R05 Terminal illness benefit: free practice questions

1. Question 1 of 5

   Under a typical terminal illness benefit, what life expectancy must the life assured have for a claim to be paid?

   Option A: Less than 3 monthsOption B: Less than 24 monthsOption C: Less than 6 monthsOption D: Less than 12 months

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   The answer is D: Less than 12 months

   Terminal illness benefit pays the sum assured on diagnosis of an advanced or rapidly progressing incurable illness where, in the insurer's opinion, life expectancy is less than 12 months.

   Why the other options are wrong

   A

   Three months is shorter than the usual 12-month test.

   B

   24 months is too long; the usual test is less than 12 months.

   C

   Six months is used for some State benefits, not typical terminal illness cover.

2. Question 2 of 5

   Which statement about terminal illness benefit is INCORRECT?

   Option A: The policy ends once the benefit has been paidOption B: It can be bought as a separate stand-alone policyOption C: It is an accelerated payment of the death benefitOption D: It is often included free of charge

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   The answer is B: It can be bought as a separate stand-alone policy

   Unlike critical illness cover, terminal illness benefit is not available as a separate policy. It is a rider on term or whole of life cover. It accelerates the death benefit rather than adding to it, and the policy ends once it is paid.

   Why the other options are wrong

   A

   This is true: once it's paid the policy ends, as the death benefit has been used.

   C

   This is true: terminal illness benefit brings forward the death benefit rather than adding to it.

   D

   This is true: it's often included at no extra cost.

3. Question 3 of 5

   Why does terminal illness cover on a term assurance usually stop applying during the last 12 or 18 months of the term?

   Option A: Premiums are no longer collected in the final year of the policyOption B: Regulations prohibit any claims in the final months of a policyOption C: The life assured might outlive the term, when no death claim would be paidOption D: The sum assured reduces to nil over the final 18 months of the term

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   The answer is C: The life assured might outlive the term, when no death claim would be paid

   Near expiry, the insurer would risk paying on diagnosis when the life assured could outlive the term, at which point no claim would otherwise arise. If a payment has been made and the person does survive the term, it does not have to be repaid.

   Why the other options are wrong

   A

   Premiums are still collected in the final year.

   B

   No regulation bans claims near expiry; it's the insurer's own risk management.

   D

   The sum assured doesn't fall to nil in the last 18 months of a level term policy.

4. Question 4 of 5

   What is the income tax position when a terminal illness benefit is paid to the life assured?

   Option A: It is taxed as a chargeable event gain on the policyOption B: It is not a chargeable event, so there is no income taxOption C: It is taxed as employment incomeOption D: Basic rate tax is deducted at source

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   The answer is B: It is not a chargeable event, so there is no income tax

   A terminal illness payment is not a chargeable event, so no income tax arises. There is no transfer of value either, although any money left in the recipient's estate at death counts for IHT.

   Why the other options are wrong

   A

   A terminal illness payment isn't a chargeable event.

   C

   It isn't employment income.

   D

   No tax is deducted at source.

5. Question 5 of 5

   Which of the following is a recognised argument AGAINST paying terminal illness benefit to the life assured rather than on death?

   Option A: Adding the benefit substantially increases the premium in nearly all casesOption B: The payment is always subject to income tax in the recipient's own handsOption C: The person may be too ill to benefit, and it can weaken provision for dependantsOption D: Paying the benefit early turns the policy into a non-qualifying policy

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   The answer is C: The person may be too ill to benefit, and it can weaken provision for dependants

   Supporters say early payment lets the person use the money as they choose. Critics note they may be too ill to benefit, and that paying them undermines the main aim of providing for dependants on death.

   Why the other options are wrong

   A

   The benefit is often free, so a big premium increase isn't a recognised argument.

   B

   Terminal illness payments from protection policies aren't normally taxed as income.

   D

   Paying the benefit early doesn't make a protection policy non-qualifying.

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