Free CISI IAD FPA Practice Questions: Element 2: Financial Protection

CISI means Chartered Institute for Securities & Investment. IAD means Investment Advice Diploma, and this page is for the Financial Planning and Advice unit. Use this focused CISI IAD FPA page as a short practice test for Element 2: Financial Protection. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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Sample questions

These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Element 2: Financial Protection

Amira is reviewing a claim on a personal life assurance policy held by her client, who is also the life assured. The policy is not in trust.

Policy and claim facts:

• Original sum assured: £180,000
• Indexation: 3% compound increase at each policy anniversary if accepted
• Accepted increases: two policy anniversaries
• Underwriting decision: 25% premium loading, with no relevant exclusion
• Additional benefit: waiver of premium after 26 weeks’ incapacity
• Terminal illness benefit: pays the current life sum assured early if life expectancy is less than 12 months, provided the policy is not in its final 18 months; life cover then ceases
• Claim facts: consultant confirms life expectancy of nine months; the policy has six years left to run; the client has been unable to work for 30 weeks

Ignoring tax, which outcome should Amira explain?

• A. The insurer should defer payment until death and only waive future premiums while the client remains incapacitated.
• B. The insurer should pay £190,962 as a terminal illness benefit; the life cover then ceases, and waiver of premium is not an extra cash payment.
• C. The insurer should pay £143,222 because the 25% underwriting loading reduces the benefit payable.
• D. The insurer should pay £180,000 because terminal illness claims are based on the original sum assured before indexation.

Best answer: B

What this tests: Element 2: Financial Protection

Explanation: A terminal illness benefit is normally an early payment of the life assurance sum assured, subject to the policy wording. Here, the client meets the stated condition because life expectancy is nine months and the policy is not in its final 18 months. The sum assured has increased by two accepted compound indexation increases: £180,000 × 1.03 × 1.03 = £190,962. The 25% underwriting loading affects the premium charged, not the sum assured payable, because no relevant exclusion applies. Waiver of premium is an additional benefit that pays or waives premiums after the deferred period; it does not create an extra lump-sum claim payment. Once the terminal illness benefit is paid, the life cover ceases under the stated terms.

• Using £180,000 ignores the two accepted indexation increases that have already raised the current sum assured.
• Reducing the claim for the underwriting loading confuses premium rating with the insured benefit.
• Waiting until death ignores the terminal illness wording; waiver of premium is a premium benefit, not a replacement for the terminal illness payment.

The current sum assured is £180,000 increased by 3% twice, and the terminal illness wording allows that amount to be paid early.

Question 2

Topic: Element 2: Financial Protection

During a protection review, Martin, 59, says he does not need protection because “the council will have to look after me if I cannot work or need help with washing, dressing, or meals.” He is self-employed, has no employer sick pay, his partner depends on his income, and he wants choice over care arrangements if he develops a long-term condition. Which response best applies the planning principle?

• A. Assume local authority care will replace Martin’s lost earnings, so focus only on reducing his investment risk.
• B. Ignore local authority support completely because homeowners are never eligible for any social care assistance.
• C. Explain that state benefits and local authority social care are safety nets subject to eligibility assessments, then quantify income and care-choice gaps before considering affordable private protection or funding.
• D. Recommend private medical insurance as the main solution because it normally replaces earnings and funds long-term personal care.

Best answer: C

What this tests: Element 2: Financial Protection

Explanation: Social care and private protection serve different planning purposes. Local authority social care is generally based on assessed care needs and financial circumstances, and state benefits may provide only limited support. These arrangements are not designed to replace self-employed earnings, maintain a household’s full lifestyle, clear debts, or guarantee a preferred type or provider of care. A suitable adviser response should recognise public support as a possible safety net, but still assess the client’s likely income shortfall, dependency needs, care preferences, affordability, and existing resources before recommending private protection or later-life funding options.

• Treating local authority care as earnings replacement confuses care provision with income protection.
• Private medical insurance may help with eligible medical treatment, but it is not normally the main answer for lost earnings or long-term personal care needs.
• Home ownership may affect a financial assessment, but it does not mean public support should be ignored altogether.

This distinguishes assessed public support from privately arranged cover and links the recommendation to Martin’s income, dependency, choice, and affordability needs.

Question 3

Topic: Element 2: Financial Protection

A client couple have two young children and a repayment mortgage. One partner earns most of the household income. Their emergency cash reserve is £1,500, they have no meaningful investments, and the employer provides only statutory sick pay and no death-in-service benefit. If the main earner died or became unable to work for several months, the family could not meet the mortgage and essential bills.

Which approach best applies the role of insurance in this situation?

