R05 Benefit limits and ceasing age: free practice questions

1. Question 1 of 5

   Why do insurers limit individual income protection benefit to a proportion of earnings?

   Option A: Because State benefits always make up the differenceOption B: To meet the FCA's capital adequacy requirements for insurersOption C: Because IP benefits are taxed at 50%Option D: To avoid the insured being better off claiming than working

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   The answer is D: To avoid the insured being better off claiming than working

   If benefit matched full earnings, there would be little incentive to return to work. Individual benefit is tax-free, so 50–60% of gross earnings is broadly comparable to take-home pay.

   Why the other options are wrong

   A

   State benefits don't make up the difference to full earnings.

   B

   The limit isn't set by FCA capital requirements.

   C

   Individual IP benefits are tax-free, not taxed at 50%.

2. Question 2 of 5

   Diana insured £3,000 a month of IP benefit when earning £72,000. When she claims, her earnings in the previous year were £48,000 and the policy limit is 60%. What will she receive?

   Option A: £3,000 a monthOption B: Nothing, as she is over-insuredOption C: £3,600 a monthOption D: £2,400 a month

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   The answer is D: £2,400 a month

   The limitation clause applies whatever benefit is insured: 60% × (£48,000 ÷ 12) = £2,400 a month. Premiums paid for the excess cover bought no extra benefit, unless the policy has a guaranteed benefit feature.

   Why the other options are wrong

   A

   The benefit limit applies at claim, so she can't receive more than 60% of her recent earnings.

   B

   Over-insurance doesn't wipe out the claim; the benefit is cut back to the limit.

   C

   £3,600 is 60% of her old £72,000 salary; the limit uses the previous year's £48,000.

3. Question 3 of 5

   How might an insurer limit benefit on a very high earner's income protection policy?

   Option A: By automatically applying an any occupation definitionOption B: By applying a lower percentage, or tiered limits on higher slices of incomeOption C: By refusing any cover at all once earnings exceed £50,000 a yearOption D: By restricting the benefit payment period to a single year for each claim

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   The answer is B: By applying a lower percentage, or tiered limits on higher slices of income

   For very large policies, insurers may reduce the limit to around 25–35% or use tiers, with a higher percentage on the first part of income and a lower one above that.

   Why the other options are wrong

   A

   The definition of incapacity isn't changed because of earnings.

   C

   Insurers don't refuse cover above £50,000; they use lower or tiered limits.

   D

   Limiting the payment period to a year isn't the usual approach for high earners.

4. Question 4 of 5

   Why can group income protection benefit be set at a higher percentage of salary, such as 75%, than individual cover?

   Option A: Benefit is paid via payroll, so the employee pays tax and NICs on itOption B: Group schemes are subject to lighter regulation than individual policiesOption C: Group schemes do not have deferred periods, so claims are shorterOption D: Employees covered by group schemes are less likely to return to work

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   The answer is A: Benefit is paid via payroll, so the employee pays tax and NICs on it

   Group benefit is usually paid to the employer, who pays it through payroll with tax and NICs deducted. A higher gross percentage is needed to give a similar net income.

   Why the other options are wrong

   B

   Lighter regulation isn't the reason for the higher limit.

   C

   Group schemes do have deferred periods, often 26 weeks.

   D

   Group claimants aren't assumed to be less likely to return to work.

5. Question 5 of 5

   Ian earned £54,000 in the year before incapacity. His new IP policy insures £2,500 a month and limits total IP benefits to 60% of average monthly gross earnings. He also has an older IP policy paying £700 a month. How much will the new policy pay?

   Option A: £1,800 a monthOption B: £2,700 a monthOption C: £2,500 a monthOption D: £2,000 a month

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   The answer is D: £2,000 a month

   The limit is 60% × (£54,000 ÷ 12) = £2,700 a month for all IP benefits combined. The older policy already pays £700, so the new one pays £2,700 − £700 = £2,000.

   Why the other options are wrong

   A

   £1,800 takes £700 off the insured amount; it's the £2,700 limit that the £700 is deducted from.

   B

   £2,700 is the limit for all IP benefits combined; the older policy's £700 counts towards it.

   C

   The limit applies whatever benefit is insured, so the full £2,500 can't be paid.

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