Protection Planning: policy design, claim definitions, taxation and trust wording
Protection Planning covers the products that transfer mortality, morbidity and longevity risk, plus the tax and trust mechanics that decide whether the money arrives intact. Questions test policy design, claim definitions, how premiums and benefits are taxed, and business protection structures.
The product set
Term assurance pays on death within a set term: level, decreasing for a repayment mortgage, increasing, or family income benefit paid as instalments. Whole of life pays whenever death occurs, on guaranteed or reviewable premiums. Critical illness cover pays a lump sum when a condition meets the policy definition, usually after a 14-day survival period, and often includes total permanent disability. Income protection pays 50–70% of earnings after a deferred period; the definition of incapacity - own occupation, suited occupation or any occupation - drives claim outcomes. Waiver of premium keeps cover in force, and long-term care policies may pay once a set number of activities of daily living cannot be performed.
Tax and trusts
Individual life and critical illness policies written on qualifying terms pay out free of income tax and CGT. Income protection benefits are taxed as earned income where the employer pays the premiums and are tax-free where the individual pays. Employer-paid premiums are normally deductible only for a relevant life policy or a registered group life scheme: relevant life is written under trust, pays a tax-free lump sum outside the estate and is not a benefit in kind, while death in service under a registered scheme typically pays a multiple of salary through a discretionary trust. Discretionary trusts keep benefits outside the estate but face relevant property charges; absolute (bare) trusts give the beneficiary a fixed right that forms part of their estate.
Worked example
Kai earns £60,000 and his employer pays the premium for income protection of 60% of gross, £36,000 a year. Because the employer pays, the benefit is taxable: at 40% it is worth £21,600 net, only 36% of salary. Had Kai paid the premium himself from taxed income, the £36,000 would be paid tax-free. Who pays the premium changes the real replacement ratio, and the suitability report should show both figures.
Traps that cost marks
Assuming critical illness pays on any severity of a condition; ignoring the deferred period against employer sick pay; promising 100% of earnings; overlooking non-disclosure and the proportionate remedy under the Consumer Insurance (Disclosure and Representations) Act 2012; leaving a death benefit untrusted so it falls into the estate; assuming whole-of-life premiums are guaranteed.