AFAP2 — Protection — Unit 2

What AFAP2 covers

• •Quantifying the life and IP need (multiple of salary, outstanding liabilities, replacement income)
• •Writing life cover in trust: IHT, probate and the right beneficiaries
• •Relevant life policies and employer-sponsored arrangements
• •Key-person cover, shareholder/partnership protection and cross-option agreements
• •Taxation of premiums and proceeds for personal vs business policies
• •Suitability: when the right answer is not to sell a policy

3 free AFAP2 practice questions

Straight from Mock Paper 1, in the real exam style — no sign-up, no paywall.

1. Q1.A common starting point for life cover need on a breadwinner is:

   1. AOne times annual rent
   2. BOutstanding debts plus a multiple of income or capitalised income need until dependants are independent
   3. CState Pension forecast only
   4. DThe client's age multiplied by 1,000
   Reveal the answer

   B is correct. Life need analysis typically adds liabilities (mortgage, loans) to income replacement (often 5–10 times salary or a DCF of net income until children are independent).

2. Q2.Writing a life policy in trust primarily helps:

   1. AIncrease income tax on premiums
   2. BEnsure proceeds pass to chosen beneficiaries quickly, often outside the estate for inheritance tax and without waiting for probate
   3. CGuarantee the insurer cannot decline a claim
   4. DAvoid paying any premiums
   Reveal the answer

   B is correct. Trusts speed up payment to beneficiaries and usually keep proceeds outside the settlor's estate for IHT. They do not affect underwriting or premium liability.

3. Q3.A discretionary trust on a life policy means:

   1. ABeneficiaries are fixed and cannot change
   2. BTrustees decide which beneficiaries from a class receive proceeds and in what shares
   3. CThe policy is void
   4. DPremiums are paid by HMRC
   Reveal the answer

   B is correct. Discretionary trusts give trustees flexibility — useful where family circumstances may change. Absolute (bare) trusts give fixed beneficial interests.

How to pass AFAP2

• ✓A policy written in trust normally sits outside the estate — that is often the whole point.
• ✓Key-person proceeds can be taxable if the tax treatment of premiums was deducted.
• ✓If the scenario already has enough cover, 'do not recommend additional cover' is a real answer.

AFAP2 exam — common questions