• A. Rely mainly on State benefits, because personal insurance is only needed once the family has accumulated significant assets.
• B. Prioritise building an investment portfolio before considering protection, because investments can cover future emergencies.
• C. Quantify the income and debt shortfalls, then recommend affordable protection cover for risks the family cannot absorb from savings or assets.
• D. Avoid protection until the mortgage is nearly repaid, because the current cash reserve is too small to support premiums.

Best answer: C

What this tests: Element 2: Financial Protection

Explanation: Insurance is used to transfer or reduce the financial impact of events that a client could not reasonably fund themselves, such as death, serious illness, or loss of income. In this case the family has low cash reserves, no significant investments, dependent children, a mortgage, and limited employer benefits. Those facts show that self-insurance is not realistic. A suitable protection discussion should identify the likely shortfalls, prioritise essential needs, and consider affordable cover such as life assurance and income protection where appropriate. The role of insurance is not to replace all financial planning, but to protect against losses that could otherwise derail the household’s basic financial security.

• Building investments first misuses the planning principle because the immediate risk is a large loss the family cannot fund now.
• State benefits may help, but they are unlikely to fully replace household income or clear family debts.
• Waiting until the mortgage is nearly repaid ignores the current exposure, when the consequences of death or incapacity would be most severe.

Insurance is most suitable where a financial loss would be too large for the client to meet from available savings or assets.

Question 4

Topic: Element 2: Financial Protection

Amira is reviewing her life assurance arrangements. The providers have confirmed the following facts. Assume all policies are on Amira’s own life, she dies today, and no inheritance tax calculation is required. For the assigned policy, the lender is entitled to the outstanding mortgage balance only, with any surplus payable to Amira’s estate.

What total death benefit should be treated as payable to someone other than Amira’s estate?

• A. £365,000, made up of the trust policy, the paid-up policy, and the lender’s mortgage balance
• B. £120,000, because only the policy written in trust is payable outside the estate
• C. £320,000, made up of £120,000 in trust and the full £200,000 assigned policy proceeds
• D. £275,000, made up of £120,000 to the trustees and £155,000 to the lender

Best answer: D

What this tests: Element 2: Financial Protection

Explanation: A life policy written in trust is normally claimed by the trustees and does not pass through the life assured’s estate. An assignment changes who has rights over policy proceeds, so the lender receives the amount needed to clear the secured mortgage, while the stated surplus from that policy returns to the estate. A paid-up policy is not surrendered; it remains in force for a reduced benefit, so Amira’s estate receives the £45,000 because she still owns it. A surrendered policy has ceased, so it produces no death benefit. The amount payable outside the estate is therefore £120,000 to the trustees plus £155,000 to the lender, giving £275,000.

• Treating the full assigned policy as outside the estate ignores the stated surplus rule; £45,000 would return to Amira’s estate.
• Including the paid-up policy is incorrect because paid-up status preserves reduced cover but does not change ownership.
• Counting only the trust policy overlooks the lender’s rights under the assignment.

The trust policy bypasses Amira’s estate, and the assignment directs £155,000 of the mortgage policy proceeds to the lender.

Question 5

Topic: Element 2: Financial Protection

A married client, aged 38, has two young children and a £260,000 repayment mortgage with 22 years remaining. Their employer provides death-in-service cover of £180,000, payable at trustees’ discretion and ceasing if the client leaves that employment. The client wants the family to be able to clear the mortgage and have an additional £100,000 lump sum if they die, and the available budget can support a modest term assurance premium.

What is the single best recommendation?

• A. Recommend cancelling any further life cover planning until the client changes employer, then reassess the need.
• B. Ignore the employer benefit completely and recommend personal cover for the full mortgage and lump-sum need.
• C. Treat the employer scheme as existing cover, verify the scheme details and nomination, and arrange personal term assurance in trust for the remaining shortfall.
• D. Rely on the employer death-in-service benefit because it is normally paid outside the estate and should be sufficient for protection planning.

Best answer: C

What this tests: Element 2: Financial Protection

Explanation: Group life or death-in-service cover is valuable existing provision and should be included when calculating a protection shortfall. It may also have useful trust-based features, such as payment outside the estate and quicker access for beneficiaries. However, it should not normally be treated as a complete substitute for personal protection where there is a long-term family or mortgage need. The cover is linked to employment, may cease on leaving service, and the payment route is often discretionary through trustees. In this case, the total stated need is £360,000, while the employer cover is £180,000, leaving a clear shortfall. A suitable approach is to verify the group scheme terms and nomination, then use affordable personal term assurance, commonly written in trust, to cover the remaining need over the relevant mortgage and dependant timescale.

• Relying solely on death-in-service cover overlooks the shortfall and the risk that cover ends when employment ends.
• Ignoring the employer benefit overstates the amount of new personal cover required and may make the plan less affordable.
• Deferring protection leaves the family exposed now, despite an immediate mortgage and dependant need.

