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Academic year: 2021



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Fact finding – R05 Financial Protection


This guide is part of our support material for the R06.

These guides identify the key areas that may be examined and have deliberately been kept concise to enable you to manage your time effectively – remember we will provide you with a full analysis of the actual case study that you will sit, and our experts will be online to help with any of your questions.


The first step for the R06 is to know the options and the when they may apply, the main types of financial protection that could come up include:

 Life assurance

 Income Protection Insurance – (IPI)

 Critical Illness Cover – (CIC)

 Mortgage Payment Protection Insurance (MPPI) and Payment Protection Insurance (PPI)

 Personal accident and sickness insurance (PAS)

 Accident, sickness and unemployment insurance (ASU)

 Long-term care insurance (LTCI)

 Private Medical Insurance (PMI)

When could it apply?

Remember, this exam is for us to demonstrate our financial planning skills and the case study could cover:

 Health, incapacity or accident

 Income, mortgage and other debt

 Death

 Asset Protection

 Divorce

 Business Protection

What are the possible sources?

The case study will be set in different scenarios with the individuals needing to secure protection from:

 The state

 An employer

 Life assurance and pension policies

 Health and other insurances

Don’t worry, our detailed solution will provide all the information you will need for your case study. These guides are part of the FinancialAdviserExam library to cover the main technical areas.


Fact finding – R05 Financial Protection


When reviewing the protection position, no policies should be cancelled or amended until the correct revised cover is in place.

remember – write it down – secure a mark Remember, the R06 is a fact finding exam, you are demonstrating your fact finding skills and applying your technical

knowledge to the circumstances in the case study.

Before we make any recommendation, we must first make sure we understand the current position and future intentions:

What fact finding questions should we be considering for R06?

 What protection is in place currently?

 Why are these policies in place?

 What is the cost?

 What can they afford to pay?

 Are there children? How would they cope financially with looking after family should they suffer from death or critical illness of either party?

• Any dangerous hobbies/occupation/lifestyle?

 Any future investment planning, e.g. school fee planning or university fee planning which might require additional protection to cover this?

• financial commitments

• What are his future plans and priorities?

• Attitude to risk – this would be relevant if the recommendation included an element of investment – ie unit linked whole of life.

Other questions

• smoker status

• health and family history

• providing for children i.e. independence or longer university plans

• attitudes to putting protection plans in trust.

• affordability.


Fact finding – R05 Financial Protection

Remember, within the R06 exam, you are identifying and quantifying the protection needs of the individuals in the case study. It is unlikely that you will secure a mark for knowing the claims for employment support allowance before 27 October 2008, you might, but we should focus our attention on the core areas:

• Life Assurance

• Income Protection

• Critical Illness Insurance

• Private Medical Insurance

With your fact finding skills and understanding in the core areas, you are on your way to securing R06 success, R06 – Five step guide to the life assurance planning

Step 1 Identify the need for life cover – who would suffer financially if the client died?

Step 2 Determine the amount of capital and income needed if the client dies. Focus on settling any immediate liabilities, income needs short term and long term.

Step 3 How long the cover should last Step 4 Consider existing policies Step 5 Your recommendation Income protection and Critical Illness

Income Protection Critical Illness

Provides an income for as long as the policyholder is unable to work

Provides a capital lump sum on the diagnosis of one of a number of specified critical illnesses

Pays out for illnesses that may not be covered by critical illness – (mental illness)

Can be combined with life assurance

Continues to the individuals retirement age Could compliment Income Protection – ie provide an income in retirement when income protection would stop.

Does have limitations whether the individual can work, based on an individual’s earnings therefore benefit may not be sufficient.

Not linked to earnings

Private medical insurance (PMI)


 PMI is a high priority for many individuals, in the R06 world, this is especially true for the self employed where any illness could reduce their income.

 Many clients would want to choose when they can receive treatment and appreciate the additional benefits from private hospitals and medical centres.


Fact finding – R05 Financial Protection

Know your product

Level Term Assurance Family Income Benefit

Fixed lump sum that is payable on death Designed to pay monthly income to survivor on death of life assured

Term specific to match needs – i.e. mortgage Inflation proofed

Tax free benefit – although consider IHT Typically a cheap form of life cover No cash in value Write in trust or life of another Write in trust or life of another

Income Protection Plan (PHI) Critical Illness Cover Tax free income if unable to work due to

sickness, accident or disability

Payout on diagnosis of a specified illness Can claim more than once Tax free lump sum

Benefit linked to salary levels Benefit is not based on income level – but the policyholder may set it at a level to repay mortgage etc

Pays out until death or return to work or selected retirement age

Children cover can be included Underwriting may be required

Joint policies that pay out on first claim Available

Accident Sickness Private Medical Insurance

Can provide lump sum on loss of limp or Death

To pay for private health care Is not dependent on income Can cover the whole family Premium is linked directly to benefit amount Excludes pre-existing conditions Minimal underwriting

Benefits are tax free

Short term benefit – 12 -24 months Can be cancelled by insurer and review Annually

Minimal underwriting


Remember, make your statement, explain your reason and why – these three simple steps will help you on your way.

remember – write it down – secure a mark


Fact finding – R05 Financial Protection

State benefits

We have seen questions on state benefits appear in the R06 exam, the main benefits are:

• Child benefit

• State pension

• Maternity allowance Child Benefit

Remember, this remains tax free until 2013, however the intention is that this will be removed where anyone earns over


There are two separate amounts - you get £20.30 a week for your eldest child and £13.40 a week for each of your other children.

