11 Business Protection Flashcards
What is key person insurance?
taking out a life policy to protect itself against financial loss if key people in a business die/ become to ill to work
Name 2 financial detriments that could be caused to a business if they lose a key person
- Replacement costs – headhunting/ agency fees
- Business Interruption – illness/ death of key person can cause contracts to be lost as well as business contacts
- Financal implications of losing profits, repayment of loans etc
Which types of business are more likely to need key person insurance?
- New businesses
- Manufacturing companies
- High tech companies
- Smaller businesses
When assessing how much cover is needed, what types of factors need to be considered by advisors?
the current cash position of the company, current & projected profits
What 2 formulas are used to assess the level of key person cover required?
Multiple of salary
Proportion of profits
How is the multiple of salary formula used to determine how much cover should be bought for key person insurance?
Cover is based on x amount of a person’s salary e.g (5-10x)
What is a downside of using the multiple of salary formula?
this doesn’t always reflect of person’s true value to the business and full earnings package
How is the proportion of profits formula used to determine how much cover should be bought for key person insurance?
Key person’s salary x profit last year x years to replace person/ total salary bill
Should net tax or gross tax profit figure be used to assess how much should be covered using proportion of profits formula?
Gross tax
When can there be ‘admissable deductions’ in corporation & income tax for key person insurance?
The sole relationship is employer & employee
The insurance is intended to meet loss of profit if losing a key person
It’s annual/ short term insurance
For key person protection, when can the premiums attract tax relief?
When it is a term assurance policy
To obtain tax relief on a key person protection policy, what is the max amount of shareholding the assured can hold?
5%
How long does the length of the key person policy generally have to be to attract tax relief?
Annual/ short term
If the adviser needs to understand whether the amount underwritten is correct which documents could the adviser ask for?
- The company’s accounts
- Business plan
- Loan agreements
What could be required by the insurer if more cover is needed?
More medical underwriting
What are some of the disadvantages of structuring key person insurance as a term assurance policy?
may not offer protection v inflation, some policies may not be able to deal with large increases e.g if the employee gets a promotion
How should a policy be written so the benefits are paid to the company for key person insurance?
Life of another basis
When could a CIC policy pay out more than once when taken out for a key person?
When it is set up with severity based cover
What is share protection insurance?
Share protection insurance is intended for private companies where there are only a couple of shareholders to buy company shares if a shareholder dies/ becomes seriously ill
Which set of documents would govern what would happen to the shares if shareholder dies/ becomes too ill ?
Articles of association
If shareholders die and leave their shares to family, what problems could this cause?
problems for the family as they may struggle to find a buyer & problems for the company as they may not be able to afford the shares to buy off the family
What are the 3 ways shareholder protection can be arranged?
Buy and sell agreement
Cross option agreement
Automatic Accrual
What is a buy and sell agreement?
prior agreement that heirs must sell shares to business. Purchase price agreed and stated beforehand
What is a cross-option agreement?
Shareholders have option to buy shares from estate and estate has option to sell
