For professional adviser use only

Protecting business wealth

A guide to

Protecting business wealth

Introduction
There are no rm statistics to show the number of companies with business protection but industry estimates suggest that the gure could be as low as 5%. This gure indicates an extremely high proportion of companies living dangerously and a vast opportunity for independent nancial 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.

Canada Life International Limiteds (CLI) business protection proposition

Key features of CLIs proposition Sound nancial 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 reection of our nancial strength. Great-West and its subsidiaries have received strong ratings from the major ratings agencies.
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Rating Agency A.M. Best Company DBRS Limited Fitch Ratings Moodys Investors Service Standard & Poors Ratings Services

Measurement Financial Strength Claims Paying Ability Subordinated Debt Insurer Financial Strength Insurance Financial Strength Insurer Financial Strength Subordinated Debt

Great-West A+ IC-1 AA (low) AA Aa3 AA AA-

Canada Life A+ IC-1 AA Aa3 AA

Canada Life Assurance Company (which owns 100% of Canada Life International Limited) Source: Great-West. Ratings are correct as of 14/12/12.

Protecting key people

Who is a key person? Every business has key employees on whom the prots depend. It may be the directors, the top salesman, the managers, the technicians the people most difcult and costly to nd and replace. The key employees in a business are usually not difcult 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 re and the resulting loss of prots. 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 unnished on his or her desk, perhaps with orders in mid negotiation, might have a shattering effect on a company where there are insufcient reserves available to meet the crisis. As well as loss of prots, the credit standing of the company may be jeopardised, for example, where the key person is a director and there are 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: 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 ve to ten times average

salary over the past three years. This formula is based on the broad assumption that a salary tends to reect an individuals contribution to the company, or

a multiple of ve times the average attributable

net prot for the past three years (that is take the multiple of net prot and divide the resultant gure by the attributable percentage for that employee).

The amount of cover chosen could reect the capital investment tied-up in a particular project, the anticipated loss of prots, 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 long period in cases where the key person is likely to be making a signicant 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.

cover the fall in prots due to lost orders repay bank loans, directors loan accounts
or trade creditors

pay the salary of a temporary manager cover the cost of recruitment and training
a replacement

Taxation
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 prot resulting 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) fullled 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 nancial circumstances of the investor. *These rules govern the tax treatment of prots, gains and losses incurred on assets owned by a company.

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

Informing HMRC of the policy

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 benet 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 nancial consequences of Xs death because it would lead to a considerable reduction in prots 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 conrm that the premium will [not] rank as an allowable deduction for corporation tax purposes.

Yours faithfully

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 conrm 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 not be levied

How should a business owner identify key persons? Some of the following questions are appropriate:

Who are the most important people

in your company?

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 condence in customers or suppliers Delays to special key projects Increased stresses and strains on remaining staff
who have to stand in for the key person

Who would be the most difcult person for the

company to replace?

Which people are key to the protability

of the company? Looking at each possible person ask If they died

Loss of morale Costs of replacement Loss of competitive edge Loss of prots 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 protable integrity of the business.

would customers condence fall? would useful contacts be lost? would shareholders become nervous? would loans guaranteed by this person be recalled
or nance be more difcult to obtain?

would a replacement be difcult to nd? would product development/design be lost

or restricted? If the response to any of these questions is yes then a key person has been identied.

Directors share purchase insurance

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 beneciaries of his estate until a purchaser can be found. It may prove very difcult to nd 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 nd difcult 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 nancial obligations on the death or retirement of a director/shareholder. Insurance arrangements can be tailored to meet the following objectives: 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 rst

be 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 the event 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 gures taking into account the assets, goodwill and prot trend of the company can be used.

Make sure a fair value is paid for the shares Avoid costly bank borrowings by the
continuing directors

Quickly and fairly compensate a deceased directors

dependants by payment of a lump sum

Prevent the company from falling into the hands

of outsiders

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 efciency 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 inexible for larger companies. Own life in trust Again, taking the example X & Y Ltd, X effects a policy on his own life in trust to benet Y for an amount equal to the value of his own shares. Y would reciprocate with a corresponding policy for Xs benet. Please note that if the policyholder could be included as a beneciary 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 signicantly.

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

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. For example

X & Y Ltd

250,000 plan under trust for Y & Z

250,000 plan under trust for X & Z

250,000 plan under trust for X & Y

On the death of a shareholder (for example X)

Shares

X dies

Xs family
Cash

Y&Z

Plan 250,000

250,000 plan proceeds

Partnership insurance
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 prot 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 nancial disruption as possible, whereas the retiring partner or the dependants of a deceased partner may want to receive fair payment for his interest as quickly as possible. For example, on the death of X in the rm 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 nancial obligations on the death or retirement of a partner. Insurance cover can be arranged to meet the following objectives: What is a partnership agreement? All active partnerships should have a formal agreement or deed setting out the division of prots 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 prots Goodwill
What does the partnership agreement say? There are a variety of different types of partnership agreement and the insurance arrangements need to be tailored to t 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 signicant amount. If the partnership agreement does not itself cover the 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.

