2: Financial Protection: Illness and Business Protection Flashcards
(31 cards)
Financial needs in the even of death and illness - considerations?
What sums are needed? And what for?
Protection provision needs likely to be greater than those upon death:
* Ongoing care fees
* Home adjustments
* Personal care - if costs cannot be covered, the main income earner may need to reduce the time spent on their normal role to pick up these duties.
* Replacement income
List 6 types or situations in which the benefit from a protection policy in the event of sickness or disability would help
- Replacement income
- Provide an income to cover ongoing costs of covering the tasks the unwell individual would have carried out (Homemaker)
- Income for ongoing medical treatement
- A lump sum to pay for private medical care (to obtain more quickly)
- A lump sum to pay for changes needed to environment
- Funds to repay debts/mortgage
Protection provision - provides flexibility
Without adequate financial protection, there will be limited chouce over the methods and location of treatment, rehabilitation and subseqent nursing care.
Another possible consequence is that follow‑up care cannot be provided in the home or
locally, meaning that the period of rehabilitation and care also involves undue financial
and personal stress.
Factors effective how much protection would be needed?
- the duration of the illness or disability
- the extent of the inability to work (that is, of the inability to do any work, remembering
that the client might be able to carry out certain other types of work) - the extent to which an employer will continue to pay wages or salary (that is, how
much and for how long) - the additional costs that arise from the illness (for example, expenditure on
wheelchair or home improvements) - the number and ages of the children and other dependants
- the ability of the healthy spouse or civil partner to generate** replacement income**
- the availability of volunteer help from** family and friends**
- the** cost of hired help **to assist with housekeeping or childminding, or to replace
other skills lost - the extent to which income can be provided from other sources.
Illness and disability - The level of need can often be subjective compared, however some are more straightforward…
- The need for income replacement if the breadwinner is unable to work can be based
on current income levels or outgoings. - The need for income generation if a homemaker is unable to perform their normal
role can be based on the costs of providing replacement services. - The sum required to pay off a mortgage or debt can be based on the outstanding
capital debt together with any repayment charges.
Income protection Insurance (IPI)
Will provide an income should the policy holder be unable to work for health reasons.
- If their concern is ensuring that they have income to maintain their current lifestyle should they become ill, Income protection insurance is designed to meet that need.
Critical illness cover
Will pay out a lump sum on diagnosis of a specified illness or condition
Key considerations
* Is the payout to meet the additional costs associated with illness?
* Or to repay a debt, like a mortgage?
* If their concern is ensuring that they have income to maintain their current lifestyle should they become ill, **Income protection insurance **is designed to meet that need.
Existing personal provision - Considerations
- May have PMI
- May have CIC attached to decreasing term assurance as part of the protection for their mortgage debt
- Interest-only mortgage may have CIC as a stand-alone policy or as a rider on an endowment or** level term assurance**
- Monthly mortgage repayments may be protected by mortgage payment protection
insurance (MPPI). - Other debts, such as personal loans or credit card bills, may be protected by some
form of loan care cover that may ensure that payments are made if the insured is
prevented from working owing to accident, sickness or unemployment (ASU). - Other loans, such as hire purchase, bank loans and credit cards, may include life
assurance cover.
Employer provision - Considerations
- What components of earnings are covered by the scheme? (Does it cover basic salary
only or does it include overtime and commission?) - What percentage of pre‑sickness income will be paid?
- For how long will it be paid? (Two years is the maximum for most employers and
many pay for a much shorter period of time.)
As with all employer‑provided protection, these benefits will cease once the person
leaves their current employment.
What are ‘rider benefits’
These are additional benefits that can be added on to a protection policy, these include:
* Waiver of premium
* Terminal illness
* Accidental death
* Total and permanent disability cover
* Guranteed insurability opitions
* Optional benefits - such as, fracture cover, second opinion services, mental health support
Main thing to remember with employer protection benefits:
These benefits will cease once the person leaves their current employment.
Often, employees believe that their employers pay sick pay but on further investigation it
is simply the statutory sick pay state benefit.
Employer protection provision and pension scheme?
Occupational pension scheme providers may offer the provision for pension benefits to be paid before normal retirement age in the event of early retirement due to ill health.
State benefits in the event of sickness or disability - Name 4
- Statutory Sick Pay (SSP)
- Personal Independence Payment (PIP)
- Disability Living Allowance (DLA)
- Employment and Support Allowance (ESA)
The main areas to be considered in relation to business protection needs are:
- Protecting the business from the adverse financial consequences that would arise on
the death or illness of a key employee - Protection for shareholders or business partners in the event of a shareholder’s or
partner’s death or illness -
Protection for the self‑employed, whose inability to work for a living would have an
immediate and severe impact on business finances.
Protection against the effects of death or illness of a
key employee
Key Person Insurance (KPI)
* The financial consequences stem not just from the loss of that person’s contribution to the
business, but also from the costs of sourcing and bringing on board a replacement.
* If illness prevents a key employee from working, the effect on the business’s profits can
be just as serious, and possibly even greater, than in the case of their death.
* If illness prevents a key employee from working, the effect on the business’s profits can
be just as serious, and possibly even greater, than in the case of their death.
Calculating KPI - Two methods
- Multiplying the key person’s salary by a factor of five or ten
Alternatively, a more accurate calculation:
- Current gross annual profit x (Key person’s renumeration/Total annual wage bill)
Then
Multiplied by the estimated number of years for the company to recover*
Other methods of calculation could be used in line with a company’s needs and cirmcumstances
This takes the key person’s contribution to profit into account, and is calculated by assuming that
their contribution is in the same proportion as that which their remuneration bears to the
total wage costs.
What product is KPI typically structured under?
*Term assurance
This is the typical choice, and covers the impact the loss of the KPI for the duration of their employment until retirement or a specified term or project
Types of KPI Policy - Whole-of-life
May be considered to provide protection in respect of a founding director who does not plan to retire.
Types of KPI Policy - For limited (Ltd.) and Limited liability Partnerships (LLP)
- The policy is taken out by the
business on the life of the key person
Types of KPI Policy - For partnerships
- The policy is taken out either by the key person themselves or one of the partners in trust
to the benefit of all other partners - In Scotland, a partnership is seen as an agreement and not an entity in its own right. Therefore, the partnership cannot own property in its own right.
KPI premiums are usually a deductable business expense - if they follow the anderson principles. What are they?
- Policy must be short term - should not be beyond the period of the employee’s usefulness to the company. WOL unlikely to meet this.
- Policy must cover an expected loss of profits - if intended to repay a loan, the premiums are unlikely to meet this.
- Relationship must be that of employer/employee - Where the key person owns an interst in the company, this can lead to complications (Business expense must be wholly and exclusively for ‘business purposes’)
If premiums of a KPI are accepted as a business expense, how are the proceeds treated in the event of a claim?
Treated as a business receipt and subject to corporation tax
If a KPI plan does not meet the Anderson Principles?
Not treated as a business expense
If the plan accrues an investment value, as could be the case with a whole‑of‑life plan, any gain will be subject to corporation tax. The gain is calculated as the excess of surrender value over premiums paid at the date of
Protection for business partners - reasons why this might be necessary
On the death or severe illness of a buisness parter, their beneficaires or they themselves, may wish to withdraw their share of the partnership’s value, assets, and withdraw from the partnership.
This presents an issue for remaining partners who normally wish to continue the partnership - they may need to sell partnership assets to buy out the ill partner.
Goodwill may form a large part of the commercial value of the partnership, the value may not be able to be realised, except perhaps by **selling the whole business. **
There is, then, a clear need for partnerships to insure against the death or illness of each
individual partner
