Buisness Protection Flashcards

1
Q

What are the two principle approaches for selecting sum assured on KPI?

A

Multiple of salary
Proportion of profit

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2
Q

What is the equation for proportion of profit KPI?

A
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3
Q

When would proportion profit KPI be utilied

A

Only when the company is making profit.

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4
Q

How is KPI undewriten?

A

Normal medical underwriting.
Extra financial underwriting

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5
Q

What is the purpose of financial underwriting?

A

Is the company taking out an appropriate level of insurance.

This is to prevent moral risk and that the company is only insuring for the loss it would make.

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6
Q

How is financial undewriting performed?

A

Looking at company accounts, business plans, and the methodology for arriving at the selected sum assured.

Might have a fianacial questionnaire, particularly if the amount is over £250,000

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7
Q

What are the Anderson Rules? (Rules that state when tax relief is due on KPI) 3

A

Employee and employer relationship

Covers costs from the loss of the employee.

Short term. (Might not be able to be renewable)

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8
Q

What are the objectives of shareholder protection?

A

Provide protection
Maintain flexibility
Maintain tax efficiency

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9
Q

What forms of shareholder protection agreements are there?

A

Buy and sell - must be bought and sold
Cross option - if one party wishes to but or sell, it must happen.
Automatic Accrual - no shares handed to beneficiary
Single option - only one person makes decision to prevent forcing out.

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10
Q

What is the disadvantage of buy and sell?

A

Creates a binding contract for sale, meaning business property relief is nulified, and IHT must be paid.

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11
Q

What is the advantage of cross opinion?

A

No binding contract of sale, so benefits from business property relief. (Most favoured agreement for this reason)

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12
Q

What is a cross option agreement usually backed with?

A

A level term assurance policy

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13
Q

What should be arranged with an automatic Accrual agreement

A

Life cover

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14
Q

What is single option often used with?

A

CIC

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15
Q

What is beneficial about term insurance for share holder protection?

A

Best way forward where proceeds go straight to the company.

No surrender value, so it can be lapsed if the individual leaves.

Cheap.

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16
Q

What is the benefit of whole of life for shareholder protection?

A

Though expensive can be done cost effectively with maximum sum assured and premium increase every 10 years, which will remove issues of insureability.

Potential use for automatic accrual

17
Q

How does life of another work for shareholder insurance?

A

Each shareholder takes out insurance on each other shareholder.

This keeps things fsir but is messy with lots of shareholders.

18
Q

How does own life in trust work?

A

Each share holder takes out a policy on their own life and puts it into trust for the shareholders.

Keeps things clean but can be unfair.

19
Q

How can unfairness be mitigated with an own life policy?

A

The company pays
Increases in salary
Equalisation exercise.

20
Q

What are own life in trust policies used for?

A

Auto Accrual

21
Q

What is the problem with the company with shareholder lives insured?

A

It may incur CGT as the HMRC might see this as a distribution rather than disposal.

22
Q

How will shareholder insurance sum assured be set?

A

By each shareholder holding as provided by the accountant.

23
Q

Over what amount would a company’s account be requested for undewriting?

A

£500,000

24
Q

What is partnership protection important?

A

The Partnership Act 1980 dictates that on the death of a partner, the partnership should be desolved. Unless otherwise specified.

This could be problematic if the surving partner can not pay up the deceaseds share.

25
Q

How should an overdraft be covered?

A

Full amount of the overdraft.
Term done on a case by case basis.

26
Q

How should a loan be covered?

A

Maximum possible repayment covered over the appropriate term of the loan.

Potentially use decreasing term if no need for further borrowing.