Life Assurance Plans

The reviews carried out by insurers in Reviewable life assurance policies take into account mortality, expenses and investment returns.

With a Standard Cover unit-linked whole life policy, the premium level is set at such a rate that it need not be increased over the insured person’s lifetime as long as the underlying fund meets a pre-determined rate of return

Maximum Cover Plans

The features of Maximum Cover Plans are:

  • Premium is fixed for set period of, say, 5 or 10 years
  • Premium is revised after set period
  • A fund with a small surrender value may build up

Guaranteed Cover Plans

The features of a Guaranteed Cover unit-linked whole life policy are:

  • There is no investment although there may be a surrender value.
  • There is a guaranteed level of cover throughout the term.
  • It used to be called ‘Whole Life non-profit assurance’

Life Assurance Plans

Term 100 term assurance policy

A Term 100 term assurance policy is written to age 100 and can be used as an alternative to a whole life policy. The disadvantage of a Term 100 policy is that people are generally living longer so it is possible that the life insured could still be alive at age 100 and there would be no cover.

Return of Premium term assurance

A Return of Premium term assurance pays out on death within the term, like all term assurance, but also returns the premiums paid if the life assured survives until the end of the policy.

Family Income Bond

A Family Income policy might be cheaper than level term assurance for the same sum assured because the sum assured decreases like decreasing term assurance. The total of the instalments payable on death early in the policy term is greater than on death later in the policy term.

The features of a Family Income Bond policy are:

  • Similar to decreasing term assurance
  • Regular payments can be commuted into a lump sum once death has occurred. Where this is the case, a rate of interest is used to reduce the amount that would have been paid over the remainder of the term due to early payment.
  • Payments can be level or increasing (called escalating), eg, by 5% per year

Relevant Life Policy

A Relevant life policy is a type of term assurance policy taken out be an employer and designed to provide death-in-service benefit for an employee. It is normally used by smaller companies without access to group life schemes. The features of a Relevant Life Policy are:

  • It will be held under a discretionary trust with the employee’s dependents as beneficiaries
  • It allows up to 4 x salary as life cover with greater amounts available to buy an annuity
  • Premiums will be paid by the employer and treated as an allowable business expense for corporation tax purposes.

Key Person Insurance Facts

  • Most key person assurance in the corporate market is written for Small and medium sized companies.
  • Care needs to be taken in arranging key person insurance contracts on major shareholders because their death may result in a large cash payment to the company and business property relief may be restricted because of the amount of cash in the company.
  • Where the key person policy is being effected on a life of another basis, for the policy to be justified on the grounds of insurable interest, there must be a financial loss that will arise to the grantee (e.g. the company) on the death of the key person.
  • The amount of cover provided by a Key Person policy should be determined by assessing the extent of the potential financial loss to the business on the death of the key person. In this context, the life office underwriting the risk will usually be concerned that the level of cover effected is roughly commensurate with the financial loss that would be suffered and there is no over-insurance.
  • There is no hard and fast rule for accurately assessing the level of cover required in any particular case but two formulae often used in respect of non-business owning employees are Multiple of Salary (usually 5 x but could be up to 10) and Proportion of Profits formula.

Key Person Insurance

Multiple of Salary approach to Key Person insurance

  • The two drawbacks of the Multiple of Salary approach to Key Person insurance are:
  1. Salary does not necessarily show an individual’s true value to the business;
  2. Salary alone may not be a true reflection of the person’s total earnings. This can be overcome by using a total earnings formula.
  • Salary alone may not be a true reflection of the person’s total earnings. Other benefits can increase the total remuneration package substantially such as pension contributions, share incentive schemes and bonuses.
  • Even though Multiple of salary has significant drawbacks, it is the one most commonly quoted and favoured by insurers and reinsurers.
  • The Multiple of salary does not allow for a time factor so a key person who is nearing retirement may be worth less to the company than an employee or director who is rather younger.
  • The Proportion of Profits formula is regarded as being a more scientific approach for calculating Key Person protection.
  • The general practice in dealing with insurance 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 the sole relationship is that of employer and employee, the insurance is intended to meet loss of profit resulting from the loss of services of the employee and it is an annual or short-term insurance.

Key Person Insurance Tax Relief

  • The tax treatment of Key Person policies depends on the facts of each case, and the practice of local tax offices can vary. Every company proposing to take out a key person policy should obtain guidance on the possible tax treatment of premiums and benefits from its own tax office before completing the arrangement. These are general rules that obtaining tax relief:
  1. It is given on most term assurance premiums.
  2. If tax relief is given on premiums, the benefits are generally taxed.
  3. It is not normally given on the premiums to any other type of policy. This is because they are treated as building up a capital sum.

Prudential Regulation

The adequacy of a firm’s financial resources needs to be assessed in relation to all the activities of the firm and the risks to which they give rise, and so the rules apply to a firm in relation to the whole of its business. A firm must at all times maintain overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.

Adequate financial resources and adequate systems and controls are necessary for the effective management of prudential risks. Senior Management Arrangements, Systems and Controls (SYSC) set out general rules and guidance on the establishment and maintenance of systems and controls.

Principle 4 requires a firm to maintain adequate financial resources. The FCA (and PRA where applicable) is concerned with the adequacy of the financial resources that a firm needs to hold in order to be able to meet its liabilities as they fall due. These resources may include both capital and liquidity resources, as set out in the various prudential source books.

The FCA and PRA Handbooks set out provisions that deal specifically with the adequacy of that part of a firm’s financial resources that consists of capital resources. The adequacy of a firm’s capital resources needs to be assessed both by that firm and the appropriate regulator. Through their rules, the FCA/PRA set minimum capital resources requirements for firms. They also review a firm’s own assessment of its capital needs, and the processes and systems by which that assessment is made, in order to see if the minimum capital resources requirements are appropriate. The FCA/PRA may impose a higher capital requirement than the minimum requirement as part of the firm’s Part 4A permission where this is deemed appropriate by them.

A firm should have systems in place to enable it to be certain whether it has adequate capital resources to comply with the requirements at all times. This can be tested via a risk identification and management process, and stress and scenario testing of its risk assessments. Consistent with its approach in other areas, the FCA/PRA require the process to be documented. These tests should be performed, at a minimum, annually, but FCA/PRA guidance suggests that they should be performed more regularly should a significant change in future expectations occur suddenly. This does not necessarily mean that a Firm needs to measure the precise amount of its capital resources on a daily basis. A firm should, however, be able to demonstrate the adequacy of its capital resources at any particular time if asked to do so by their regulator.

1 2 3 4