A Guide to Protecting Weath 7856

8/13/2019 A Guide to Protecting Weath 7856

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Protectingbu

sinesswealth A guide to

Protecting business wealth

Forprofessional

adviseruseonly


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There are no firm statistics to show the number of companies with

business protection but industry estimates suggest that the figure could

be as low as 5%. This figure indicates an extremely high proportion of

companies living dangerously and a vast opportunity for independent

financial advisers.

Most businesses have at least one key person requiring protection,

and, in addition, the market for business protection is probably as great.

Loan security is another substantial area that should not be overlooked.

U.K. bank lending to businesses runs at an enormous level every year

but only about half have loan cover in place. The need for protection

is self-evident.

In general it is the small to medium sized businesses who are most

at risk from under-insurance in the business protection area, but the

protection needs always exist even in the largest organisations.

This guide is designed to provide you with details of key person,partnership and directors share purchase insurance, including relevant

tax implications and draft documentation.

The information in this guide is based on English Law. It is a guide only

and is not intended to replace the advice which you may need to seek

from a lawyer or accountant. Information in this guide may not be relevant

to legal systems outside England. Suggested contract and trust wordings

are specimens only and may be inappropriate to your particular

circumstances, or need substantial amendment in order to be appropriate.

2

Introduction


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3

Key features of CLIs proposition

Sound financial strength (please see current ratings below)

Consistently high quality service standards

Dedicated administration and technical support teams

Long term experience in providing life assurance solutions

Access to underwriting support, which is especially useful for pre-application enquiries

Experience to handle and issue large sum assured cases

Large case underwriting experience

Highly competitive premium rates

Guaranteed insurability options

Current ratings

Ratings are a reflection of our financial strength. Great-West and its subsidiaries have received strong ratings from

the major ratings agencies.

Rating Agency Measurement Great-West Canada Life1

A.M. Best Company Financial Strength A+ A+

DBRS Limited Claims Paying Ability IC-1 IC-1

Subordinated Debt AA (low)

Fitch Ratings Insurer Financial Strength AA AA

Moodys Investors Service Insurance Financial Strength Aa3 Aa3

Standard & Poors Ratings Services Insurer Financial Strength AA AA

Subordinated Debt AA-

1 Canada Life Assurance Company (which owns 100% of Canada Life International Limited)

Source: Great-West. Ratings are correct as of 14/12/12.

Canada Life International Limiteds (CLI)

business protection proposition


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Who is a key person?

Every business has key employees on whom the profits

depend. It may be the directors, the top salesman, the

managers, the technicians the people most difficult

and costly to find and replace. The key employees in

a business are usually not difficult to identify and

it makes sound commercial sense for the company

to insure these people in the same way it insures

its premises and stock against fire and the resulting

loss of profits. Indeed the companys material assets

are likely to prove much easier to replace than its

human assets.

The unexpected death of a key person leaving work

unfinished on his or her desk, perhaps with orders in

mid negotiation, might have a shattering effect on a

company where there are insufficient reserves available

to meet the crisis. As well as loss of profits, the credit

standing of the company may be jeopardised, for

example, where the key person is a director and thereare personal bank guarantees and/or directors loan

accounts which have to be repaid upon death.

What can key person insurance do?

Insurance on the life of a key person cannot replace

the unique talents of the individual but it will safeguard

the continuity of the business for the survivors.

The assurance proceeds, in the form of a cash lump

sum, will help the company through the immediate

crisis until arrangements can be made for the

replacement of the key persons (or in extreme cases,

allow time for the company to be sold as a going

concern). According to circumstances this protection

can be used by the company to:

cover the fall in profits due to lost orders

repay bank loans, directors loan accountsor trade creditors

pay the salary of a temporary manager

cover the cost of recruitment and traininga replacement

How much life cover?

The law recognises that an employer has an insurable

interest in an employees life to the extent of the

potential loss suffered on the employees death.

In practical terms, any reasonable formula for

calculating the possible loss over the period required

to replace the key person will be acceptable.

