1. CISI – Financial Products, Markets & Services
Topic – Other Retail Financial Products
(10.3 and 10.4) Life Assurance and Protection Insurance

2. Life and Protection Insurance
Provides individuals with some financial protection in case certain events occur.
Insurance protects against something that might happen e.g. Loss of job, burglary or death in the next 25-years
Assurance helps to minimise the financial impact of events that will definitely happen e.g. death
The big insurance companies are global operations, so the range of products they offer have common features and are similar wherever they are sold.

3. Life Assurance
Life assurance policies involve the payment of premiums (i.e. fees) in exchange for life cover (a lump sum payable upon death)
These policies are commonly taken out to....
provide for dependants after death (typically the spouse and children)
pay off any outstanding mortgage on the death of the borrower

4. Provides PERMANENT cover and pays out whenever death occurs
Types of life cover
There are two main types of life cover: OR
Whole-life Policy
Term Assurance
Provides cover for a fixed period of time and will pay out if death occurs during that period
Provides PERMANENT cover and pays out whenever death occurs
Referred to as Life assurance as the person will die at some point and the policy will pay out when this happen
Referred to as Life insurance as the person might die during the fixed period of the policy. The policy will only pay out if death occurs within the period covered

5. Types of life cover – term assurance
Terms
Purposes
Premiums
Funds available to pay off any outstanding mortgage
The amount paid for the policy will depend upon:
Policy is for a set period of time
The amount insured
Policy length
Personal profile:
Provides a lump sum used to generate income for a surviving partner
Age - the older you are, statistically the more likely to die within the term
20 years
25 years
Policyholder selects the sum to be paid out if death occurs in the period
Sex - women have longer life expectancy than men
Family history - certain diseases are hereditary
Funds to pay any tax that might become payable on death.
Smoker? Non-smokers will pay less for their policy
Hobbies – dangerous sports?
Occupation – dangerous job?

6. Types of life cover – term assurance
There are three types of term assurance cover:
Type of term assurance
Level of cover
Premiums
Level Cover
Remains the same throughout the period in which the policy is in force
Fixed at the outset and do not change during the period of the policy.
Increases each year – often rise by inflation or a set percentage
Increases each year in line with inflation or a set percentage
Increasing Cover
Decreases each year – often linked to a mortgage which would be paid out on death
Fixed at the outset and do not change during the period of the policy.
Decreasing Cover

7. Types of life cover – whole-of-life assurance
Whole-of-life assurance policies pay out on the death of the policy-holder, regardless of when that might occur. They are usually linked in with investment plans.
There are three types:
1. Non-profit policy
Offers a set amount of cover (pay-out) on the death of the person, regardless of when that might occur:
The insured sum is chosen at the outset and is fixed
Guaranteed amount paid out means that the policy does not depend on investment growth
There is no ‘savings’ portion for this type of policy
Equivalent of a term policy where the term will only end when the insured dies
Premiums are often very high.
A quotation for whole-of-life non-profit policy for a male non-smoker, aged 54 (statistically likely to live another 25 years). 25 years worth of premiums at £50 per month makes a total of £15,000. Invested in gilts at 4%, those premiums would provide a nominal return of over £25,000

8. Types of life cover – whole-of-life assurance
2. With-profits policy
Offers a minimum amount of cover (pay-out).
If the insured dies during the policy period:
The minimum cover is increased each year by the addition of annual bonuses:
Bonuses are based on the performance of the underlying investment portfolio run by the insurance company
Bonuses are usually spread out over a number of years to smooth the effect of fluctuating stock market returns
In a good year not all of the positive return will be added to the allocated bonus which should enable the insurance company to add a bonus even in a bad year
Profits are locked in each year, ie, the bonuses permanently increase the basic guaranteed sum

9. Types of life cover – whole-of-life assurance
2. With-profits policy
A typical scheme might pay out:
The sum assured or guaranteed sum, which is usually an amount a little less than the premiums paid over the term;
Annual bonuses - If the underlying performance of the investments in the fund is better than expected part of the
A terminal bonus at the end of the period:
It is not declared until the end of the policy term.
Tops up the policy to give it the appropriate share of the with-profits fund.

10. Types of life cover – whole-of-life assurance
3. Unit-linked policies
Premiums
Savings
Life assurance cover
Buys units in the insurance company’s investment fund as opposed to allocating them to the with-profits fund.
The eventual return will be dependent upon the performance of the funds selected.
As with with- profits
policies, investment
returns of unit-linked
policies are usually
smoothed to reduce
volatility

11. Protection Planning Family & Personal
There are four main areas that might be in need of protection:
Area for Protection
Type of cover
Purpose
Critical Illness Cover
Illness may force an individual to give up work – replaces earnings from work
Family &
Personal
Pay a lump sum in the event that a person suffers from any one of a wide range of critical illnesses
Pay for specialist medical treatment
Costs that permanent disability bring
Income Protection Cover
Pays bills if the main income-earner were to fall ill – can be expensive
pay out an income benefit when a person is unable to work for a prolonged period due to sickness or incapacity
Accident and Sickness Cover
Short-term cover – relatively inexpensive but exclusions and limits apply
taken out for annual periods and can provide for income or lump sum payments in the event of an accident.
Medical Insurance
Cover the cost of medical and hospital expenses
Household Cover
Cover the cost of rebuilding
Covers possessions stolen
Covers weather damage
Covers accidents

12. Protection Planning Mortgage Long-term Care Business
Area for Protection
Type of cover
Purpose
Mortgage Payment Protection Cover
Mortgage
Short-term loss of earnings
Covers if a person is ill
Payments that are due for a mortgage continue to be paid after an unfortunate event. Available from the lending institution, as well as insurance companies.
Covers if a person loses their job
Covers if a person has an accident
Long-term
Care
Long-term Care Cover
Covers the cost of nursing home care – premiums are expensive
Provide the funds that will be needed in later life to meet the cost of care.
Normally be paid as an income that can be used to cover the expenditure.
Business
Business Cover
Key person may become ill or die – the business may no longer be able to generate sufficient profits without the key person’s contribution.
A substantial shareholder or partner within the business may die. Their shareholding or partnership stake may need to be bought out by the remaining shareholders/ partners.

13. Remember.....
The higher the risk, the higher the reward must be to compensate for that risk