

If you have a treatable condition, then this type of cover pays for your healthcare costs. It covers overnight stays, outpatient treatment, tests/diagnostics, aftercare etc. so long as it is part of the agreement in the contract. Health insurance covers the cost of medical treatment for conditions such as digestive system related issues and back pain, to name two. This is because these particular ailments are most likely to have a quick response to treatment and are among the most frequent claims.

It is possible to find policies that offer further benefits such as the payment of a daily rate, if treatment is delivered within an NHS hospital involving an overnight stay.

Whilst there are a multitude of policies to select from, you will find that the basic plans offer the cover of essential treatments, the more comprehensive policies can include chiropody or acupuncture. To summarise, a sum is paid on a monthly basis to the insurance company, and the company pays any fees incurred, including stays in hospital and surgery (if required).

PMI can be arranged on an individual basis or as part of a group scheme from an employer. The way in which benefits are paid varies between providers. Some will offer a 100% refund of charges with payment direct to the healthcare provider, while others impose a ceiling on the amount that can be reclaimed in any one year.

As health insurance covers the cost of private medical attention, people take out this type of cover because they can receive faster consultations and treatment, and this can be carried out in both private and NHS hospitals.

Premiums are themselves subject to insurance premium tax, but benefits are paid out free of tax. Employers who contribute to PMI on behalf of their employees are able to claim the cost as a deduction against corporation tax, as above.

Employer contributions are regarded as a benefit-in-kind as far as the employee is concerned, and are therefore taxable.

Long-term care insurance (LTC) is the provision of funds to meet the costs of care that may arise along the way, when a person is no longer able to perform competently some of the daily basic actions involved in looking after themselves.

Long-term care insurance policies are no longer sold. They were used to provide a regular form of income to meet the cost of nursing home fees, or for home care to those no longer able to take care of themselves properly for reasons such as a disability or old age. The needs of an individual would have to be discussed with an advisor to ensure that needs are met with the cover provided.

The need for this cover has increased because:

• Families are less able to take care of elderly relatives than perhaps they were in earlier generations (maybe because they live further away from each other, there are restrictions on their time, or because their accommodation is unsuitable);
• People are living longer these days;
• Expectations of quality of life in later years are higher;
• There are worries or concerns about the standard of care that the state and the NHS can realistically be relied upon to provide.

• Monthly payments rise and fall in line with changes in interest rate.
• It is hard to predict what future payments will be, therefore making budgeting quite difficult.

• The Interest rate is discounted from the standard variable rate (SVR).
• There may be penalties for early repayment.

• The Interest rate is fixed for a specific time period (typically between one and five years) then reverts to the variable rate (SVR).
• This makes it easier for borrowers to budget.
• There may be a significant standard arrangement fee, and penalties or restrictions on switching to another lender.

• The interest rate is variable within a specified upper limit (the cap).
• This allows borrowers to budget within set parameters.
• Borrowers can benefit from falls in interest rates (as far as any collar limit set, i.e. a minimum level).
• Products that also have a specified lower limit are called ‘cap and collar’ mortgages.

• Interest moves up and down in line with changes in bank rate.
• Please be aware that a tracker mortgage is not at the same rate as the bank rate – the lender’s rate will be a little higher in most cases.

• The flexibility to overpay, underpay and/or take payment holidays without incurring penalties or charges.
• Interest is usually calculated on daily basis.
• Options can include current account and offset mortgages.

• Repayment mortgages with lower payments to start, during which capital is not repaid.
• These are suitable for borrowers keen to keep outgoing payments low in the early years.
• Higher payments will be required after that initial period to make sure repayment of capital is taking place.

• The interest payments are deferred until later down the line.
• This suits borrowers who might expect their income to increase over the term of the mortgage.
• Not suitable for those who borrow a high proportion of the property value, because of the ongoing increased risk of ‘negative equity’.

These mortgages give the borrower some flexibility to change their monthly payments to suit the person’s ability to pay, as well as the opportunity to pay off the mortgage more quickly. Although there is no exact or precise definition of a flexible mortgage, it is generally considered that such a product should offer the following basic features as standard:

• The facility to make overpayments at any time without incurring an early repayment charge;
• The interest is calculated on a daily basis;
• There is a facility to underpay, but only within certain limits set by the lender;
• The facility to take a payment holiday, again within boundaries laid out from the start.