Statutory Maternity Pay (SMP)

A weekly payment made by the employer.

To qualify for SMP a woman must have been:

• Employed by the same employer continuously for at least 26 weeks into the 15th week before the week their baby is due (the qualifying week)

• Earning on average an amount which at least equals the lower earnings limit which applies on the Saturday at the end of their qualifying week

The lower earnings limit is the amount individuals have to earn before they are treated as paying National Insurance Contributions. This is £97 a week if the end of their qualifying week is in the 2010-11 tax year.

All benefits payable are taxable as income.

Maternity Allowance

Payable to those who are pregnant or have a new baby, but don't qualify for Statutory Maternity Pay (SMP) from any employer. Individuals might get Maternity Allowance if:

• They are employed, but not eligible for Statutory Maternity Pay

• They are registered self-employed and paying Class 2 National Insurance Contributions (NICs), or hold a Small Earnings Exception certificate

• They have very recently been employed or self-employed

• They have been employed and/or self-employed for at least 26 weeks in their 'test period' (66 weeks up to and including the week before the week the baby is due). Part weeks count as full weeks

They earned £30 a week averaged over any 13 weeks in the test period. Earnings from employment and earnings treated as if self-employed are used to work out the Maternity Allowance


Fact finding – R05 Financial Protection

How ready are you for the RO6? Here is a question focusing on Financial Protection. The marks allocated are similar to what you could see on the day.


David and Justine, aged 40 and 35 respectively, are married with three children.

David is an in-house accountant for a major firm and earns £115,000 per annum. Justine, previously an Executive Assistance, stopped work when Andrew was born and has no plans to return to work in the immediate future.

David and Justine currently hold an interest only mortgage of £340,000 on their home which is worth £450,000.

David’s employer will pay his salary for up to six months if he is unable to work due to sickness or accident. He has no other employee benefits.

David and Justine have a unit-linked whole of life assurance policy written on a joint life first death basis. This has a sum assured of £340,000 and is on a maximum cover basis. It was taken out to repay the mortgage in the event of death.


1. Comment on the suitability of David and Justine’s existing protection arrangements to meet their life assurance

needs. (10)

2. Recommend and justify suitable protection products for David and Justine should either of them die. Assume their

mortgage remains on its current basis. (12)

3. Identify any gaps in David and Justine’s provision to meet financial needs in the event of serious illness or long-term

disability. (6)

4. Recommend and justify suitable protection arrangements for David and Justine should either of them suffer a

serious illness or long-term disability. (15)

If a question of this style was to come up in the exam – you are looking to collect 43 marks. Have a think how you would answer and then see the next page for what the CII expect.


Fact finding – R05 Financial Protection



 The unit linked whole of life policy is not suitable for David and Justine because they wish to take a very low risk approach to their finances.

 Does not match their attitude to risk.

 Sum assured matches the mortgage.

 Premium reviewed/may increase at review.

 Term not linked to mortgage/will continue for whole of life.

 Premium likely to be higher than term assurance.

 They do not have any other provision to replace income in the event of either death.

 They are wholly reliant on David’s income.

No provision for child care if Justine dies.


 Effect family income benefit policy/level term assurance (LTA).

 Joint Life First Death/two single lives.

 At least until retirement as he is the breadwinner.

 Until children no longer dependant to cover costs of child care.

 To cover outgoings/income need/£100,000 per annum/half million.

 Guaranteed premium.

 Matches attitude to risk.

 Include escalation to offset effects of inflation.

 Waiver of premium to protect contributions in the event of incapacity.

 Policies to be written under trust/life of another.

 To be kept outside the estate/avoid probate.

 Joint Life First Death LTA to cover mortgage.

 May be cheaper/more suitable than whole of life.


 After six months David’s income ceases.

 No income replacement insurance/Income Protection Insurance.

 No cover for childcare if Justine falls ill.

 They have no critical/serious illness cover.

 May be eligible for State benefits but likely to be minimal.

 No Private Medical Insurance in place.


 An Income Protection Insurance policy;

 for David based on the maximum benefit/50-75%.

 Own occupation.

 To retirement.

 Indexation.

 In order to provide an income if David cannot work.

 With a six month deferred period to match his employers benefits.

 An Income Protection policy for Justine until children no longer dependant


Fact finding – R05 Financial Protection

 Critical Illness cover.

 For at least the mortgage amount.

 Until retirement/mortgage term.

 To repay mortgage/provide capital/income for other needs.

 Private Medical Insurance.

 For family cover/David and Justine.

 Quick treatment/return to work.

How did you do?

Remember, our solution will pick up the likely angles and provide the answers for the case study that you will sit.


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