Insurance and Risk Management
Risk management follows a hierarchy: avoid, reduce, retain, transfer, share. Insurance is a transfer mechanism. Candidates must understand insurable interest, utmost good faith, indemnity, subrogation, and contribution. Life assurance pays a sum assured on death; term assurance has no investment element, while whole-of-life and endowment policies combine protection with savings.
Key products: income protection (replaces income on incapacity), critical illness (lump sum on diagnosis of a specified condition), private medical insurance, home and motor, and liability cover. Note the difference between level, decreasing, and increasing term cover - decreasing term suits repayment mortgages.
Traps: confusing critical illness (defined conditions) with income protection (incapacity to work); assuming all life policies pay out on terminal illness (only if included); and overlooking non-disclosure as grounds for claim rejection. Also watch for the protection gap - the difference between cover needed and cover held.
Worked example: A client with a £250,000 repayment mortgage over 20 years needs cover that falls roughly in line with the outstanding balance. Decreasing term assurance matches this at lower cost than level term. If he also wants to protect his income if he cannot work, income protection is appropriate - critical illness would only pay on a specified diagnosis, not on any incapacity.
Rule of thumb: match the policy structure to the liability's shape.