Protection and general insurance linked to mortgage advice
Domain 3 - Protection and general insurance linked to mortgage advice
This domain tests whether you can identify a protection shortfall from the fact-find, match cover to the mortgage structure, and arrange protection within ICOBS rather than treating it as an afterthought.
Products and where they fit
Term assurance: level (a flat sum for a set term - suits interest-only or family cover), decreasing (the sum follows an amortising repayment mortgage), convertible (extend term or increase sum without further underwriting), renewable (extend the term). Whole of life guarantees a payout but costs more and is generally used for inheritance tax planning, not basic mortgage cover. Family income benefit pays an income to the end of the term. Critical illness pays a lump sum on diagnosis of a specified condition - check definitions and survival periods. Income protection pays a proportion of income after a deferred period until recovery or retirement; check set-off against employer sick pay and state benefits. General insurance covers buildings (usually a lender condition), contents, and mortgage payment protection/ASU.
Rules and conduct
Pure protection and general insurance are non-investment insurance contracts governed by ICOBS. You must be authorised for the activity, disclose whether you are independent or restricted, provide a demands-and-needs statement explaining why the recommended contract is suitable, and disclose remuneration. Insurable interest must exist when the policy starts; a lender has an insurable interest in the borrower's life and can insist on cover, but cannot force the borrower to buy the lender's policy - the borrower may assign an existing policy. Buildings cover should reflect rebuild cost, not market value. A policy written in trust avoids probate delay and can reduce inheritance tax exposure.
Worked example
A couple, both 38, with a £250,000 capital repayment mortgage over 25 years, two children and one income. Cover should track the debt (decreasing term of £250,000 over 25 years, possibly two single policies written in trust) and add family protection for the income gap (level term or family income benefit), with income protection for the earning partner. Critical illness is discussed and declined on affordability - record the discussion and the reason.
Traps
Recommending level cover for a repayment mortgage without justification; ignoring death-in-service benefits and existing policies; selling whole of life as 'mortgage cover'; forgetting commission disclosure; assuming buildings insurance includes contents; and pressing protection after the client declines.