Employer cover reduces the calculated shortfall but is not secure personal provision because it is employment-linked and paid under trustees’ discretion.

Question 6

Topic: Element 2: Financial Protection

A 38-year-old self-employed dental hygienist earns £3,200 a month net. She has no employer sick pay and has savings to cover about 12 weeks of household spending. She wants cover if illness or injury prevents her from doing clinical work until she can return to work or retire. She had treatment for anxiety two years ago and asks whether it can be left off the application because she is currently well. Which adviser response best applies income protection principles to her facts?

• A. Recommend unemployment cover because income protection is mainly designed to replace income after redundancy rather than illness or injury.
• B. Consider long-term income protection on an own-occupation basis, with a deferred period linked to her savings, and ensure full medical disclosure before underwriting.
• C. Choose the longest deferred period solely to reduce the premium because her lack of employer sick pay makes the waiting period unimportant.
• D. Omit the anxiety history because recovered medical conditions are automatically excluded and do not affect underwriting.

Best answer: B

What this tests: Element 2: Financial Protection

Explanation: Income protection is designed to replace part of earned income when illness or injury prevents the insured from working, subject to the policy definition of incapacity. For a self-employed dental hygienist, an own-occupation definition is important because it tests whether she can perform her own clinical role, not just any work. The deferred period should be coordinated with resources available during sickness, such as savings or sick pay. Here, savings for around 12 weeks point towards a deferred period that does not leave an unaffordable income gap. Medical history must be disclosed fully so the insurer can underwrite the risk and decide whether to accept, rate, exclude, or decline cover.

• Unemployment cover addresses redundancy rather than the long-term illness or injury risk described.
• A longer deferred period may reduce premiums, but suitability depends on whether the client can afford the income gap.
• Past medical treatment can be relevant to underwriting and must not be omitted from the application.

Own-occupation cover, an appropriate deferred period, and full disclosure match her need for long-term earnings protection as a self-employed clinical worker.

Question 7

Topic: Element 2: Financial Protection

Amira and Dev have two young children and rely mainly on Dev’s earnings. Their essential household spending is about £2,800 a month, household net income is about £3,400 a month, and they have £4,000 in savings. Dev’s employer provides full sick pay for eight weeks only, and they have no income protection. They ask whether possible Universal Credit, disability benefits, or local authority help means they can reduce the amount of private protection. Which approach is most suitable?

• A. Treat possible benefits and local authority support as a limited safety net, explain that eligibility and amounts are assessment-dependent, and base any affordable protection recommendation on the remaining shortfall.
• B. Ignore state and local authority support entirely because protection planning should be based only on private insurance solutions.
• C. Delay any private protection recommendation until the family has applied for all welfare benefits and received formal award notices.
• D. Deduct an estimated amount of Universal Credit and local authority help from the income need as guaranteed income before calculating the protection shortfall.

Best answer: A

What this tests: Element 2: Financial Protection

Explanation: State and welfare benefits can form part of the overall protection picture, but they should not be presented as guaranteed replacements for lost earnings. Entitlement may depend on household income, savings, health assessment, caring responsibilities, housing costs, and future rule changes. Local authority support is also needs-assessed and may not meet the family’s full spending requirement. In this case, Dev’s employer sick pay is short, savings are modest, and the family has an ongoing income dependency. The adviser should acknowledge potential support, explain its limitations, and calculate the protection gap conservatively before recommending affordable cover.

• Treating benefits as guaranteed income overstates their certainty and could leave the family underinsured.
• Ignoring benefits altogether misses part of the client’s wider financial position, even though they should be treated cautiously.
• Waiting for benefit awards before making any recommendation leaves an immediate protection need unaddressed.

This incorporates state support without treating it as certain or adequate for the family’s identified income need.

Question 8

Topic: Element 2: Financial Protection

A married couple, both in their late 30s, have an £180,000 repayment mortgage with 18 years remaining and two young children. Their stated priority is to have the mortgage cleared if either spouse dies or suffers a qualifying critical illness during the mortgage term. They have no existing life or critical illness cover outside employer benefits and want the lowest-cost structure that meets this mortgage need. They understand that affordability is more important than providing multiple separate payouts. Which recommendation is the single best answer?

• A. Two individual whole-of-life policies with critical illness cover for the original mortgage amount
• B. Two separate standalone level critical illness policies with no life cover
• C. A joint-life decreasing term life assurance policy with no critical illness cover
• D. A joint-life first-event decreasing term policy with accelerated critical illness cover for the mortgage amount and term

Best answer: D

What this tests: Element 2: Financial Protection

Explanation: For a repayment mortgage protection need, decreasing term cover is often suitable because the sum assured broadly reduces in line with the outstanding debt. Adding accelerated critical illness cover to life assurance means the policy pays on the first qualifying event, either death or specified critical illness, and then ends. That structure is usually less expensive than arranging separate life and standalone critical illness policies, but the trade-off is that there is only one payout. Here, the clients want an affordable way to clear the mortgage if either spouse dies or suffers a qualifying critical illness, and they accept that multiple payouts are not their priority. A joint-life first-event decreasing policy with accelerated critical illness cover is therefore the closest fit.