Two formulae often used are:

a multiple of salary, say five to ten times averagesalary over the past three years. This formula

is based on the broad assumption that a salary

tends to reflect an individuals contribution

to the company, or

a multiple of five times the average attributablenet profit for the past three years (that is take

the multiple of net profit and divide the resultant

figure by the attributable percentage for

that employee).

The amount of cover chosen could reflect the

capital investment tied-up in a particular project, the

anticipated loss of profits, the amount of any overdraft

facility or a number of other cash requirements.

For what term?

The period of the insurance can be tailored to suit

individual circumstances. For example, a high level of

cover may be needed for a relatively short period while

a special project is being undertaken. Alternatively,

cover could be for the term of a loan or for a longperiod in cases where the key person is likely to be

making a significant contribution to the company up

to or beyond retirement age.

Which type of cover?

The basic types of cover are:

Maximum cover the sum assured is at a high level

for 10 years, but then requires an increased premium

to sustain it.

Balanced cover for a longer time frame, where the

sum assured remains level throughout.

Protecting key people


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Term assurance policies

In practice what happens is that the local Inspector of

Taxes interprets an answer to a parliamentary question

made in 1944 by the then Chancellor of the

Exchequer, Sir John Anderson

Treatment for taxation purposes would depend upon

the facts of the particular case and it rests with the

assessing authorities and Commissioners, on appeal

if necessary, to determine the liability by reference

to these facts. I am however advised that the general

practice in dealing with insurances by employers

on the lives of employees is to treat the premiums

as admissible deductions and any sums received

under a policy as trading receipts if:

i. the sole relationship is that of employer

and employee

ii. the insurance is intended to meet loss of profitresulting from the loss of services of the employee

and

iii. it is annual or short term insurance.

Cases of premiums paid by companies to insure the

lives of directors are to be dealt with on similar lines.

HM Revenue & Customs in practice are likely to

consider condition (i) fulfilled if the life assured

is a director with a shareholding of less than 20%.

Condition (ii) will not be met if the purpose of the plan

is loan repayment as this is a capital item. Condition

(iii) will be met if the term of the policy is no more than

5 or 10 years.

The premiums for whole life policies will not be treated

as admissible deductions. Any gains held by companies

on policies that have a surrender value will be taxed

under the loan relationship rules*.

Gains (that is the surrender value less premiums

paid) will be chargeable to corporation tax on all

keyman policies.

Please note that the Canada Life International Limited

Flexible Life Plan is a pure protection policy and only a

sum assured is payable (on death). There is no

surrender value at any time.

The information regarding taxation is based on our

understanding of current legislation, which may be

altered and depends on the individual financial

circumstances of the investor.

*These rules govern the tax treatment of profits, gains

and losses incurred on assets owned by a company.

Taxation


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Specimen letters to HM Revenue & Customs

The letter(s) should be on the letterhead of the company which has effected the policy.

Dear Sir/Madam

Key person assurance: ABC Limited

I/we refer to your letter dated ******** which informed the Company that the

premium in respect of the assurance effected by the Company on the life of

X will not rank as an allowable deduction for corporation tax purposes.

Please confirm that the proceeds of this policy will not be treated as a trading

receipt and that, therefore, the Company will not be taxed on the proceeds in

accordance with the provisions of the Income Tax (Trading and Other Income)Act 2005.

Yours faithfully

Checking that corporation tax will notbe levied

Dear Sir/Madam

Key person assurance: ABC Limited

This Company is effecting a policy of life assurance with Canada Life

International Limited on the life of X for its own benefit for the sum assured of

. The premium is per annum.

a) X is the (export manager) (managing director) of the Company. The

Company is a director controlled company and X [owns (x%) (none) of the

shares in the Company.] [together with his relatives, controls the Company.]

b) The reason for the policy is [to protect the Company from the financial

consequences of Xs death because it would lead to a considerable

reduction in profits for the Company in the year(s) immediately following

his death.] [to cover a loan repayable on the death of X.] [to cover the

reduction in value of the Company occasioned by the death of X.]

c) The policy is a whole-life assurance which will acquire a surrender value.

Please confirm that the premium will [not] rank as an allowable deduction for

corporation tax purposes.

