Chapter 11 - Business Protection Flashcards
What is Key Person Insurance?
KPI is not an insurance product itself but a market.
When is there a need for Key Person Insurance?
If loss is likely to lead to serious financial detriment to the business
What are the key considerations for calculating Key Person Insurance cover?
- Present cash position
- Level of profits in recent past and projections
- Effect of profits if key person died/illness
- Cost of recruiting
- Delay in replacements settling in time
- Loans that could be recalled due to the Key person’s death/disability
What are the 2 methods used for calculating Key Person Insurance?
- Multiple of salary
2. Proportion of profits formulae
What are the common factors used in Multiple of salary calculations for Key Person Insurance?
5-10 (years salary)
What is the proportion of profits formulae?
Key person salary x profit last year x no. of years to replace / total salary bill
In what circumstances will premiums be admissible deductions and sums received as trading receipts on Key Person Insurance?
i. If sole relationship is that of employer and employee
ii. If insurance intended to meet loss of profit
iii. If annual or short term insurance
What are the potential suitable policies for Key Person Insurance?
Term assurance (Convertible, Renewable, Reviewable)
Flexible Whole Of Life (Standard or Max Cover)
What is Share Protection Insurance?
Provides funds to buy company shares if a shareholder dies or becomes seriously ill
What type of company is Share Protection Insurance intended for?
Private limited Companies (PLCs)
What are ‘articles of association’?
Basically a company’s will
What are the 3 key elements for Share Protection Insurance?
- An agreement on how to transfer shares
- Insurance to provide funds
- Documentation so surviving shareholders can receive funds free of tax
What 3 things must be considered to reach an agreement for Share Protection Insurance?
Recommendation must be compared with articles of association
Must be prior agreement for how to calculate share price
Ensure IHT BPR (business property relief) continues
How does a buy and sell agreement work for Share Protection Insurance?
All shareholders enter an agreement to say their heirs must sell the shares and surviving shareholders must buy them
What is the benefit of a buy and sell agreement for Share Protection Insurance?
Everyone knows what will happen in the event of a death.
What is the major downside of a buy and sell agreement for Share Protection?
IHT business property relief is lost
What is Cross-Option (double) agreement?
Each party has the option to sell/buy within a specified time period
What is an automatic accrual agreement?
Shareholders leave shares to other shareholders in their will or complete automatic accrual agreement which does the same thing
What are the downsides of automatic accrual agreements?
Share growth may exceed value of policy
Could be an IHT liability
Shareholder could change will without telling other shareholders
How can a policy be written for share protection?
Life of another if buy and sell agreement
or
Own-life- in trust for benefit of co directors
What kind of trust should be used for share protection?
Flexible trust, to accommodate potential change of shareholders
How are premiums for share protection treated if company pays?
Subject to both Income Tax and NICs. Business expense but will be liable to extra employer’s NICs on the payments.
According to the Partnership Act 1890, what happens to a partnership if a partner dies without a partnership agreement?
It is automatically dissolved and the capital accounts must be distributed to the partners.
What will each partner have in event of a dissolution of partnership?
Their Capital account and share of business
What should be included in a partnership agreement?
A clause stating what should happen if partner dies to prevent business dissolving
What agreements can be made for partnership business interest?
- Buy and sell
- Cross option
- Automatic accrual
What policy should be taken out in a Cross-option agreement for partnership business interest protection?
Own-life index-linked term assurance written in trust
