Learning Objective 10 Flashcards
(29 cards)
Life Assurance
How to calculate the sum assured required
- Capital required
- Long-term income needs
- Short term income needs
Add together to provide a sum assured
Life Assurance
Identifying Capital Needs
Funeral costs, debt repayments (mortgage) etc.
Life Assurance
Long-term income needs (retirement and beyond)
- Amount needed by spouse
- Minus any continuing income (i.e. widows/spouses pension)
- Apply income multiplier (Amount of years income required)
Life Assurance
Short-term income needs
- Amount needed for children until dependency age
- i.e. family income benefit
- Apply income multiplier (Amount of years income required)
Income Protection
Calcuating Sum Assured
- Establish level of expenditure - What needs to be paid
- Any new expenditure - e.g. nursing care
- Any lost expenditure (travelling costs etc.) no longer needed whilst off
- Any existing cover or state provision
Single tied Financial advice
- Restricted advice
- Can only recommend products of one provider
Multi-tied Financial advice
- Restricted advice
- Can only recommend products from a specific set of providers
Independent Financial Advice
- Not restricted in recommendations
- Must assess a sufficient range of relevant providers to ensure suitability for the client
Influences on product selection by IFA
- Premium costs
Underwriting process
Claims record
Customer Service
Financial strength of the providers
Ethical practises
IFA
Financial strength of the product provider
- Free asset ratio to calculate strength of company
- Surplus assets held / value of its liabilities expressed as a %
- Higher the % the better
Presenting recommendations
Suitability reports are mandatory for products where advice is provided
Inadequate protection / unfulfilled needs should be documented in report
Protection policy reviews
Undertaken periodically / on demand
Ensure ongoing suitability, any new products that may be beneficial
Benefits the client and not the adviser
Business protection -
Key Person Insurance
Protecting business profits by insuring business assets
Can be stock, transportatsion, personnel
Insurance to produce lump sum for business in event of loss of key person
Need for Key Person Cover
Replacement costs - Recruitment and allowing employee to settle in to new role
Business interruption - Loss of profits due to loss of keyperson
Financial implications - Maintain trust, debts to be reduced or repaid, funding to adapt business
Key person cover - Life Cover
Calculating amount of cover
Business cash levels
Profit forecast
effects on profit due to loss of KP
Recruitment costs
Delays in bringing new employee up to speed
Loans that may be recalled
Insurable interest needs to be proven so the cover amount is relative to potential loss
Main approaches to calculate KP cover
- Multiple of salary method: Simple multiplier of keypersons salary i.e. 5 x (Most common/ useful)
- Proportion of profits method: KP’s salary + annual profit of company and time taken to replace KP
Percentage of profits - Calculation
KP’s salary x profit for last year x number of years to replace / Total salary bill
KP protection
Taxation
- Each case is reviewed separately
Premiums are tax relievable and sum assured is taxable
KP Insurance
Financial underwriting
- Insurers need to be convinced that cover amount is relative to potential lost profits.
- Will ask to see accounts, business plans and any loan agreements
Share and Partnership protection
- To provide funds to buy company shares if a shareholder dies/becomes seriously ill
Share protection - For companies
Partnership - For businesses
Both very similar so understand one and you get the other
Shareholder protection insurance
- Objectives
- Ensure funds are available to buy shares from the shareholders’ estate in event of death
- Ensure funds are available to compensate the deceased’s estate if they wish to have the cash value of the shares instead
This allows business continuity and allows the estate the option for cash value rather than the actual shares
Articles of association
Essentially a Will for the company
Generally have clauses inserted saying what should happen if a shareholder dies
No automatic obligation to buy out deceased shares, usually a first option
Reaching an agreement
For IHT purposes, should only have an option to buy shares, as an obligation would remove the right to business relief (IHT exemption for business assets)
Buy and Sell agreement
- Obligation to buy shares
- Simple and effective
- Removes Business relief