Two key benefits of these features are as follows:

• The mix of a daily interest calculation and occasional/regular overpayments will result in considerably less interest being paid overall, and the mortgage term being reduced.
• The ability to reduce monthly payments (or suspend them completely) for a limited time will be helpful for someone experiencing temporary financial problems. In these circumstances, a borrower may be able to borrow back overpayments made earlier in the term.

Many lenders are now offering flexible mortgages with a fixed, discounted or capped rate for an initial, interim period. Early repayment charges do not usually apply to these products, but an arrangement fee may be chargeable and, in some cases, a particular insurance product must be purchased from the lender at the same time.

Most flexible mortgages will allow the borrower to draw down further funds as and when required, although the lender will have set a limit on total borrowing at the commencement of the agreement.

Flexible mortgages involve a much simpler administrative process than is usual when dealing with further advances. The way in which the mortgage deed is generally worded for flexible mortgages is such that all additional funds withdrawn, within the limit on total borrowing, will automatically take priority over any other subsequent or further charges registered against the property.

Cashback is an incentive offered by many lenders to their customers. A lump sum is paid to the borrower immediately on completion of their mortgage. This might take the form of a fixed amount or a percentage of the advance itself.

Generally, the lower the loan-to-value ratio (commonly abbreviated as LTV), the higher the cashback, as the risk of the lender losing money is reduced, and a lower LTV makes the borrower more attractive to the lender. For example, the cashback may be 3% of the advance for an LTV ratio of up to 80 per cent, and 2 per cent for a higher LTV ratio.

Some or all of the cashback would have to be repaid if the loan is repaid within a specified period.

Discounted rates and cash back may be used as loyalty bonuses or as a way of tempting clients away from competitors. Paying the borrower’s legal fees is another offer commonly made to encourage the borrower to switch to a different lender while incurring the minimum by way of costs.

The amount of the loan in relation to the value of the asset used for security is represented as a percentage. To give an example on a mortgage loan of £80,000 against a property valued at £100,000, the LTV is 80 percent.

Typically arranged by housing associations, shared-ownership schemes help people on lower incomes to become owner-occupiers, even if they cannot afford a standard mortgage by themselves.
Shared-ownership schemes enable a borrower to buy a percentage of the property and then pay rent on the remaining. For example, a borrower can purchase a 25% stake in a property, funded by a mortgage, with the option of buying further 25% in the future. As the homeowner increases their share in the property, the mortgage element increases and the rental element goes down.
This process of increasing the mortgage element is sometimes known as staircasing. Be aware that not all lenders offer mortgages for shared-ownership arrangements.

Employment status (employed, self-employed, unemployed or retired). It may be necessary to delve deeper and establish basic information about business arrangements if the client is a director or a partner. It also helps to know whether their status is part-time/full-time, temporary/permanent, as well as obtaining details of the client’s profession or trade.
Income and benefits – it is frequently useful to establish an exact breakdown of income by its component parts (for example basic, commission, bonus, etc.), as well as the average level of overall earnings (or net profits in the case of self-employed clients). An adviser must also establish the exact nature of benefits provided, e.g. private medical insurance, company cars, pension and/or death-in-service details (where applicable), subsidized loans, etc.
Previous and/or additional employment – details of previous employment (especially if the client has a preserved pension entitlement), profit-related pay schemes, share-option schemes, details of any further employment. It can be useful to obtain pay slips, P60s, tax returns and notices of tax coding as well.
Income and expenditure –looking at a client’s income and expenditure makes it possible to identify more easily the implications of premature death on the family income and spending. It may also be possible to ascertain any surplus income that could be used to fund the purchase of any recommended additional products.
Calculating a household’s income is usually straightforward, but a reliable breakdown of clients’ expenditure can be more tricky. Certain items are easily determined: for example, those paid by standing order, such as rent and household bills. It is usually more difficult to identify or ascertain how much is spent on food and drink, holidays or cars.

