Financial Protection Fundamentals

• Topic 01

  Financial Protection Fundamentals

  69 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A client wishes to take out a life policy on the life of a business partner. Which of the following correctly describes the legal requirements for this arrangement?

   • A
     No insurable interest is required between business partners; any person may insure any other person's life
   • B
     Insurable interest must exist at the time of claim, not just at policy inception, for business life policies
   • C
     The client has unlimited insurable interest in a business partner's life, identical to the interest spouses have in each other's lives
   • D
     The client (as policyholder) must have insurable interest in the business partner's life up to the financial value of that interest, and the business partner must consent to being the life assured
     Correct answer
   Explanation

   Business partners have insurable interest in each other's lives, but only up to the financial value of that interest (e.g. the value of the business interest that would be lost on death). This contrasts with spouses and civil partners who have unlimited insurable interest in each other. The life assured must consent to being insured. For life assurance, insurable interest must exist at inception — not necessarily at the time of claim (unlike general insurance where it must exist at both). This is a frequently tested distinction.

2. A small business owner applies for commercial income protection insurance and fails to disclose that their business is in significant financial difficulty. The Insurance Act 2015 applies. The insurer argues this was a deliberate omission. What remedy is available to the insurer, and what must the business owner pay back?

   • A
     The insurer may only impose a retrospective premium adjustment as avoidance is not available under commercial insurance law
   • B
     The insurer must refer the matter to the Financial Ombudsman Service before taking action on the policy
   • C
     The insurer may avoid the policy from inception; it need not return the premiums for a deliberate or reckless breach under the Insurance Act 2015
     Correct answer
   • D
     The insurer may void the policy and retain premiums only if the financial difficulty directly caused the claim
   Explanation

   Under the Insurance Act 2015, for a deliberate or reckless qualifying breach of the duty of fair presentation, the insurer's remedy is to avoid the policy from inception and retain the premiums — the same approach as under the old common law for deliberate concealment. Proportionate remedies apply only to non-deliberate breaches. Financial difficulty would be a material circumstance for income protection underwriting, making its non-disclosure potentially deliberate.

3. An adviser is explaining the protection gap to a self-employed client who earns £80,000 per year and believes State benefits are adequate. The client argues that SSP and ESA will cover most of their needs if they cannot work. Which of the following best summarises the adviser's most accurate response?

   • A
     As a self-employed person, the client has no entitlement to SSP and may have limited ESA entitlement; Universal Credit is means-tested and would replace only a small fraction of their income
     Correct answer
   • B
     State benefits adequately cover most income needs as long as the client has paid NI contributions
   • C
     SSP would replace their full salary for 28 weeks, and ESA would continue indefinitely thereafter
   • D
     The client is entitled to the same State benefits as an employed person as long as they file a self-assessment tax return
   Explanation

   Self-employed individuals are not entitled to SSP — a critical distinction. Their ESA entitlement depends on their NI contribution record (Class 2 contributions, now voluntary from 2024/25). Universal Credit is means-tested and for a single claimant over 25 pays approximately £393/month — a tiny fraction of an £80,000 salary. This demonstrates a very large protection gap for self-employed high earners relying solely on State provision.