• Standalone critical illness cover would not meet the death-cover part of the stated mortgage need.
• Life assurance without critical illness cover would leave the main illness-related protection gap unresolved.
• Whole-of-life cover is usually unnecessarily expensive for a time-limited repayment mortgage need.

This matches the reducing mortgage debt, covers either death or qualifying critical illness, and is normally cheaper than separate standalone covers because it pays once and then ceases.

Question 9

Topic: Element 2: Financial Protection

A client is reviewing family protection for their partner and two children. If the client died, the adviser’s cash-flow notes show:

• Monthly essential household spending: £3,200
• Survivor’s ongoing net earnings: £1,500
• Benefits checker estimate: up to £700 per month from welfare benefits, depending on eligibility, income, capital, and future reassessment
• Local authority support: only relevant if eligible care needs arise and not intended to replace household income

Which planning conclusion best incorporates the benefit information?

• A. Plan around a prudent monthly shortfall of £1,700, while showing that the gap could fall to £1,000 if the estimated benefits were actually paid.
• B. Plan around a monthly shortfall of £700 because welfare and local authority support should replace the survivor’s lost income.
• C. Plan around a monthly shortfall of £1,000 because the benefits checker estimate should be deducted in full from the protection need.
• D. Plan around a monthly shortfall of £3,200 because state and welfare benefits should be ignored completely in protection planning.

Best answer: A

What this tests: Element 2: Financial Protection

Explanation: State and welfare benefits should be reflected in a financial plan, but they should not be treated as certain or fully adequate unless the facts justify that treatment. The household’s essential spending is £3,200 per month and the survivor has £1,500 of net earnings, so the prudent protection shortfall is £1,700 per month. The possible £700 welfare benefit could reduce the practical cash-flow gap to £1,000, but it depends on eligibility, income, capital, and reassessment. It is therefore better shown as a potential offset or sensitivity rather than a guaranteed replacement for protection cover. Local authority support is also limited in purpose and normally linked to assessed care needs, so it should not be relied on to meet ordinary household bills.

• Deducting the benefits checker figure in full understates the need because the award is conditional and may change.
• Ignoring welfare support completely misses relevant cash-flow information, even though it should be treated cautiously.
• Relying on local authority support for household income confuses care-related support with family income replacement.

The core shortfall is £3,200 less £1,500, and the £700 benefit estimate should be treated as uncertain rather than guaranteed.

Question 10

Topic: Element 2: Financial Protection

A financial planner is comparing income protection arrangements for Nadia, an employed client. Nadia can either take out a personally owned income protection policy and pay the premiums herself from salary, or join her employer’s group income protection scheme. Under the group scheme, the employer owns the policy and pays the premiums; if Nadia is unable to work, the insurer pays the employer and the employer pays Nadia through payroll.

Which tax treatment should the planner apply when assessing the suitability of the two choices?

• A. The employer’s group scheme premiums should be treated as Nadia’s pension contributions, with any claim payments taxed as pension income.
• B. Personal policy benefits should usually be treated as tax-free with no tax relief on Nadia’s premiums, while group scheme claim payments should be treated as taxable employment income through payroll.
• C. The personal policy premiums should be treated as income tax relievable, with any claim payments then taxable as Nadia’s earned income.
• D. Both arrangements should be treated as producing tax-free claim payments because they insure sickness-related loss of earnings rather than investment returns.

Best answer: B

What this tests: Element 2: Financial Protection

Explanation: For a personally owned income protection policy paid for by the individual from taxed income, premiums do not normally qualify for income tax relief, but claim payments are usually received tax-free. The planning comparison should therefore focus on whether the tax-free benefit would meet Nadia’s net income need and whether the premiums are affordable. Under an employer-owned group income protection scheme, the employer pays the premiums and any claim is normally paid to the employer, then passed to the employee through payroll. Those payments are treated as employment income and taxed accordingly. The planner should compare the two choices on a realistic net-income basis, rather than assuming the same gross benefit produces the same amount available to spend.

• Treating both claim payments as tax-free ignores the employer-owned group arrangement and payroll payment route.
• Giving tax relief on Nadia’s personal premiums reverses the usual treatment of individually paid income protection.
• Treating group income protection as pension provision applies the wrong product and tax framework.

The supplied ownership and payment facts distinguish personally funded income protection from employer-funded group income protection paid as earnings.

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