Yours faithfully

Informing HMRC of the policy


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How should a business owner identify key persons?

Some of the following questions are appropriate:

Who are the most important peoplein your company?

Who would be the most difficult person for the

company to replace?

Which people are key to the profitabilityof the company?

Looking at each possible person ask

If they died

would customers confidence fall?

would useful contacts be lost?

would shareholders become nervous?

would loans guaranteed by this person be recalled

or finance be more difficult to obtain?

would a replacement be difficult to find?

would product development/design be lostor restricted?

If the response to any of these questions is yes

then a key person has been identified.

How to establish the need for key person insurance

If a key person was to die or be unable to work then

the company is at risk from the following:

Interruption of sales and business development

Loss of confidence in customers or suppliers

Delays to special key projects

Increased stresses and strains on remaining staffwho have to stand in for the key person

Loss of morale

Costs of replacement

Loss of competitive edge

Loss of profits

Loan protection

Loss of technical expertise

By effecting key person insurance companies can

protect themselves so that a single capital sum would

be paid to be used by the company as it wished,

to maintain the profitable integrity of the business.


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The problem for private companies

In a private limited company most of the shares are

usually held by directors and senior staff who contribute

their skills as well as capital to the company. Indeed,

the success of the company and therefore the value

of the shares arise out of their collective efforts.

A company is a corporate entity distinct from its

members which does not dissolve automatically on

the retirement or death of a shareholder/director.

The shares continue to be owned by the ex-director or

by the beneficiaries of his estate until a purchaser can

be found. It may prove very difficult to find a purchaser

from outside the company willing to pay a fair price,

especially if the block of shares does not represent

a majority holding.

The other directors may view with alarm the prospect

of outsiders coming onto the board and members of

the ex-directors family might also be unwelcome.A practical solution is often for all the directors to

enter into a double option agreement whereby it is

agreed in advance that the continuing directors will

have the option to buy the deceaseds shares.

For example, Mr X holds 60% and Mr Y 40% of the

shares in X and Y Ltd.

If X dies, his widow (who has no wish to run the

business herself), wants to sell the shares. Y wishes

to buy them if he can raise the money.

On the other hand, if Y dies his widow will inherit

a minority holding which she will find difficult to sell

unless there is an agreement for X to buy the shares.

In both cases the urgent need is for cash to replace

the lost income of the deceased director.

What can share purchase insurance do?

Share purchase insurance allows the directors to make

advance provision to meet financial obligations on the

death or retirement of a director/shareholder.

Insurance arrangements can be tailored to meet the

following objectives:

Make sure a fair value is paid for the shares

Avoid costly bank borrowings by thecontinuing directors

Quickly and fairly compensate a deceased directorsdependants by payment of a lump sum

Prevent the company from falling into the handsof outsiders

What is a double option agreement?

A private limited companys Articles of Association

(the companys internal rules and regulations)

may contain:

rights of refusal, restricting the transfer of the

shares and/or

rights of pre-emption by which the shares must firstbe offered to the other directors/shareholders

There may be other rights attached to the shares.

In other words, a director may not be free to sell his

or her shares to an outsider as the other directors

may refuse to register the transfer. Furthermore, the

continuing directors are not automatically obliged to

purchase the shares of a deceased director.

To make sure that a deadlock position does not arise

the directors should enter into an existing agreement

as to the purchase and valuation of their shares in theevent of death or retirement. Occasionally these

circumstances have already been envisaged in the

Articles of Association but more commonly it is

convenient to cover the position in the event of the

death of a director by means of a separate double

option agreement.

For practical and tax reasons the agreement is usually

framed in the form of a double option agreement so

that should either the deceased directors dependants

or the continuing directors exercise their respective

options to sell and buy the shares the other party

is bound to co-operate.

The double option agreement will stipulate the method

of valuing the shares and therefore the amount of

insurance required. This may be designated as such

amount as is agreed by the directors from time to time

in which case any realistic figures taking into account

the assets, goodwill and profit trend of the company

can be used.

Directors share purchase insurance


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How should the cover be arranged?

