Buisness Protection

Question 1

What are the two principle approaches for selecting sum assured on KPI?

Answer 1

Multiple of salary
Proportion of profit

Question 2

What is the equation for proportion of profit KPI?

Answer 2

Question 3

When would proportion profit KPI be utilied

Answer 3

Only when the company is making profit.

Question 4

How is KPI undewriten?

Answer 4

Normal medical underwriting.
Extra financial underwriting

Question 5

What is the purpose of financial underwriting?

Answer 5

Is the company taking out an appropriate level of insurance.

This is to prevent moral risk and that the company is only insuring for the loss it would make.

Question 6

How is financial undewriting performed?

Answer 6

Looking at company accounts, business plans, and the methodology for arriving at the selected sum assured.

Might have a fianacial questionnaire, particularly if the amount is over £250,000

Question 7

What are the Anderson Rules? (Rules that state when tax relief is due on KPI) 3

Answer 7

Employee and employer relationship

Covers costs from the loss of the employee.

Short term. (Might not be able to be renewable)

Question 8

What are the objectives of shareholder protection?

Answer 8

Provide protection
Maintain flexibility
Maintain tax efficiency

Question 9

What forms of shareholder protection agreements are there?

Answer 9

Buy and sell - must be bought and sold
Cross option - if one party wishes to but or sell, it must happen.
Automatic Accrual - no shares handed to beneficiary
Single option - only one person makes decision to prevent forcing out.

Question 10

What is the disadvantage of buy and sell?

Answer 10

Creates a binding contract for sale, meaning business property relief is nulified, and IHT must be paid.

Question 11

What is the advantage of cross opinion?

Answer 11

No binding contract of sale, so benefits from business property relief. (Most favoured agreement for this reason)

Question 12

What is a cross option agreement usually backed with?

Answer 12

A level term assurance policy

Question 13

What should be arranged with an automatic Accrual agreement

Answer 13

Life cover

Question 14

What is single option often used with?

Answer 14

CIC

Question 15

What is beneficial about term insurance for share holder protection?

Answer 15

Best way forward where proceeds go straight to the company.

No surrender value, so it can be lapsed if the individual leaves.

Cheap.

Question 16

What is the benefit of whole of life for shareholder protection?

Answer 16

Though expensive can be done cost effectively with maximum sum assured and premium increase every 10 years, which will remove issues of insureability.

Potential use for automatic accrual

Question 17

How does life of another work for shareholder insurance?

Answer 17

Each shareholder takes out insurance on each other shareholder.

This keeps things fsir but is messy with lots of shareholders.

Question 18

How does own life in trust work?

Answer 18

Each share holder takes out a policy on their own life and puts it into trust for the shareholders.

Keeps things clean but can be unfair.

Question 19

How can unfairness be mitigated with an own life policy?

Answer 19

The company pays
Increases in salary
Equalisation exercise.

Question 20

What are own life in trust policies used for?

Answer 20

Auto Accrual

Question 21

What is the problem with the company with shareholder lives insured?

Answer 21

It may incur CGT as the HMRC might see this as a distribution rather than disposal.

Question 22

How will shareholder insurance sum assured be set?

Answer 22

By each shareholder holding as provided by the accountant.

Question 23

Over what amount would a company’s account be requested for undewriting?

Answer 23

£500,000

Question 24

What is partnership protection important?

Answer 24

The Partnership Act 1980 dictates that on the death of a partner, the partnership should be desolved. Unless otherwise specified.

This could be problematic if the surving partner can not pay up the deceaseds share.

Question 25

How should an overdraft be covered?

Answer 25

Full amount of the overdraft.
Term done on a case by case basis.

Question 26

How should a loan be covered?

Answer 26

Maximum possible repayment covered over the appropriate term of the loan.

Potentially use decreasing term if no need for further borrowing.