John, 45, was admitted to hospital last year suffering with chest pains. John runs his own business as a site manager of a quarry, and would like to take out business protection so that the business is catered for should something happen to him. He works with four people - the managing director, chairman and two labourers. The business brings in £250,000 a year, and has been in profit for the past 10 years.
David Brunning, Brunning Newman Houghton
John has done the right thing by seeking treatment for his chest pains, which is not always the first course of action. A health scare is often the trigger to realising a company needs business protection, and John is wise to consider it.
There are three main areas to explore. First, what is John's understanding of business protection? Does he want to release the value of his shareholding should he die or suffer a critical illness (CI), or does he want the business to receive enough cash to continue trading should he or another key member of staff suffer a CI or die?
Second, what was the outcome of his hospital admission with chest pains? This case will require in-depth underwriting and we would want to ensure the policy is placed with an insurance company with experience of underwriting large and complex business protection cases.
Third, who are the key people within John's business? His senior members of staff may be crucial to the ongoing success of the company.
If John simply wishes to ensure the future of the business in the event of his incapacity, he should consider a key-person policy on his life. A Skandia rolling term policy will cover a whole of life basis with a low initial cost and no reliance on stock market performance. Alternatively, he may wish to consider a five-year fixed term policy, meaning the premiums are tax-deductible as a business expense. This could be helpful, as John's medical history is likely to attract a raised premium.
Jerry Bayman, Bright Grey
As this owner-managed business has just two labourers, the directors are likely to be 'hands on', so what questions should we ask to establish their protection needs?
The questions may include: Do they rely on an overdraft, which is repayable on demand? Do they have expensive machinery with high lease costs? Have the directors made loans to the company that would be repayable on death? In addition, what about the business value and share split? What do the articles of association say about the transfer of shares on death or ill health?
Depending on the answers, the company could consider taking out life, critical illness (CI) or disability cover on each key person. Each owner should cover the value of their shareholding with a life and possibly CI policy written under a business trust and supported by an appropriate cross option buy-and-sell agreement.
In terms of costs, £100,000 10-year life cover for John would cost about £150 a year. Adding in CI would cost another £600 a year, while £2,000 monthly disability cover to age 65 would add about £1,300 a year (assuming there is a six-month waiting period). These rates are an approximate indication and do not form part of any illustration. They would, of course, be subject to any underwriting regarding the outcome of his chest pains, which could have been anything from a pulled muscle to angina.Gerry Warner, Zurich
There are three issues this business and its owners would need to consider in the event of John's death or diagnosis of a critical illness (CI) - director share purchase arrangements, key person arrangements and debt protection for any existing company borrowing. In terms of the key person requirements, the company employs five people, therefore, John is key to its profitability. Key person cover should be considered to replace him permanently or temporarily. Combined life and CI cover will provide protection against these possibilities, although income protection should also be considered.
Methods to calculate the appropriate level of protection vary, however, we use the 'cost of replacement' basis (up to seven times remuneration for life cover, five times for CI cover). Assuming an annual salary of £50,000 and recruitment costs of £10,000, in addition to a sum assured of £120,000 to give the business two years to recruit, train and remunerate John's replacement is advised. Combined cover over 20 years, non-smoking terms, would cost the company £99.70 a month with no financial underwriting.
John's history of chest pain would require a GP report. Normal terms are likely if the pain is purely muscular and short term. If a specific condition, for example, angina, has been diagnosed, we would apply relevant terms assuming all investigations and treatment had been completed. If coronary artery disease exists, CI would be declined, however rated terms for life cover could be offered.
