Protection in Business Context

• Topic 01

  Protection in Business Context

  54 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. What is required from the key person for a key person insurance policy to be valid?

   • A
     The key person must be a shareholder in the company for the policy to be valid
   • B
     The key person (life assured) must give their consent to the policy being placed on their life
     Correct answer
   • C
     The key person must complete a full medical examination regardless of the sum assured
   • D
     The key person must be named in the company's Articles of Association as a director or officer
   Explanation

   Like all life assurance, a key person policy requires the consent of the life assured (the key person). Without this consent, the policy would be void. The key person is the individual whose life is being insured. They must agree to the policy, provide details for the application, and typically undergo any underwriting requirements (such as a medical examination for higher sums assured). Consent is separate from insurable interest, which the business must also demonstrate.

2. What is the most common structure for a shareholder protection arrangement?

   • A
     Company-owned policy: the company takes out a policy on each shareholder and receives the proceeds to fund a share buyback
   • B
     Joint life first death policy: a single policy covering all shareholders jointly
   • C
     State-owned policy: the government-backed scheme provides free shareholder protection for businesses with fewer than 5 employees
   • D
     Own life in trust: each shareholder insures their own life and places the policy in trust for the other shareholders
     Correct answer
   Explanation

   The own-life-in-trust structure is the most common and recommended approach. Each shareholder takes out a policy on their own life, avoiding complications with insurable interest valuation. The policy is placed in trust for the other shareholders (or for the benefit of shareholders generally), ensuring the proceeds are paid to the surviving shareholders rather than into the deceased's estate. This structure also avoids complications if a shareholder leaves the business.

3. Under the Anderson criteria, when are key person insurance premiums deductible for corporation tax?

   • A
     When the policy is written in a company trust and the key person is a non-executive director only
   • B
     When the sum assured is less than 5 times the key person's annual salary and the policy term is under 10 years
   • C
     When the policy is short-term (term assurance, not whole of life), taken to protect profits (not capital), has no surrender value, and the business is both the policyholder and beneficiary
     Correct answer
   • D
     When the key person has been employed by the company for at least 3 years before the policy is taken out
   Explanation

   The Anderson criteria (from HMRC BIM45525) require all four conditions to be satisfied: (1) the policy is a short-term policy (term assurance, not whole of life); (2) it is taken out to protect trading profits, not business capital; (3) the business has no beneficial interest in any surrender value; (4) the business is both the policyholder and the beneficiary. When all four criteria are met, premiums are deductible for corporation tax and proceeds are taxable as a trading receipt.