R05 Qualifying policy rules: free practice questions

1. Question 1 of 5

   Why does qualifying status matter for the tax treatment of a life policy?

   Option A: Only qualifying policies are allowed to be written under a discretionary trustOption B: Qualifying policies attract income tax relief on the premiums paid each yearOption C: Non-qualifying policies are exempt from inheritance tax when paid out on deathOption D: Qualifying gains are usually tax-free; non-qualifying gains may face higher rate tax

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   The answer is D: Qualifying gains are usually tax-free; non-qualifying gains may face higher rate tax

   Qualifying status generally means gains are not taxable. A non-qualifying policy may give rise to a gain taxed at higher or additional rates, and gains on offshore policies may be fully taxable.

   Why the other options are wrong

   A

   Any policy can be written under a discretionary trust, qualifying or not.

   B

   Qualifying policies don't get income tax relief on premiums; the benefit is tax-free gains.

   C

   Qualifying status is an income tax matter; it doesn't make non-qualifying policies IHT-exempt.

2. Question 2 of 5

   What is the minimum term for an endowment policy to be a qualifying policy?

   Option A: Fifteen yearsOption B: Seven yearsOption C: Five yearsOption D: Ten years

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   The answer is D: Ten years

   A qualifying endowment must have a term of at least ten years, with premiums payable at least annually throughout.

   Why the other options are wrong

   A

   Fifteen years is longer than required; ten is the minimum.

   B

   Seven years is too short; the minimum is ten.

   C

   Five years is too short for a qualifying endowment.

3. Question 3 of 5

   Grace, aged 45, takes out a qualifying whole of life policy with an annual premium of £1,200. What is the minimum sum assured needed to satisfy the 75% rule?

   Option A: £24,000Option B: £36,000Option C: £30,000Option D: £27,000

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   The answer is D: £27,000

   For whole of life, the sum assured must be at least 75% of the premiums payable if death occurred at 75. From 45 to 75 is 30 years: 30 × £1,200 = £36,000, and 75% of £36,000 is £27,000.

   Why the other options are wrong

   A

   £24,000 is 75% of 26 years' premiums; from 45 to 75 is 30 years, so 75% of £36,000 is £27,000.

   B

   £36,000 is the total premiums to age 75; the rule only requires 75% of that, which is £27,000.

   C

   £30,000 is 25 years of premiums; the test is 75% of 30 years' premiums, which is £27,000.

4. Question 4 of 5

   When applying the 75% rule to a joint life second death whole of life policy, which life's 75th birthday is used?

   Option A: Whichever life is the policyholderOption B: The average age of the two livesOption C: The younger lifeOption D: The older life

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   The answer is C: The younger life

   For joint life second death policies, the calculation uses the younger life, because cover is expected to run until the second death. For joint life first death policies, the older life is used.

   Why the other options are wrong

   A

   Who owns the policy doesn't matter; the rule looks at the lives assured.

   B

   There's no averaging of ages; the younger life is used for second death cover.

   D

   The older life is used for joint life first death policies, not second death.

5. Question 5 of 5

   Oliver's qualifying policy lapsed and he applies to reinstate it ten months later. His health declaration reveals a new condition and the insurer increases the premium. How is the reinstated policy treated?

   Option A: As the original policy, provided he pays the arrears with interestOption B: As the original policy, because reinstatement was within 13 monthsOption C: As a new policy, because the terms are not identical to the originalOption D: As non-qualifying from the date of the original policy

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   The answer is C: As a new policy, because the terms are not identical to the original

   Reinstatement within 13 months is ignored only if the policyholder gets exactly the same policy. A higher premium means it is treated as a new policy, which may affect qualifying status.

   Why the other options are wrong

   A

   Paying arrears doesn't help if the terms have changed; it becomes a new policy.

   B

   Reinstatement within 13 months is only ignored if the terms are exactly the same; a higher premium changes them.

   D

   It isn't made non-qualifying back to the original start; it's treated as a new policy from reinstatement.

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