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

deceased partner

Avoid costly bank borrowings by the continuing

partners

Quickly and fairly compensate a deceased partners

dependants by payment of a lump sum

Facilitate the entry of new talented partners with

insufcient capital

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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:

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 benet 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 signicantly. Advantages of automatic accrual

Simplicity Ease of attracting new partners Possibility of creating capital gains tax loss Generally, no adverse inheritance tax
(IHT) consequences

Money in the right hands at the right time Fair distribution of costs bearing in mind the shares
and ages of the partners and division of prots between them

Reduction of the nancial need for the continuing

partners to compensate an outgoing partner Disadvantages of automatic accrual

In the event of Business Property Relief for

inheritance tax (IHT) not applying then possible IHT liabilities could arise

Flexibility to deal with changes in the partnership Maximum tax efciency 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 a corresponding policy on Xs life. The arrangement is fair and straightforward for small partnerships but becomes cumbersome and inexible for larger ones. Own life in trust Again, taking the example XY & Co, X effects a policy on his own life, in trust to benet Y, for an amount equal to the value of his share. Y reciprocates with a corresponding policy for Xs benet. 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 signicantly.

Need to nd 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 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

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Partnership individual purchase Each partner effects an own life plan with a sum assured sufcient 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.

For example:

ABC partnership

Plan under trust for B & C 350,000

Plan under trust for A & C 350,000

Plan under trust for A & B 350,000

If one of the partners dies, part of the benets 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.

Share

A dies

As family
Cash 250,000

B&C
100,000

Trust receives 350,000 plan proceeds

250,000 100,000

Invested in business

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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 prots 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 benet, 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

Double Option Agreement

This Agreement
is made on the

DD

/ MM / YYYY

You must date this agreement using the date that the last person signs

Part 1 The Parties

between (full name of Shareholder/Partner/ Member)

/
of

(date of birth)
day, month, year

(address) Postcode and (full name of Shareholder/Partner/ Member)

/
of

(date of birth)
day, month, year

(address) Postcode and (full name of Shareholder/Partner/ Member)

/
of

(date of birth)
day, month, year

(address) Postcode and (full name of Shareholder/Partner/ Member)

/
of

(date of birth)
day, month, year

(address) Postcode (the Parties).

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Part 2 Business
(full legal name of company/partnership/ limited liability partnership)

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

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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 option concerned 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 two months 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 excess of 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 be a 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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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 Signature All signatures must be witnessed by an independent person, not another Party

In the presence of Full name of witness Signature of witness

Occupation of witness Address of witness

Postcode Signed and delivered as a Deed by the second named Party Print name in full Signature All signatures must be witnessed by an independent person, not another Party

In the presence of Full name of witness Signature of witness

Occupation of witness Address of witness

Postcode

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An alternative approach
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 sufcient 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.

For example

ABC Ltd

350,000 plan owner ABC Ltd

350,000 plan owner ABC Ltd

350,000 plan owner ABC Ltd

If one of the shareholders dies, part of the benets are used to purchase his shares. The company for key person purposes can hold the remaining funds.

A dies
Cash 250,000 100,000

As family
Shares

Plan 350,000
250,000

ABC Ltd

100,000 for key person

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The trust solution Each of the shareholders would take out a life policy on their life with a sum assured sufcient 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 beneciaries. 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.

For example:

ABC Ltd

350,000 plan under trust for B & C

350,000 plan under trust for A & C

350,000 plan under trust for A & B

If one of the shareholders dies, part of the benets 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.
Tax-free repayments

Shares

B dies

Bs family
Cash 250,000

A&C

Loan 2x 50,000

ABC Ltd
100,000

Plan 350,000
250,000

Bs trustees

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.

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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 2 Insurer will underwrite the application 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 benet. 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 also indicate that the life assured is not the beneciary 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 nancial 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 benet 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 beneciaries. Usually, this means 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 benet 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 benet of co-partners or directors.

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Financial underwriting
Financial evidence required The purpose of nancial underwriting is to determine if the amount of insurance can be justied by the insurance need. The requirements of CLI are as follows: Product Flexible Life Plan Sum assured greater than 1,500,000 3,000,000 Evidence Business assurance questionnaire (BAQ) 1 BAQ countersigned by an independent third party 2 Form reference 6598 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 35 and under 36 40 41 45 46 50 51 55 56 60 61 70 71 and over
1 2

Non-medical limit 600,000 500,000 400,000 300,000 200,000 150,000 75,000 50,000

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

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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 of The 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 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 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 is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Insurance and Pensions Authority. Canada Life International Assurance Limited is authorised and regulated by the Central Bank of Ireland.

7856 213R (S)