Protection & insurance

A repayment vehicle for an interest-only mortgage is best described as:

• A A type of car finance
• B A plan or asset intended to repay the outstanding capital at the end of the term ✓
• C The monthly interest payment itself
• D The lender's standard variable rate

Answer: A repayment vehicle is the means by which the capital on an interest-only mortgage will be repaid, such as savings, investments or sale of an asset. Its credibility must be assessed at outset.

Which of the following could be an acceptable repayment strategy for an interest-only mortgage, subject to lender criteria?

• A Hoping property prices will rise with no other plan
• B An investment or savings plan, pension lump sum, or sale of another asset ✓
• C Ignoring the capital entirely
• D Relying on the lender to write off the debt

Answer: Credible strategies include savings or investment plans, a pension lump sum, or the planned sale of another property or asset. Simply hoping prices rise, with no concrete plan, is not an acceptable strategy.

What is the main purpose of term life assurance taken alongside a mortgage?

• A To pay the monthly mortgage interest if rates rise
• B To repay an outstanding debt if the policyholder dies during the policy term ✓
• C To increase the property's value
• D To cover the cost of redecoration

Answer: Mortgage-related term assurance pays a lump sum on death within the term, intended to clear the outstanding mortgage and protect dependants. It does not address interest-rate changes or property improvements.

How does decreasing term assurance differ from level term assurance?

• A The sum assured reduces over time, often to mirror a reducing repayment mortgage balance ✓
• B The sum assured increases each year
• C It pays out only on survival to the end of the term
• D It has no fixed term

Answer: With decreasing term assurance the sum assured falls over time, making it well suited to a repayment mortgage where the outstanding balance also reduces. Level term keeps the sum assured constant.

What does critical illness cover (CIC) typically provide?

• A A lump sum on diagnosis of a specified serious illness covered by the policy ✓
• B A monthly income for any minor illness
• C Cover for accidental damage to the property
• D A refund of all mortgage interest paid

Answer: Critical illness cover pays a lump sum on diagnosis of one of the serious conditions specified in the policy, helping repay the mortgage or meet costs. It is distinct from income protection and life cover.

What is the main purpose of income protection insurance?

• A To pay off the mortgage on death
• B To provide a replacement income if the policyholder cannot work due to illness or injury ✓
• C To insure the building against fire
• D To cover legal fees in a purchase

Answer: Income protection provides a regular replacement income if the insured is unable to work because of illness or injury, helping maintain mortgage and living costs. It is not a lump-sum death benefit.