A to Z of Business Financial Protection
Anything owned by individuals or companies with an economic value, especially that which could be converted into cash. Key persons can often be classified as assets to a business.
Amount paid by a financial institution such as an insurance company or investment house to an intermediary such as an IFA for business placed. Following the implementation of the Retail Distribution Review on 1st January 2013, commission will no longer be permitted on new transactions, to be replaced with fees, either charged explicitly or implicitly within any investment. However, protection business is exempt from this and commission remunerated advice can still be provided.
Critical Illness Benefit
Designed to primarily pay a lump sum in the event of an individual contracting any one of a whole range of critical illnesses such as cancer, heart attack, stroke, paralysis, blindness, and brain tumour. A good, ‘standard’ policy will cover at least 25 to 30 serious illnesses. However, recent innovations have seen an entirely new product and given rise to a totally new approach to critical illness, with coverage of over 170 critical conditions.
Death in Service (DIS)
Life cover provided by an employer usually expressed as a multiple of salary.
Decreasing Term Insurance
This is an insurance plan that pays out a lump sum if you die or suffer a critical illness within a specified plan term. Unlike a Mortgage Protection policy, the amount of benefit payable reduces in equal instalments throughout the policy term.
Double Option / Cross Option Agreement
Upon the death of a shareholder, the shares and their value will usually form part of the deceased’s estate and in all likelihood result in at least initially, the surviving spouse / partner owning the shares. However, at this point there is no legal compulsion for the unexpected recipient to sell those shares back to the remaining shareholders and equally there is no requirement for the surviving shareholders to buy them back. This is not to say that amicable negotiations cannot be entered into, however, agreement may not be reached. Therefore, to ensure that a sale can be compelled by the surviving shareholders or a purchase enforced by the deceased’s beneficiary, a double option agreement should be considered. It is an option and not a binding agreement, therefore, assets qualify for Business Property Relief (BPR). As a consequence, it is often preferred over a contractually binding Buy & Sell Agreement, which does not qualify for BPR.
Employee Benefits / Flexible Benefits
These are benefits provided by an employer for employees and usually paid for by the employer. These can include pension, sick pay entitlement, death in service, critical illness and private medical insurance. These may be offered as part of a standard package of benefits, although larger employers often provide a flexible choice of benefits so that they may pick and choose those that are specific to their needs and requirements. For example, a single person with no financial dependants may choose no death in service cover and instead enhance their personal sick pay benefits.
Within a Shareholder Protection / Partnership Protection arrangement, premiums will often differ for each shareholder and the likely benefit that each will enjoy does also. For example, assuming standard mortality and / or morbidity experience, the oldest individual is more likely to die or suffer a serious illness. However, those younger are consequently more likely to benefit. Also, relative shareholdings may differ and a minor shareholder will benefit to a greater extent from the death of a majority shareholder. It is, therefore, unfair that that individual is financially disadvantaged due to the higher cost of insuring them. Therefore, to ensure the arrangement is deemed to be on a commercial basis, and each party bears a fair portion of the total cost, it should be apportioned across all parties. This is known as premium equalisation and is based upon a number of factors including age and sums insured.
Another term for shares in a company.
Group Critical Illness Scheme
A scheme organised by an employer that will pay a cash lump sum to the employees of a company who are scheme members and are diagnosed as suffering from any of the specified illnesses or conditions.
Group Health Insurance / Group Private Medical Insurance
This is scheme arranged by an employer that pays towards private medical treatment for employees that are members where the condition is covered by the policy.
Group Income Protection / Group Permanent Health Insurance
This scheme provides employees suffering from sickness or disability with a replacement income. The benefit usually becomes payable when the company’s own self funded sick pay entitlement ends and will continue to be paid until retirement age or until the claimant returns to work if earlier. Benefit is payable to the employer who passes it on as continuing salary. Consequently this is taxable in the hands of the employee.
Group Life Insurance
This arrangement will pay either a lump sum or a dependants’ pension upon the death of the member. This is often expressed as a multiple of salary.
Indexed Term Insurance
Similar to Level Term Insurance in that the plan benefit is payable as a lump sum, however, this does not remain level but rather the sum insured increases each year either by Retail Price Index (RPI), National Average Earnings Index (NAEI) or on a fixed percentage basis. This helps to offset the effects of inflation and maintains the real value of the benefit.
Key Person Insurance
This can sometimes be referred to as Key Man Insurance. This is designed to protect a business against loss of income / impact on profit resulting from the disability or death of an employee. It provides funds to cover the absence or loss of a key employee and for the replacement of that person, either on a permanent or temporary basis.
Level Term Insurance
Is generally a life insurance plan that pays out a fixed, level lump sum upon death or diagnosis of a critical illness during the specified policy term.
A benefit which becomes payable upon the death of an individual. This can be effected either in isolation or in combination with critical illness cover.
This can considered for any number of reasons including business-related mortgages / finance, key person cover and shareholder protection.
It may be structured as a lump sum or annual income. Please see the various structures of term insurance for specific information. For additional tax effectiveness may be written in trust.
These are any physical or mental conditions that exist prior to the effective date of an insurance policy.
Private Medical Insurance (PMI)
An insurance policy that pays towards private medical treatment if the condition is covered by the policy.
Relevant Life Policy
A tax efficient policy allowing an employer to provide Death In Service cover for an individual, usually a key employee.
Renewable Term Insurance
A term insurance policy that at the end of the plan term, can be renewed without further medical underwriting, albeit that the cost will be calculated based upon the age of the individual at that time. An often used method of providing insurance for Key Person cover.
Share Protection / Partnership Protection
This is an arrangement that upon the death or serious ill health of a business owner provides the necessary funds to the remaining partners or shareholders to facilitate the acquisition of that individual’s share.
Term insurance is a plan that pays out a benefit if the insured dies or suffers a critical illness within the plan term. These are generally pure risk policies, with no surrender value or maturity value accumulating within the plan. If no death or critical illness, depending upon the cover selected, occurs during the term, then the policy will end and no money will be returned. Equally should premiums cease under the arrangement at any time, cover will lapse without value. As noted above, term insurance comes in many different forms.
The primary advantage of writing an insurance policy under trust is that in the event of death the plan proceeds are payable without the need to obtain probate. This is a legal administrative process, which can sometimes be a long drawn out affair and one that may otherwise delay the payment of the benefit. The proceeds will be payable to the nominated beneficiary or beneficiaries regardless of whether a will has been drawn up or not. Policy proceeds paid out under trust are also outside of an individual’s estate with regard to Inheritance Tax (IHT).
This is the legal document that establishes and governs the operation of a Trust.
An individual or corporation appointed to administer the terms of a Trust document.
Whole of Life Assurance
This is an open ended policy structure. The benefit is paid out whenever this occurs, as unlike term insurance there is no expiry date. Premiums may be payable throughout life, or for a shorter period. ‘Traditional’ Whole of Life plans were With Profit based.
However more modern investment linked versions replaced these. These are known as Flexible Whole of Life and, as the name suggests, premium levels are flexible. Cover can be costed for on a ‘maximum’ basis where cover is maintained for a period of typically 10 years at a time or 5 years for older clients. Alternatively they can be effected on a ‘balanced’ basis where premiums are set at a level to maintain the cover for the duration, subject to an agreed rate of investment return being achieved.
A subsequent evolving of this market has lead to the introduction of guaranteed premium products, removing the link to investment returns altogether, although these are generally more expensive.