Share purchase insurance should aim to provide:

Money in the right hands at the right time

Fair distribution of costs

Flexibility to deal with changes in directors

Maximum tax efficiency for premiums and proceeds

Life of another

Take the example of X & Y Ltd where the double option

agreement requires X to buy Ys shares in the event

of his death and vice versa. X insures Ys life for the

amount needed to buy out Ys shares and Y effects

a corresponding policy on Xs life. The arrangement

is fair and straightforward where there are a few

directors but becomes cumbersome and inflexible

for larger companies.

Own life in trustAgain, taking the example X & Y Ltd, X effects a policy

on his own life in trust to benefit Y for an amount equal

to the value of his own shares. Y would reciprocate

with a corresponding policy for Xs benefit.

Please note that if the policyholder could be included

as a beneficiary of the policy, a charge to pre-owned

assets tax may arise.

Because the directors pay premiums for policies on their

own lives a cost adjustment between them might be

required if their ages/shareholdings differ significantly.

The trust solution example

Each shareholder takes out an own life plan for the value of his shares under trust for their co-shareholders.

All shareholders enter into an appropriate agreement. If one of the shareholders dies, the others would have

the funds to purchase the deceased shareholders shares from his personal representatives following the death

of the life assured.

What are the steps to be taken?

Stage 1 The Articles of Association should either

include rights of pre-emption or a separate double

option agreement should be written

Stage 2 Value the shares

Stage 3 Application to the insurer completed by the

appropriate applicant, together with a suitable trust,

where relevant.

Stage 4 Insurer will underwrite the application

Stage 5 Putting policy into force

Stage 6 Yearly reviews

X

250,000 plan under

trust for Y & Z

250,000 plan under

trust for X & Z

X dies

Cash

Shares

plan proceeds

250,000

On the death of a shareholder (for example X)

For example

Plan 250,000

Xs family Y & Z

250,000 plan under

trust for X & Y

Y Z

X & Y Ltd


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The problems for business partners

A partnership is the relationship between two or more

people carrying on a business together, with a view to

making a profit out of their joint endeavour. It differs

from and does not include the relationship of employer

and employee and principal and agent.

Partners pool their capital and their skills while they

are working together but each partners share of the

partnership remains his own so that when a partner

retires or dies the other partners have no automatic

rights to claim on it. At that stage the partners

interests have become very different and the

partnership agreement, if there is one, will govern

their respective rights.

The continuing partner(s) will normally want the

business to keep running with as little financial

disruption as possible, whereas the retiring partner

or the dependants of a deceased partner may wantto receive fair payment for his interest as quickly

as possible.

For example, on the death of X in the firm XY & Co

the surviving partner Y is immediately faced with

three major problems.

1. XY & Cos creditors as the partnership

has changed

2. Xs estate will wish to take the value of Xs

interest out of the partnership

3. Ys own livelihood and providing for his own family

The urgent need is for cash to enable him to meet

these liabilities and carry on the business.

What can partnership insurance do?

Partnership insurance allows the partners to make

advance provision to meet financial obligations on the

death or retirement of a partner.

Insurance cover can be arranged to meet the

following objectives:

Make sure a fair value is paid for the interest of the

deceased partner

Avoid costly bank borrowings by the continuingpartners

Quickly and fairly compensate a deceased partnersdependants by payment of a lump sum

Facilitate the entry of new talented partners withinsufficient capital

What is a partnership agreement?

All active partnerships should have a formal agreement

or deed setting out the division of profits between the

partners and also the procedures to be followed on

the death, retirement or withdrawal of a partner.

Failing such an agreement the partnership would by

law have to be wound up on the departure of any one

of them. The agreement also covers the method of

valuing an outgoing partners interest including all or

some of the following:

The original capital subscribed by the partner

Interest on the capital

Any undrawn profits

Goodwill

What does the partnership agreement say?

There are a variety of different types of partnership

agreement and the insurance arrangements needto be tailored to fit in with the provisions of the

agreement concerned.

There are however, two basic ways in which the

interests of the partners are dealt with on the death,

retirement or withdrawal of a partner.

