Objective: To review their business and personal protection arrangements

Question 1

Comment on their present situation, and identify any weaknesses in their
protection arrangements if either of them were to
(a) suffer a long-term illness (8)

Answer 1

 Tom has no income protection
 Sally has no income to protect
 State benefits are basic, inadequate
 Neither of them has critical illness cover in place
 They would not be able to meet even their basic expenditure if Tom was not working
 and would have to use savings
 Neither has PMI - Tom could implement a scheme through is company
 and then Sally could be covered

Question 2

Comment on their present situation, and identify any weaknesses in their
protection arrangements if either of them were to

(b) die prematurely (8)

Answer 2

They have a joint life first death level term assurance policy to protect their
mortgage
 They have made nominations for their respective pension plans
 They don’t have any other life cover in place
 They both have an IHT liability which is currently not covered by insurance
 On the first death, the survivor would receive the benefits from the deceased
pension plan(s) as nominations have been made
 and the survivor would own the house outright, assuming the life policy pays the
mortgage off
 as it is owned as joint tenants
 The joint deposit account would belong to the survivor
 but as they are unmarried and have not made wills yet, the survivor would not
inherit other solely owned assets of the deceased– they would go to Hannah

Question 3

Detail and justify any recommendations you would make relating to ensuring
Tom and Sally are adequately protected
(a) in the event of Tom becoming seriously ill and unable to work (7)

Answer 3

Tom to take out income protection insurance
 Benefit level to cover mortgage and lifestyle changes, within provider’s limits
 Deferred for as long as he is comfortable drawing on emergency fund
 As he has no other sick pay in place, other than SSP
 On an own occupation basis to improve chances of pay out
 And guarantee premiums for peace of mind
 Term to retirement

Question 4

Detail and justify any recommendations you would make relating to ensuring
Tom and Sally are adequately protected

(b) on first death of either Tom or Sally.(7)

Answer 4

Tom to take out additional life cover, term assurance or FIB, in trust to Sally
 to pay a lump sum or regular income in the event of his death before retirement
 Sum assured to match his income to the household
 With a term to his selected retirement age
 Sally to consider taking out a similar policy in trust to Tom if/when she starts earning

 Include critical illness protection
 To ensure they can clear/reduce the m

Question 5

Tom is considering taking out key person assurance on his sales manager.
a) State and briefly explain the two main methods of calculating the level of
cover needed. (2)

Answer 5

(a)
Multiple of salary - Key person’s salary is multiplied by an agreed factor, usually between
five and ten times
Proportion of profits - Key person’s salary multiplied by last year’s profits and time in years
to replace, then divided by the total salary bill

Question 6

Describe briefly the advantages and drawbacks for Multiple of Salary. (1) (3)

Answer 6

Multiple of Salary:
Advantages:
• Simple to calculate the level of cover, as it is a multiple of salary
Drawbacks:
• Salary is only one part of total remuneration
• Salary alone does not reflect true value of the individual to the business
• Salary does not allow for the time factor in relation to term to retirement

Question 7

Describe briefly the advantages and drawbacks for Proportion of Profits method (3) (3)

Answer 7

Proportion of Profits:
Advantages:
 A more scientific approach to the level of cover and more accurate reflection of key
person value to the business
 Gross or net profit may be used
 Net profit is a good reflection of the business performance although gross profit is a
better reflection of loss of the key person’s contribution to the business

Drawbacks:
• Difficult to determine a time factor e.g. for recruitment, training and settling in
• Does not work where the company is showing a loss or deliberate low profit
• Still uses a salary figure so has same problems as multiple of salary.

Question 8

Outline the conditions that must apply for the premium paid by Lincoln
Specialist Paints Ltd to be an allowable deduction from business profits for
tax purposes and state the likely tax treatment. (4)

Answer 8

The cover must be short-term/maximum of five years/annual contract
• The cover should be solely to replace lost profit through loss of services of insured
life
• The sole relationship must be of employer and employee which is taken by HMRC to
mean any director shareholder must own less than 5% of the shares
• If they own more than 5%, the premiums will not qualify for tax relief, but equally
any payout will not be taxable

Question 9

Comment on the financial implications Tom’s company if his sales manager
were to suffer from a serious illness or die. (6)

Answer 9

Sales fall while a replacement is sought
• Profits may decrease
• Creditors/suppliers may no longer offer the same credit facilities
• Debts may be called in
• Further credit may be difficult to obtain
• Loans may need to be re-financed on higher interest rates

Question 10

Explain the issues to Tom which should be considered when calculating the
sum assured required to replace him as a key person. (4)

Answer 10

The present cash flow position of the business
• The level of profits in the recent past and the profits projections for at least one year
• The likely impact on profits if he died or suffered from a serious illness
• The costs of recruitment and any delay/settling in period for his replacement

Question 11

Explain to Tom and Sally the benefits of setting up a Lasting Powers of
Attorney (9)

Answer 11

Provides peace of mind/personal wishes known/avoids disputes
 Appoint trusted person/each other/family as attorney/replacement attorney
 Health care decisions LPA to deal with health matters, such as appropriate
accommodation and medication
 For this type, attorney cannot act unless donor is unable to make decisions for
themselves
 Financial affairs LPA to deal with financial transactions and property matters
 For this type, attorney can act before donor is unable to make decisions, and as well
as them making their own decisions, as appropriate
 Less complex than Court of Protection
 Quicker than Court of Protection
 Cheaper than Court of Protection