Chapter 11 - Business Protection

Question 1

What is Key Person Insurance?

Answer 1

KPI is not an insurance product itself but a market.

Question 2

When is there a need for Key Person Insurance?

Answer 2

If loss is likely to lead to serious financial detriment to the business

Question 3

What are the key considerations for calculating Key Person Insurance cover?

Answer 3

• 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

Question 4

What are the 2 methods used for calculating Key Person Insurance?

Answer 4

1. Multiple of salary

2. Proportion of profits formulae

Question 5

What are the common factors used in Multiple of salary calculations for Key Person Insurance?

Answer 5

5-10 (years salary)

Question 6

What is the proportion of profits formulae?

Answer 6

Key person salary x profit last year x no. of years to replace / total salary bill

Question 7

In what circumstances will premiums be admissible deductions and sums received as trading receipts on Key Person Insurance?

Answer 7

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

Question 8

What are the potential suitable policies for Key Person Insurance?

Answer 8

Term assurance (Convertible, Renewable, Reviewable)

Flexible Whole Of Life (Standard or Max Cover)

Question 9

What is Share Protection Insurance?

Answer 9

Provides funds to buy company shares if a shareholder dies or becomes seriously ill

Question 10

What type of company is Share Protection Insurance intended for?

Answer 10

Private limited Companies (PLCs)

Question 11

What are ‘articles of association’?

Answer 11

Basically a company’s will

Question 12

What are the 3 key elements for Share Protection Insurance?

Answer 12

• An agreement on how to transfer shares
• Insurance to provide funds
• Documentation so surviving shareholders can receive funds free of tax

Question 13

What 3 things must be considered to reach an agreement for Share Protection Insurance?

Answer 13

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

Question 14

How does a buy and sell agreement work for Share Protection Insurance?

Answer 14

All shareholders enter an agreement to say their heirs must sell the shares and surviving shareholders must buy them

Question 15

What is the benefit of a buy and sell agreement for Share Protection Insurance?

Answer 15

Everyone knows what will happen in the event of a death.

Question 16

What is the major downside of a buy and sell agreement for Share Protection?

Answer 16

IHT business property relief is lost

Question 17

What is Cross-Option (double) agreement?

Answer 17

Each party has the option to sell/buy within a specified time period

Question 18

What is an automatic accrual agreement?

Answer 18

Shareholders leave shares to other shareholders in their will or complete automatic accrual agreement which does the same thing

Question 19

What are the downsides of automatic accrual agreements?

Answer 19

Share growth may exceed value of policy
Could be an IHT liability
Shareholder could change will without telling other shareholders

Question 20

How can a policy be written for share protection?

Answer 20

Life of another if buy and sell agreement
or
Own-life- in trust for benefit of co directors

Question 21

What kind of trust should be used for share protection?

Answer 21

Flexible trust, to accommodate potential change of shareholders

Question 22

How are premiums for share protection treated if company pays?

Answer 22

Subject to both Income Tax and NICs. Business expense but will be liable to extra employer’s NICs on the payments.

Question 23

According to the Partnership Act 1890, what happens to a partnership if a partner dies without a partnership agreement?

Answer 23

It is automatically dissolved and the capital accounts must be distributed to the partners.

Question 24

What will each partner have in event of a dissolution of partnership?

Answer 24

Their Capital account and share of business

Question 25

What should be included in a partnership agreement?

Answer 25

A clause stating what should happen if partner dies to prevent business dissolving

Question 26

What agreements can be made for partnership business interest?

Answer 26

• Buy and sell
• Cross option
• Automatic accrual

Question 27

What policy should be taken out in a Cross-option agreement for partnership business interest protection?

Answer 27

Own-life index-linked term assurance written in trust