R05 Redundancy and affordability: free practice questions

1. Question 1 of 5

   Under the current rules on Support for Mortgage Interest, which statement is correct?

   Option A: SMI pays the full mortgage, including capital, from day one of a claimOption B: SMI is available to anyone, regardless of their capitalOption C: It's a loan, covering interest only, usually on up to £200,000 of mortgageOption D: SMI is a grant that never needs repaying, even on sale

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   The answer is C: It's a loan, covering interest only, usually on up to £200,000 of mortgage

   SMI is paid as a loan, repayable with interest when the home is sold or transferred. It covers interest only, usually on the first £200,000, and is subject to a capital means test.

   Why the other options are wrong

   A

   SMI never covers capital and doesn't pay from day one.

   B

   SMI is subject to a capital means test.

   D

   SMI is now a loan, not a grant.

2. Question 2 of 5

   Which resource is probably the most helpful to a client who becomes unemployed?

   Option A: A single premium bond with surrender penaltiesOption B: A whole of life policyOption C: An emergency cash reserveOption D: A critical illness policy

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   The answer is C: An emergency cash reserve

   An emergency reserve is probably the most helpful resource on redundancy. Other strategies include redundancy insurance, a flexible mortgage and cutting spending quickly.

   Why the other options are wrong

   A

   A bond with surrender penalties is a costly source of cash in a hurry.

   B

   Whole of life cover pays on death, not unemployment.

   D

   Critical illness cover doesn't pay on unemployment.

3. Question 3 of 5

   Which of the following is NOT a disadvantage of redundancy insurance?

   Option A: It gives reassurance that mortgage interest will be paid for a periodOption B: It may never pay outOption C: It typically pays only for a set period, such as two yearsOption D: It can be expensive relative to the benefits it eventually pays

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   The answer is A: It gives reassurance that mortgage interest will be paid for a period

   Reassurance that mortgage interest will be covered for a period is the advantage. The disadvantages are that it may never pay, can be costly, the most at-risk may be uninsurable, and benefits are time-limited.

   Why the other options are wrong

   B

   It may never pay out, which is a disadvantage.

   C

   It usually pays only for a limited period, which is a disadvantage.

   D

   It can be expensive relative to the benefits, which is a disadvantage.

4. Question 4 of 5

   An adviser identifies needs that would cost more than the client can afford. What should the adviser do?

   Option A: Prioritise the most important needs within budget, leaving the rest for laterOption B: Recommend all the cover anyway, as the client's needs must always come firstOption C: Recommend nothing at all until the client's income risesOption D: Recommend the cheapest product available, regardless of suitability

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   The answer is A: Prioritise the most important needs within budget, leaving the rest for later

   Clients should not take on premiums they are unlikely to sustain. High priority needs should be covered first, with lower priorities addressed when income allows.

   Why the other options are wrong

   B

   Recommending cover the client can't afford risks lapses.

   C

   Doing nothing leaves high priority needs unprotected.

   D

   The cheapest product regardless of suitability isn't good advice.

5. Question 5 of 5

   How can an adviser best assess whether a proposed protection solution is affordable?

   Option A: By assuming that 10% of gross income is always affordableOption B: By asking the insurer to review the client's bank statements before applyingOption C: By choosing whichever policy has the lowest sum assuredOption D: By comparing quotations with disposable income from the cash flow statement

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   The answer is D: By comparing quotations with disposable income from the cash flow statement

   Obtaining quotations and comparing them with disposable income, based on the client's cash flow, shows whether a commitment can realistically be maintained.

   Why the other options are wrong

   A

   There's no rule that 10% of gross income is always affordable.

   B

   Insurers don't review clients' bank statements for affordability.

   C

   The lowest sum assured may not meet the need.

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