Chapter 10

Question 1

What are the 3 different types of business protection?

Answer 1

Key person insurance
Partnership protection
Shareholder protection

Question 2

How can the death of a key person affect a business? Name 3 ways

Answer 2

Business interruptions
Cost of finding a replacement
Length of time for profits to recover
Loss of confidence in business
Loss of preferential interest rates

Question 3

What is key person assurance?

Answer 3

A way a business can insure itself against the financial implications of a key person’s death or illness
Set up on a “life of another” basis
Business is the assured, key person is the life assured and benefit paid to the company directly

Question 4

What factors affect the need for key person assurance? Name 3

Answer 4

Size - smaller businesses will depend on several key people
If the business is involved in a niche market
If the key person has specialist skills
If the key person is the reason a company may benefit from preferential interest rates

Question 5

What 2 main factors influence the amount of cover required for key person protection?

Answer 5

Costs to replace them
Loss of profits resulting from their illness or death

Question 6

What are the 2 main methods for calculating the sum assured on death or critical illness of a key person?

Answer 6

Salary multiple- sum assured usually 5-10 times the key persons salary
Proportion of profits formula -
(Key persons’s salary) x (last year’s profits) x (estimated years to replace key person) all divided by (total salary bill)

Question 7

What are the drawbacks of using a salary multiple for key person assurance?

Answer 7

Takes no account of key person’ contribution to profits
Key person also typically received additional benefits in addition to salary
Takes no account of key person’s age or proximity to retirement

Question 8

What are the drawback of the proportion of profits formula for key person protection?

Answer 8

Profits can be gross or net and low for tax reasons
No profit means formula is useless
Key person might receive other benefits in addition to salary

Question 9

How is the sum assured calculated for long term sickness cover for key person protection?

Answer 9

Maximum percentage of key persons salary
Usually lower than CIC as key person can likely still work in an advisory capacity