R05 Income protection policy types: free practice questions

1. Question 1 of 5

   What does income protection insurance primarily insure against?

   Option A: Loss of earnings through long-term sickness or accidentOption B: Redundancy and unemploymentOption C: Diagnosis of a specified serious illness, such as cancerOption D: Death before retirement

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   The answer is A: Loss of earnings through long-term sickness or accident

   Income protection pays a regular income when the insured cannot work because of illness or injury. It protects earnings rather than paying a lump sum on diagnosis or death.

   Why the other options are wrong

   B

   Redundancy and unemployment are covered by short-term products such as ASU or MPPI, not IP.

   C

   A lump sum on diagnosis of a specified illness is critical illness cover.

   D

   Death before retirement is covered by life assurance.

2. Question 2 of 5

   Under which FCA rules does the selling and marketing of a pure protection income protection policy fall?

   Option A: ICOBSOption B: SYSCOption C: MCOBOption D: COBS

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   The answer is A: ICOBS

   IP is classed as long-term insurance, but pure protection IP is sold under ICOBS. Unit-linked IP with an investment element falls under COBS.

   Why the other options are wrong

   B

   SYSC deals with firms' systems and controls, not how IP is sold.

   C

   MCOB covers mortgages, not income protection.

   D

   COBS applies to unit-linked IP with an investment element, not pure protection IP.

3. Question 3 of 5

   What is the main trade-off of choosing a limited payment term, such as two years, on an income protection policy?

   Option A: Lower premiums, but benefit may stop while the claimant still can't workOption B: Higher premiums, but more comprehensive cover for long-running claimsOption C: The policy can be cancelled by the insurer once a claim has been paidOption D: Benefits become taxable

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   The answer is A: Lower premiums, but benefit may stop while the claimant still can't work

   Limited term cover is cheaper because the insurer's exposure is capped. At the end of the payment period, benefit may stop or a lump sum may be paid, even if the claimant has not recovered.

   Why the other options are wrong

   B

   A limited payment term lowers the premium and gives less comprehensive cover, not more.

   C

   The insurer still can't cancel an IP policy because of claims.

   D

   The payment term doesn't change the tax treatment of individual IP.

4. Question 4 of 5

   What is a distinctive feature of a Holloway income protection policy?

   Option A: It pays benefit only on unemployment, not on illnessOption B: It is always renewable annuallyOption C: It is available only through group schemesOption D: It builds up a cash value with profits by retirement

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   The answer is D: It builds up a cash value with profits by retirement

   Holloway policies, usually issued by friendly societies and popular with the self-employed, combine income protection with a cash value and profits at retirement.

   Why the other options are wrong

   A

   Holloway policies are income protection for illness or injury, not unemployment-only cover.

   B

   Holloway policies are long-term friendly society contracts, not annually renewable cover.

   C

   They're individual policies, popular with the self-employed, not group-only products.

5. Question 5 of 5

   Why are some legacy unit-linked income protection policies regulated under COBS rather than ICOBS?

   Option A: They include an investment element, so are classed as investmentsOption B: They are sold only to companies rather than to individualsOption C: They are general insurance contracts renewed every yearOption D: They pay a lump sum on incapacity rather than a regular income

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   The answer is A: They include an investment element, so are classed as investments

   Because unit-linked IP includes an investment element, it is treated as an investment and falls under COBS. Pure risk IP falls under ICOBS.

   Why the other options are wrong

   B

   Legacy unit-linked IP was sold to individuals; the reason for COBS is the investment element.

   C

   They're long-term contracts with an investment element, not annually renewed general insurance.

   D

   These policies pay income, not a lump sum; COBS applies because of the investment element.

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