CeMAP - Certificate in Mortgage Advice and Practice Advising on Protection Products Questions and Answers 1 — Questions and Answers
Question 1: A client has a £200,000 capital and interest repayment mortgage over a 25-year term. They want life insurance to ensure the mortgage is paid off upon their death. Which type of policy would be the most suitable and cost-effective recommendation to meet this specific need?
- A Whole of Life policy
- A Level Term Assurance policy
- A Decreasing Term Assurance policy (Correct answer)
- An Endowment policy
Correct answer: A Decreasing Term Assurance policy
Decreasing Term Assurance is designed specifically for repayment mortgages. The sum assured decreases over the term of the policy, broadly in line with the outstanding mortgage balance. This makes it more cost-effective than Level Term or Whole of Life policies, which would over-insure the debt in the later years.
Question 2: An adviser is discussing Income Protection (IP) with a self-employed client. The client has significant savings that could cover their expenses for six months. How would this information most likely influence the adviser's recommendation?
- It would mean Income Protection is not required.
- It would suggest a higher monthly benefit is needed.
- It would allow for a longer deferred period, reducing the premium. (Correct answer)
- It would require the policy to be written in trust immediately.
Correct answer: It would allow for a longer deferred period, reducing the premium.
The client's savings can act as a buffer, allowing them to self-fund for an initial period of incapacity. By selecting a longer deferred period (e.g., 26 weeks instead of 4 weeks), the premium for the Income Protection policy will be lower, making the cover more affordable. The need for income protection still exists for long-term incapacity.
Question 3: Which of the following statements BEST describes the key difference between Critical Illness Cover (CIC) and Income Protection (IP)?
- CIC pays a monthly income, while IP pays a one-off lump sum.
- CIC covers any illness that stops you from working, while IP only covers specified conditions.
- CIC is only available with a mortgage, whereas IP is a standalone product.
- CIC pays a tax-free lump sum on diagnosis of a specified condition, while IP provides a regular replacement income if the policyholder is unable to work. (Correct answer)
Correct answer: CIC pays a tax-free lump sum on diagnosis of a specified condition, while IP provides a regular replacement income if the policyholder is unable to work.
The fundamental difference lies in how they pay out and what they are designed for. Critical Illness Cover provides a one-off lump sum to help with major life changes or to pay off a mortgage upon diagnosis of a specific serious illness. Income Protection is designed to replace lost earnings by providing a regular, ongoing income stream during a period of incapacity due to illness or injury.
Question 4: Under the FCA's Consumer Duty, an adviser must 'act to deliver good customer outcomes'. In the context of mortgage protection, what does this primarily require the adviser to do?
- Ensure the client buys at least one protection policy with their mortgage.
- Recommend the cheapest policy available regardless of the features.
- Discuss and assess the financial risks of death or incapacity, helping the client avoid foreseeable harm. (Correct answer)
- Provide the client with a list of insurers and allow them to choose for themselves.
Correct answer: Discuss and assess the financial risks of death or incapacity, helping the client avoid foreseeable harm.
The Consumer Duty places a strong emphasis on avoiding 'foreseeable harm'. For a mortgage client, death or loss of income due to illness are foreseeable risks that could lead to losing their home. A key part of delivering a good outcome is making the client aware of these risks and discussing appropriate solutions, even if the client ultimately declines cover.
Question 5: A couple are taking out an interest-only mortgage. They require life assurance to repay the capital at the end of the term should one of them die. Which of the following policies would be most suitable for this purpose?
- Family Income Benefit
- Level Term Assurance (Correct answer)
- Decreasing Term Assurance
- Accident, Sickness and Unemployment cover
Correct answer: Level Term Assurance
With an interest-only mortgage, the capital debt remains the same (£250,000) throughout the mortgage term. Therefore, a Level Term Assurance policy is most suitable as it provides a fixed, level sum assured that will be sufficient to repay the full mortgage capital if a claim is made at any point during the policy term.
Question 6: When a client applies for a protection policy, such as life or critical illness cover, they have a duty to disclose all relevant information to the insurer. What is the primary consequence if a client fails to disclose a material fact?
- The monthly premium will automatically be increased.
- The policy will be converted to a more basic level of cover.
- The Financial Conduct Authority (FCA) will fine the client.
- The insurer could reject a future claim and declare the policy void. (Correct answer)
Correct answer: The insurer could reject a future claim and declare the policy void.
Non-disclosure of a material fact (e.g., a pre-existing medical condition) gives the insurer the right to treat the policy as if it never existed (voiding it from inception). This means they can refuse to pay a claim, as the contract was based on incomplete or inaccurate information. This is a fundamental principle of insurance contracts.
CeMAP - Certificate in Mortgage Advice and Practice Advising on Protection Products Questions and Answers 1
A client has a £200,000 capital and interest repayment mortgage over a 25-year term.
They want life insurance to ensure the mortgage is paid off upon their death.
Which type of policy would be the most suitable and cost-effective recommendation to meet this specific need?