These are:

Cash purchase The straightforward procedure where

the continuing partners purchase the capital and

goodwill of the outgoing partner. This is often used

where goodwill is not a very significant amount.

If the partnership agreement does not itself coverthe procedure for this, then a separate double option

agreement may be written. Should either the deceased

partners dependants or the continuing partners

exercise their respective options to buy or sell the

partnership interest, then the other party is bound

to co-operate.

Partnership insurance


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Automatic accrual For partnerships in the

professional and service industries, there is an

increasing trend towards agreements whereby goodwill

passes automatically to the continuing partners without

payment. In return each partner formally undertakes to

make life assurance and pension provisions for himself

and his dependants for an agreed value to represent

the goodwill. This procedure, whereby the goodwill

transfers automatically to the continuing partners is

sometimes extended to include partnership capital.

One advantage of automatic accrual is that new

recruits with talent but little capital can, more easily,

be brought into the partnership.

How should the cover be arranged?

Partnership insurance should aim to provide:

Money in the right hands at the right time

Fair distribution of costs bearing in mind the sharesand ages of the partners and division of profits

between them

Flexibility to deal with changes in the partnership

Maximum tax efficiency for premiums and proceeds

The methods of arranging the protection against the

death of a partner are broadly:

Life of another

Take the example of XY & Co where their partnership

agreement requires X to buy Ys share in the event of

his death and vice versa. X insures Ys life for the

amount needed to buy out Ys shares and Y effects acorresponding policy on Xs life. The arrangement is fair

and straightforward for small partnerships but becomes

cumbersome and inflexible for larger ones.

Own life in trust

Again, taking the example XY & Co, X effects a policy

on his own life, in trust to benefit Y, for an amount

equal to the value of his share. Y reciprocates with

a corresponding policy for Xs benefit. Flexibility is

provided as policies can revert to the lives assured in

the event of the break up of the partnership. As each

partner pays premiums for the policy on his own life, a

cost adjustment between the partners will be required

if their ages/shares differ significantly.

Automatic accrual

Where goodwill and/or capital is treated on an

automatic accrual basis in the partnership agreement

then both A and B should insure their own lives, for

their own benefit or their families to the extent of

the value which will pass to the continuing partner.

Again, a cost adjustment should be considered if their

ages/shares differ significantly.

Advantages of automatic accrual

Simplicity

Ease of attracting new partners

Possibility of creating capital gains tax loss

Generally, no adverse inheritance tax(IHT) consequences

Reduction of the financial need for the continuingpartners to compensate an outgoing partner

Disadvantages of automatic accrual

In the event of Business Property Relief forinheritance tax (IHT) not applying then possible IHT

liabilities could arise

Need to find other methods of compensation

What are the steps to be taken?

Stage 1 Partnership agreement or separate double

option agreement/automatic accrual arrangement

Stage 2 Valuing the partnership interests

Stage 3 Application to the insurer completed by theappropriate applicant, together with a suitable trust,

where relevant.


Stage 5 Putting policy into force

Stage 6 Yearly reviews


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Partnership individual purchase

Each partner effects an own life plan with a sum

assured sufficient to allow both the purchase of the

share and provide the key person cover. These plans

are written under trust for their co-partners and they

also enter into a double option agreement.

A

Plan under trust

for B & C 350,000

Plan under trust

for A & C 350,000

A dies

Cash 250,000 100,000

Share

100,000

250,000

If one of the partners dies, part of the benefits are used to purchase his share from his family.

The other partners can hold the remaining funds until they are required for key person purposes.

For example:

Trust receives 350,000

plan proceeds

B & CAs family

Invested in

business

Plan under trust

for A & B 350,000

B C

ABC partnership


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Draft clauses for an automatic accrual agreement

Suggested possible wording

1. Automatic accrual

If any partner (the outgoing partner) ceases whether

through his death or retirement or any other reason to

be a partner the partnership hereby constituted shall

not be dissolved as regards the remaining partner or

partners and the share of the outgoing partner shall

immediately thereupon vest in the remaining partner

or partners and if more than one in the proportions in

which they will thereafter be entitled to share in the net

profits of the partnership and accordingly no payment

shall (irrespective of the value at any time of any

policy on the life of the outgoing partner effected

in accordance with Clause ( ) hereof) be due to

any outgoing partner or his executors administrators

or assigns or any other person in respect of his

share of the goodwill or other capital and assets

in the partnership.

