CMFAS RES5 Conduct of Business & Disclosure question: investment-linked policy (ILP) (2)

CMFAS RES5Conduct of Business & Disclosure

For an investment-linked policy (ILP), what must the adviser disclose about the free-look period?

A That the client may have to bear any fall in the underlying investment's value during that period
B That the full premium is always refunded, regardless of any market movements in the period
C That the free-look period does not apply to ILPs, because their value is market-linked
D That the client must exercise the free-look within 3 days of receiving the policy document from the insurer

Show the answer and explanation

Answer: A. That the client may have to bear any fall in the underlying investment's value during that period

For an ILP, FAA-N03 requires the adviser to disclose that the risk of any fall in value of the underlying investment during the free-look period may have to be borne by the client, so the refund can be less than premiums paid.

Common mistake

Unlike a traditional policy, an ILP free-look refund is not guaranteed to equal premiums — market falls are borne by the client.

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