Protection Topic 2 - Illness and Business Protection Flashcards
The financial effect of illness or disability can be seen as more detrimental to a family than death because
there will be plenty more expenditure that will be necessary to cater for the new change.
On average, males and females in the UK spend about… of their life in good health
80%
Protection required for financial effects of sickness or disability usually falls into these categories:
- Replacement income
- Income to cover costs of replacing the ill person’s tasks/work
- Income for treatment
- Lump sum for treatment
- Lump sum to pay for changes in environment or lifestyle
- Lump sum to repay debts e.g. mortgage
The amount of cover required for sickness/disability can depend on a number of factors, including:
- Duration of illness or disability
- Extent of the inability to work
- Extent to which employer will continue to pay wages
- Additional costs that arrive – wheelchair, home improvements etc.
- Number and ages of children and dependants
- Ability of spouse to replace income
- Availability of help from friends and family
- Cost of hired help
- Extent to which income can be provided from other sources
2 main illness covers
- Critical illness cover (CIC) – pay lump sum on diagnosis of a range of specified illnesses
- Income protection insurance (IPI) – pays an income if the insured is unable to work for health reasons
Examples of existing personal provision a client might have for sickness or disability:
- May have IPI
- May have CIC – this can be attached to debts e.g. mortgages
- May have private medical insurance
- May have mortgage payment protection insurance
- Other debts like credit card debts may have cover for anyone who claims ASU
Examples of employer provisions for sickness or disability:
- Group IPI scheme – may be better than sick pay as it may last longer
- Private medical insurance
- Personal ASU cover
- Group CIC
- Occupational pension scheme – may offer for benefits to be paid out early if necessary
State benefits for sickness or disability:
- Statutory sick pay (SSP)
- Personal independence payment (PIP)
- Disability living allowance (DLA)
- Employment and support allowance (ESA)
Key person insurance (KPI)
insurance put in place to supplement the loss of a key employee who will be difficult to replace. This could be people in specialised jobs that may need time to search for a replacement.
Simple method of calculating amount of cover required for KPI is multiplying the person’s salary by
5 or 10
A more in depth calculation for amount required for KPI is
Types of KPI policy
Typically would be term-assurance for contract length, time spent as key person etc. or can be whole of life for someone like a managing director who will never leave/retire
KPI
For Ltd and LLPs, policy is taken out by…
the business on the life of the key person
KPI
For partnerships (other than Scotland) the policy is taken out by
the key person or one of the partners in trust to the benefit of all the other partners. This is because partnerships are not an entity in their own right, so they cannot own assets.
Premiums for KPI are normally allowed as a business expense, as long as they pass the Anderson principles, which are as follows
- Must be short-term – this is not defined, but cannot be for longer than the key person works for the business for example
- Policy must cover an expected loss of profits
- The employee should have no other relationship with the business other than employee to employer, and must be solely for business purposes otherwise it could lead to complications