2. Life assurance

Each partner will effect with ( ) life assurance

providing for the payment to such partner (or other

the legal owner or owners for the time being thereof)

of the sum of () upon his survival to his ( ) birthday

or earlier death.

3. Pensions

Each partner shall effect, for his own benefit, a

personal pension policy under Chapter IV Part XIV

Income and Corporation Taxes Act 1988 as amended

for not less than ( ) of the maximum amount

permissible and it is hereby agreed that no liability

will fall upon the remaining partners in respect of

supplementing a retired partners pension.

4. Disability

There shall be effected for each partner a policy of

insurance providing that in the event of his being

totally incapacitated by illness or injury from attending

to his partnership duties for a period of more than ( )

months, there shall be paid to him in respect of each

subsequent month thereafter until he attains the age

of ( ) or dies a sum equal to not less than ( ) his

current monthly drawings.


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Double option agreement

For directors/partners

2

This Agreement is made on the / /

Double Option Agreement

D D M M Y Y Y Y

Part 1 The Parties

between

of

(full name of

Shareholder/Partner/

Member)

/ /

/ /

/ /

/ /

(date of birth)day, month, year

(full name of


Member)

(address)

and

of

(address)

(the Parties).

Postcode

Postcode

(full name of

Shareholder/Partner/Member)

and

of

(address)

Postcode

(full name of


Member)

and

of

(address)

Postcode

You must date this

agreement using

the date that the

last person signs





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3

Part 3 Definitions

In this agreement the singular includes the plural and the

masculine the feminine and the following terms shall have

the following meanings:

Business means the business named in Part 2 and shall

include any successor in business whether resulting from

amalgamation, construction or otherwise

Interest in the Business or Interest means

(a) if the Business is a partnership or a limited liability

partnership the share of the Business which

immediately before the death of the deceased

Party belonged to that Party or

(b) if the Business is a company the ordinary shares

in the company of which immediately before the

death of the deceased Party he was the

beneficial owner.

Life Policy means a contract of life assurance effected by

a Party on his own life in accordance with the terms of

this agreement

Part 2 Business

(full legal name of

company/partnership/

limited liability

partnership)


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4

Part 4 Agreement

Now this agreement witnesses as follows:

1. Agreement

(1) Each Party named in Part 1 agrees to:

(a) effect and maintain a Life Policy on his own life

providing a sum assured which is at least the

value of his Interest in the Business at the date

of this agreement and place it in trust for the

benefit of the other Parties,

(b) grant options to the other Parties.

2. Valuation

(1) For the purpose of the exercise of an option under

clause 4 references to the value of a Partys

Interest in the Business shall mean the value of

the Interest immediately before the Interest is

transferred pursuant to the exercise of the optionconcerned and the value will be determined by an

independent auditor or a professional valuer

appointed by all the Parties including the deceased

Partys personal representatives.

3. Options arising on the death of any Party

(1) On the death of any Party the surviving Parties

shall have the option to purchase the deceaseds

Interest from the deceaseds personal

representatives. On the exercise of such option

the personal representatives shall sell the

deceaseds Interest to the surviving Parties on

the terms hereinafter appearing.

(2) On the death of any Party the deceaseds personal

representatives shall have the option to sell the

deceaseds Interest to the surviving Parties.On the exercise of such option the surviving

Parties shall buy the deceaseds Interest from

the deceaseds personal representatives on the

terms hereinafter appearing.

(3) The option in clause 3.1 shall be exercised by

written notice within six months from the date

of the Partys death (or if later three months after

the Grant of Representation is issued).

(4) The option in clause 3.2 shall be exercised by

written notice within six months from the date of

the Partys death.

(5) When the deceaseds personal representatives

have received payment for the deceased Partys

Interest in the Business they will, within twomonths from the date they receive payment,

transfer the deceased Partys Interest to the

surviving Parties.

