R05 Quantifying life cover needs: free practice questions

1. Question 1 of 5

   Why should life cover be based on a needs analysis rather than a rule of thumb such as ten times income?

   Option A: Rules of thumb are banned by the FCA for protection adviceOption B: Insurers will only accept needs-based sums assured on applicationsOption C: Rules of thumb always overstate the need, so cost too muchOption D: A rule of thumb can leave a client with far too much or too little cover

   Show answer

   The answer is D: A rule of thumb can leave a client with far too much or too little cover

   A rule of thumb ignores individual circumstances, so it can produce over- or under-insurance. A five-step needs-based process is recommended.

   Why the other options are wrong

   A

   The FCA hasn't banned rules of thumb; they're just unreliable.

   B

   Insurers don't require needs-based sums assured.

   C

   Rules of thumb can understate the need as well as overstate it.

2. Question 2 of 5

   Why does the life cover calculator include an emergency fund as a capital need?

   Option A: To cover capital gains tax payable on the policy proceedsOption B: Because the deceased's assets may be frozen during probateOption C: Because State benefits stop on deathOption D: To pay the insurer's claim processing and admin fee

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   The answer is B: Because the deceased's assets may be frozen during probate

   Cash is likely to be needed soon after death, but the deceased's assets may be frozen during probate, so an emergency fund is included.

   Why the other options are wrong

   A

   Life policy proceeds aren't subject to CGT in this way.

   C

   Some State benefits start on death rather than stop; the reason is frozen assets.

   D

   Insurers don't charge a claim processing fee.

3. Question 3 of 5

   Which of the following is NOT one of the assumptions behind the income multiplier factors?

   Option A: The beneficiary is an additional rate taxpayerOption B: Tax of 20% is deducted from the taxable income elementOption C: Factors are rounded to the nearest 0.5Option D: Income rises by about 3% a year

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   The answer is A: The beneficiary is an additional rate taxpayer

   The factors assume 20% tax on the taxable element. More cover may be needed for a higher or additional rate taxpayer beneficiary over long periods.

   Why the other options are wrong

   B

   This is one of the assumptions: 20% tax on the taxable income element.

   C

   This is one of the assumptions: the factors are rounded to the nearest 0.5.

   D

   This is one of the assumptions: income rising by about 3% a year.

4. Question 4 of 5

   Among capital needs, which is usually the highest priority where there will be a surviving partner?

   Option A: Setting aside a fund for family holidaysOption B: Paying for the funeral and associated costs straight awayOption C: Replacing the deceased's company carOption D: Repaying the mortgage so the partner has a debt-free home

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   The answer is D: Repaying the mortgage so the partner has a debt-free home

   The mortgage is usually the largest capital need, and debt-free accommodation for a surviving partner is typically a very high priority. For someone living alone it may be lower.

   Why the other options are wrong

   A

   A holiday fund isn't a priority capital need.

   B

   Funeral costs matter but are much smaller than the mortgage.

   C

   Replacing a company car is a lower priority than a debt-free home.

5. Question 5 of 5

   On Ravi's death his family would face funeral costs of £4,000, would want a £6,000 emergency fund, and would need to clear a £150,000 mortgage and a £9,000 car loan. What is the total capital need at step A of the needs analysis?

   Option A: £150,000Option B: £160,000Option C: £165,000Option D: £169,000

   Show answer

   The answer is D: £169,000

   Step A adds up all capital needs: funeral £4,000 + emergency fund £6,000 + mortgage £150,000 + car loan £9,000 = £169,000.

   Why the other options are wrong

   A

   £150,000 counts only the mortgage; funeral costs, the emergency fund and other debts count too.

   B

   £160,000 leaves out the £9,000 car loan, which would also need clearing.

   C

   £165,000 leaves out the £4,000 funeral costs.

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