Life and pensions products and their features
Domain 1 - Life and pensions products and their features. IF6 tests whether you can match a client need to the correct contract and explain its mechanics, limits and charges, rather than simply naming products.
Protection contracts
- Term assurance pays a lump sum only if death occurs within the term; it has no surrender value. Variants include level, decreasing (designed for repayment mortgages), increasing, convertible (option to extend the term or convert to whole of life without further medical evidence) and renewable.
- Family income benefit pays a regular income from death to the end of the term.
- Whole of life guarantees a payout whenever death occurs; premiums may be guaranteed or reviewable, and investment-backed versions build a surrender value.
- Critical illness pays on diagnosis of a defined condition, usually subject to a survival period (commonly 10–14 days).
- Income protection pays a proportion of earnings (often 50–70%) after a deferred period, on own-occupation, suited-occupation or any-occupation definitions.
Savings and retirement contracts
Endowments are regular-premium policies with a target maturity value. Investment bonds are single-premium life contracts with a 5% annual withdrawal allowance. Workplace pensions are defined benefit (promised benefits) or defined contribution (funded); personal pensions and SIPPs are DC. Auto-enrolment requires 8% total contributions (minimum 3% employer) on qualifying earnings for eligible jobholders aged 22 to state pension age earning over £10,000. At retirement the main options are annuity, flexi-access drawdown or UFPLS, with up to 25% normally available as a pension commencement lump sum.
Worked example
A 45-year-old has a £150,000 interest-only mortgage ending in 20 years and wants life cover to repay it. A decreasing term policy looks cheaper but is wrong: with interest-only, the capital does not fall, so cover must remain at £150,000. Level term for 20 years matches the need; family income benefit could add income protection.
Traps
Decreasing term is for repayment, not interest-only, mortgages; reviewable whole-of-life premiums can rise; critical illness definitions vary between insurers; income protection has a deferred period and an earnings cap.