4. Life Policy sum assured

(1) The value of a deceased Partys Interest in the

Business will be notified to the Trustees of the Life

Policy as soon as the value is determined so that

the Trustees may apply the Life Policy proceeds in

an appropriate manner and may, where the trusts

powers and provisions so permit:

(a) pay a sum not exceeding the value of the

Partys Interest to the continuing or surviving

Parties, and

(b) pay any additional proceeds from the Life

Policy to the deceased Partys personal

representatives.

(2) The Parties hereby agree that if any sum in excessof the value of any Partys Interest in the Business

is paid by the Trustees to the continuing or

surviving Parties, the excess will be paid

immediately by the continuing or surviving Parties

to the deceased Partys personal representatives.

5. Effect of the agreement

(1) Nothing in this agreement shall in any way

whatsoever prevent or hinder any Party from disposing

charging encumbering or otherwise dealing in any way

with his Interest during his lifetime.

(2) This agreement shall:

(a) bind all the Parties and their respective

personal representatives

(b) cease to bind any Party who shall no longer bea Party in the Business at the deceased Partys

death

(c) cease to have any effect upon the insolvent

winding up of the Business

(d) take effect notwithstanding anything in any

partnership deed or the articles of association

which may be in conflict with this agreement.


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5

Part 5 Signatures

In witness whereof the parties hereto have executed this agreement the day and year first above written

Signed and delivered as a Deed by the first named Party

Print name in full

Full name of witness

Occupation of witness

Signature of witness

Address of witness

Signature

In the presence of

All signatures must

be witnessed by

an independent

person, not

another Party

Postcode

Signed and delivered as a Deed by the second named Party

Print name in full

Full name of witness

Occupation of witness

Signature of witness

Address of witness

Signature

In the presence of

All signatures must

be witnessed by

an independent

person, not

another Party

Postcode


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It should be remembered that key person insurance

and shareholder protection are not mutually exclusive

and many businesses will require both for the same

person. As a result, it is possible for ownership

protection and key person needs to be accommodated

by one, rather than two plans.

The company solution

Each of the shareholders would have a life policy

effected on their life with a sum assured sufficient

to allow both the purchase of the shares and provide

key person cover. The company would own the plans.

The company would then enter into an appropriate

agreement that would provide for the purchase of the

deceased shareholders shares on death.

Please note that there are a number of legal

requirements that need to be met before

a Company can purchase its own shares.

A

350,000 plan owner

ABC Ltd

350,000 plan owner

ABC Ltd

A dies

Cash 250,000 Shares

If one of the shareholders dies, part of the benefits are used to purchase his shares.

The company for key person purposes can hold the remaining funds.

For example

Plan 350,000

As family

ABC Ltd

350,000 plan owner

ABC Ltd

100,000

for key person

B C

ABC Ltd

An alternative approach

250,000

100,000


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19

The trust solution

Each of the shareholders would take out a life policy

on their life with a sum assured sufficient to allow

both the purchase of the shares and provide key

person cover. The plans would be under business

trusts, with the other shareholders as beneficiaries.

The shareholders would then enter into an appropriate

agreement that would provide for the purchase of

the deceased shareholders shares on death, by the

other shareholders.

Sole trader

A sole trader has two choices, sell their business as

a going concern in which case there will be a market

value, or they can wind their business up realising the

value of assets less debts.

As a sole traders protection will be set-up on an

individual basis an exact valuation is not vital. However,

it is important that the cover is adequate to provide for

their family and pay all the business debts.

A

350,000 plan under

trust for B & C

350,000 plan under

trust for A & C

B dies

Cash 250,000Loan 2x

50,000

Tax-free

repaymentsShares

250,000

100,000

If one of the shareholders dies, part of the benefits are used to purchase his or her shares.

The remaining shareholders then loan the company the remaining funds for its key person

needs. This can be repaid to them tax free as a loan repayment once the company recovers.

For example:

Plan 350,000

A & CBs family

Bs trustees

ABC Ltd

350,000 plan under

trust for A & B

B C

ABC Ltd


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20

How is cover arranged?