Assets
The adviser should acquire details of all a client’s assets, from their home (if they own it) to all bank and savings accounts. Depending on the type of asset, the following details are required:

• Ownership (whether it is a single ownership or jointly owned)
• Purpose of the investment/Type of investment, e.g. property, deposit in a bank account, pension policy or fund/size of original investment and date
• Current value and/or projected future value/rate of return (if applicable)
• Type of return, typically capital growth or income, and whether that return is fixed, guaranteed or variable
• Tax status of the investment or other asset
• Options available and/or penalties
• Sum assured and/or lives assured and maturity dates
• Name of the organization providing the asset.

Liabilities
The following information should be obtained in relation to a client’s borrowing:

• The lender
• Amount of loan
• Balance outstanding/Original term and term remaining
• Type of loan, whether it is secured or unsecured (and, if secured, on what asset)
• Amount of monthly or other periodic payment
• Rate of interest
• Repayment method
• Protection of capital or payments.

Clients are frequently not aware of the details of the arrangements into which they have entered. It is an adviser’s obligation to obtain this information, and clients should be asked to bring all the details and documentation they have when attending the meeting.

Completion of the first two sections of the fact find (Personal/family details and their financial situation) involves gathering fact-based evidence about tangible items and people involved.
The client’s outlook, plans and objectives are often more intangible. Here, your aim would be to find out ‘why?’, ‘how?’ or ‘when?’ and to discover the client’s thoughts and feelings about what they have, what they want, and how they wish to proceed from a financial point of view. These are known as soft facts.

Clients often have a broader range of financial needs than indicated at first approach, perhaps with only one particular need in mind initially. In order to give the most appropriate advice, advisers must be aware of the possible range of needs that clients might have – and must be able to recognize those needs, even where clients themselves are not aware of them – and make the client aware of options available that do not pose a risk.
Every client is different in terms of their requirements but, in general terms, an adviser should first seek to ensure that there is adequate protection of their lifestyle in the event of illness or death.
Retirement planning might then be the next priority, as it is effectively protecting income for a time when a person either does not want to, or is no longer able to, work. Once the client’s current and future positions are established and protected, attention can then turn to enhancing the portfolio through planning for savings and investment.

If you’re looking for simple straightforward life assurance, Term Assurance means you get the benefit of total protection for a limited period of time with absolutely no element of investment involved. For this reason, it is also the least expensive type of insurance.

The ideal product that meets the need for protection against premature death is Term Assurance. It is, in essence, a policy that provides cover over a certain amount of time – and this is called the policy term.

Usually, the cost of the premium for this particular item is quite low; however, you may find that it contains a high expense loading and an allowance for adverse selection.

Term Assurance can be used both for your family and for your own personal protection, as well as for a wide range of business scenarios. The reasons you might want to use it in business includes key person insurance, which protects your business against loss of profit in the circumstance of the death of a key member of the organisation, and partnership insurance schemes or enterprises, which enable the buyout of a deceased partner’s share(s).

This style of assurance provides the person with life cover for a previously agreed period of time. Should the policyholder die during this time, the policy will pay out a lump sum, thus providing a safety net or level of security for those dependent on the individual.

Key Features of Term Assurance

• The term of the policy can range from anything from a few months to 40 years or more; but for terms that end after the age of 65, it may be advisable to take out a whole-of-life policy instead.
• The assured sum is payable only if the death of the assured party occurs within a specified period of time (the term).
• If the life assured party survives the full term covered, the cover then ceases and there is no return of premiums.
• There is no surrender value or cash-in value at any point during the term.
• If premiums are not paid within a certain time after the due date (normally 30 days) the policy lapses, and the cover ceases and has no value. Most organizations will allow reinstatement of payments within 12 months, provided that all outstanding premiums are paid up to date and evidence of continuing good health is provided.
• Normally, premiums are paid annually or monthly, although a single premium payment (a sole payment to cover the entire term assured) is also permitted.
• Premiums are usually ‘level’, so the same amount is paid each month or year, even if the assured sum varies across different years.