Protection Flashcards
Comment on any weaknesses in Simon and Grace’s protection arrangements
Although they both work, the loss of one income will leave them with an income shortfall
The mortgage is not protected in the event of death or critical illness
Simons ASU will leave them with an income shortfall and will cease to pay before retirement age
The ASU term ends in 2021 before retirement age
Grace has no income protection at all
They will qualify for state benefit in the event one of them dies but these are limited in value and will not cover the income shortfall
Nominations for pension funds have been completed but the values are relatively low
They have wills in place but these do not direct on second death which would create delays
They don’t have LPA’s in place
R&J how Simons company can set up a suitable tax efficient, individual life policy for Simon to pay benefit to Grace in the event he dies before he retires
The company as policy holder should set up a relevant life plan with Simon as the life assured
The contributions will be a deductible business expense and will not be classed as a benefit in kind for Simon or the company
The policy must be written under a discretionary trust and so will not form part of the estate for IHT purposes and will not be written under pension rules so will not count toward LTA
Policy will cover life only and the term should be until Simon intends to retire
Sum assured should be an amount to protect the loss of his income and share value and should be indexed
R&J a suitable insurance policy to provide a regular income in the event of Simon suffering a long-term I’ll was and being unable to work
Income protection insurance as this allows multiple claims and cannot be cancelled (as long as premiums are maintained)
Provides a regular tax-free income that will allow them to maintain their lifestyle
Sum assured will be based on his salary only, and should be for the maximum possible
Term should be to intended retirement age and cover should be on an own occupation basis to maximise the chance of a payout
Deferred period should be for a max of 3 months to help minimise the cost as they have sufficient assets to self insure for a period
Premiums should be guaranteed for a known cost
Cover should be indexed to keep pace with inflation and should include partial payment to enable Simon to return to work in some form
Explain why you have recommended income protection and why this should be as an executive income protection plan
Income protection
Pays a regular income to Simons retirement age
Cover cannot be cancelled as long as terms are agreed to and can be linked to inflation and will pay out in his ability to perform his own role
Executive Income protection - why
Higher levels of cover available as dividend payments can be covered which is important as there will be an income shortfall
The policy can also cover employer NIC’s and pension payments for Simon
This ensures his state benefits continue to accrue and pension payments continue
The income paid to Simon from EIP is paid via PAYE and so counts to relevant earnings which would allow him to make tax relievable pension conts based on his income if he wished
This would mean Simon could maintain his lifestyle as opposed to a personal contract where the pension conts would be much lower
Benefits and drawbacks of DTA to protect the mortgage In the event of either death
✅cheap cover
✅will ensure the mortgage is repaid if either dies during the term
✅not paying for cover in excess of the mortgage amount
✅easy to understand
✅they are both in good health so should be no loading
❌no additional funds paid out on death
❌does not include CIC
❌if their health deteriorates later it would be better to pay for more cover now
❌cover may be insufficient and cannot be amended
❌no investment content
Explain to Simon why his ASU policy may not be suitable for him
Cover level of £2k is too low as it would leave an income shortfall for Simon and Grace
Cover is not indexed against inflation
Max payment term will be 2 years and cover ceases in 2021 leaving no protection from then until Simons retirement age
The cover is not permanent and can be cancelled by the insurer
The insurer can increase the premium by giving notice
The policy does not offer proportionate benefit so if Simon returns part time all payments cease
It can be difficult to get the insurer to payout