Stage 1 Application to insurer. This should be

completed by an authorised signatory for and on

behalf of the Company as applicant.


Stage 3 Board minute. It is advisable that a formal

record is made to the effect that the policy is being

effected solely for the companys benefit. A draft board

minute for your consideration is enclosed.

Stage 4 Putting the policy into force.

Stage 5 Yearly review.

Board resolution

We suggest that a board resolution be minuted to

evidence the commercial nature of the companys

action in effecting a key person policy. It will alsoindicate that the life assured is not the beneficiary

of the policy proceeds. A draft minute is as follows:

It is resolved that the Company will enter into a life

assurance policy as soon as possible on the life of [ ]

in order to reduce the financial loss to or reduction in

value of the Company were he/she to die in service.

[ ] has authority to complete any application forms

or other documents which may be necessary to

implement this Resolution.

Trusts

It is obviously important for a business to make sure

that policy proceeds are paid to the right people and

a suitably worded trust document is normally the most

effective way of achieving this.

Another advantage is that, by making policy proceeds

subject to a trust, such sums will not usually form part

of the deceaseds estate.

Prompt payment of the death benefit is usually

effected as a result; provided there are surviving

trustees to pay.

Most companies will offer a range of trusts appropriate

to each particular business situation to suit the needs

of companies, partners, shareholders and directors.

The trust is likely to be designed such that the trustees

have the power to change the beneficiaries. Usually, thismeans the co-partners or directors in the shares

indicated. If no co-partners or directors are named, then

those partners/shareholders carrying on business with

the policy owner at the time of claim normally benefit

to the extent of their respective interests in the business.

This assumes that they have each written a similar

in-force policy on their respective lives, written for the

benefit of co-partners or directors.


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Financial evidence required

The purpose of financial underwriting is to determine if the amount of insurance can be justified by the insurance

need. The requirements of CLI are as follows:

Sum assured FormProduct

greater thanEvidence

reference

Flexible Life Plan 1,500,000 Business assurance questionnaire (BAQ)1

6598

3,000,000 BAQ countersigned by an independent third party2

6598

Non-medical limits

These requirements are for UK lives resident wholly in the UK. They are for indication only and are the minimum

basic requirements, based purely on the sum assured and age next birthday. Further evidence may be required at

the underwriters discretion.

Age next birthday Non-medical limit

35 and under 600,000

36 40 500,000

41 45 400,000

46 50 300,000

51 55 200,000

56 60 150,000

61 70 75,000

71 and over 50,000

1If the policy is to cover a loan, a copy of the agreement should be enclosed with the application form.

2For example, an accountant, solicitor or bank manager. Copies of the last three years worth of audited company accounts

are required. If the policy is to cover a loan, a copy of the agreement should be enclosed with the application form.

Financial information provided by an applicant is treated as confidential and only viewed by underwriter.

Medical underwriting is also required and the requirements are dependent on age and the sum assured.

Details are available on request.

Financial underwriting


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About Canada Life

The Canada Life Assurance Company provides

insurance and wealth management products and

services through domestic operations in Canada and

international operations in the Republic of Ireland,

Isle of Man, Germany and the U.K., as well as

branch and subsidiary operations in other

countries. Canada Life is a subsidiary ofThe Great-West Life Assurance Company and

a member of the Power Financial Corporation

group of companies.

www.canadalife.co.uk

Important information

This document is based on Canada Life Limiteds

understanding of applicable legislation, English Law

and current HM Revenue & Customs practice

as at December 2012.

Canada Life International Limited, registered in the Isle of Man no. 33178.Registered office: Canada Life House, Alexandra Road, Castletown, Isle of Man IM9 1TG.

Telephone: +44 (0) 1624 820200 Fax: +44 (0) 1624 820201 www.canadalifeint.com

Member of the Association of International Life Offices.

Canada Life Limited, registered in England no. 973271.Registered office: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA.

Telephone: 0845 6060708 Fax: 01707 646088 www.canadalife.co.uk

Member of the Association of British Insurers.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

A Guide to Protecting Weath 7856

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