Topic 15 Flashcards
Protection against the impact of sickness may fall into a number of categories what are they
An income to replace lost income
An income to pay for someone to carry out tasks normally undertaken by a person who is ill
An income to pay for continuing medical attention or nursing care during an illness or after an accident
A lump sum to Pay for private medical treatment
A lump sum to pay for changes to lifestyle or environment such as alterations to a house or a move to a more convenient house
What protection needs my businesses have
Loss of a colleague as a result of death injury or long term sickness can have severe implications for the financial health of a business. Life or sickness insurance can be used to mitigate the financial loss that may result.
Explain death of a key employee
The death of an important employee particularly in a small company can have a devastating effect on the businesses profits. Key personnel can be found at all levels of a business for example
Managing director with a strong or charismatic personality
Research scientists of specialised knowledge
Skilled engineer with detailed understanding of the company’s machinery
Sales person with a wide range of personal contacts
How can you determine the level of cover required for death of a key person
A simple method is to use a multiple of the key person’s salary say 5 or 10 times
Another method is to relate the cover to an estimate of the key person’s contribution to the businesses profits. This can be calculated by multiplying the amount of current annual profit by the ratio of the key person’s salary to the business’s overall wage bill. This estimate is then multiplied by the length of then multiplied by the length of time that the business would take to recover from the loss often assumed to be 5 years
Death of employee - explain length of term assurance and tax implications
The business would take out a term assurance on the life of the employee on the life of the employee for the period during which the employee is expected to be a key person. This may be until retirement or until the end of a contract of a particular project
If a term assurance of 5 years or less is chosen the premium Britain the premiums are likely to be allowed as a business expense which the business can set against corporations tax. In the event of a claim however the policy proceeds will then be taxed as a business receipt and subject to corporation tax
What 3 arrangements can be put in place If there is a death of a business partner
Automatic acural method - On the death of a partner his or her share is divided among the remaining partners in agreed proportions. The deceased partner’s family is compensated by the proceeds of a life policy written in trust for their benefit
Buy and sell method - On the death of a partner the deceased legal representatives are obliged to sell the partners share to the other partners who are obliged to buy it. To enable them to do so each partner takes out a life policy on their own life in trust for the other partners
Cross option method - This is basically the same as the buy and sale method except that the agreement specifies that the deceased partner’s estate has the option to sell their business share to the remaining partners who have the option of buying it. There will almost always be an agreement for the deceased estate to sell the business share and the remaining partners to buy it but there is no legal obligation to do so
Who needs shareholder protection
Small businesses that are run as a private limited company with a small number of shareholders
The same types of scheme available for partnerships can be used for shareholder protection
What policy can be used to mitigate the risk of sickness of an employee
Critical illness cover
What can be used to mitigate the risk of sickness of a business partner
Income protection insurance For the short time
Critical illness cover could be used to generate a lump sum required to buy out the partner
What can be done to mitigate the risk of sickness of a self employed sole trader
Income protection with a short deferred period
Broadly speaking what are the 2 reasons why people invest
To provide income
To provide a capital sum
What are 7 common reasons for requiring income or capital
Short term emergencies
Specific purchases
Education fees
Gifts to children
Buying a business
Loan repayment
Funds for retirement
How can the real rate of return be calculated
Nominal interest/growth rate minus inflation rate
What percentage of national average earnings is a state pension set at
Roughly 1/4 or 25%
As well as retirement planning what 3 other key issues are there in later life planning
Long term care insurance
Estate planning
Power of attorney
In what 2 ways can an adviser assist with estate planning
Has the client made a valid will
Has the client taken steps to mitigate inheritance tax liabilities
Is what are 2 approaches that people can take in relation to inheritance tax
Try to avoid having to pay it
Make provision for paying it when it is due
What is the role of an adviser in tax planning
The recommendation of a financial product should always take account of the products impact on the clients tax situation but it should be considered in context in conjunction with other features of the product.
Tax efficiency should never be the main reason for recommending a pension product
It is important to be able to choose appropriate products that can compliment and improve a client’s tax situation give 3 examples
Clients should normally consider the use of isas, pensions and friendly society policies to maximise the advantage of tax free income or growth
Clients who are non taxpayers may consider investing in funds such as offshore bonds which are free from uk tax
Clients who expect to exceed their capital gains annual exempt amount might consider investments that are free of capital gains tax such as gilts
