What is life insurance cover?

Life insurance cover is essentially an agreement between you and an insurance provider that if you have paid regular premiums and met the terms and conditions laid out in the policy, they will pay out a cash lump sum in the event of your death.

Many people decide to take out a life insurance policy to provide financial protection for their family. The money can usually be spent as the beneficiaries see fit, whether that be to clear a mortgage, ongoing household bills or funeral costs.

How does life insurance work?

There are lots of different variations of life insurance but typically life insurance is chosen based on the needs of the customer at the time of setting up a policy including what the intentions are for the funds, who is to be covered and if there are any dependants.

Upon choosing your life insurance, you will be given options which affect how much your agreement costs, how much your chosen beneficiary is paid when you pass away and how long the agreement lasts for.

You will also be asked a range of questions about your health, lifestyle and medical history because life insurance companies make money by investing the premiums you pay for your cover and usually the healthier the policy holder, the less chance of having to pay out for a claim.

Most policies will usually only pay out upon the death of the named policyholder. 

What is critical illness insurance?

Critical illness insurance (or critical illness cover as it is also known) is designed to provide financial protection upon diagnosis of a specific illness, medical condition or disability specified within the policy.

In the event of a claim, a critical illness insurance policy will provide a tax-free lump sum (defined at the outset) to the policyholder who can then use these funds as they wish.

The money received from critical illness cover is typically used to supplement income, pay off outstanding debts, cover financial outgoings or to pay for any alterations needed to your home (wheelchair access, for example).

How does critical illness insurance work?

Most insurers offer critical illness cover on a set term basis for a specified number of years, although a few specialist providers offer this type of insurance for ‘whole of life’ policies.

Each provider, using their own internal actuarial rates, will calculate a monthly premium for the amount of cover (sum assured) and for the term you require based on:

  • Age
  • Gender
  • Health and medical record
  • Lifestyle (alcohol consumption, smoker/non-smoker)
  • Occupation (some are considered more risky than others)

A policy will only usually pay out once in the event of a claim during the term and then cease.

What is Shareholder Protection?

If a shareholder of a private company dies, his or her shares will normally pass through the estate and be inherited by the deceased’s spouse, partner, children, dependants or other beneficiaries under the terms of the will (or laws of intestacy). 

Often, the inheritor(s) would prefer to receive cash rather than the shares, especially if they are not active in the business.  Private company shares may not be easy to sell, particularly if they represent only a minority shareholding. They do not generally carry any rights to a directorship, they may not produce dividends either (a minority shareholder has no power to insist on dividends being paid), and so the shares may be virtually worthless in practice. 

On the other side of the coin, the remaining shareholders may also prefer the family to get cash rather than taking on a replacement shareholder not of their choice.  

Shareholder protection arrangements are intended to provide funds so that the shares can be purchased by the other shareholders leaving everyone in the best possible situation. 

How does Shareholder Protection work?

Life assurance policies are established so that upon death a cash payment is made, providing the surviving shareholders with the funds to purchase the shares from the estate.

There is no special tax treatment for policies used for this purpose, so no tax relief is available on premiums paid for the shareholder protection policy, but any proceeds received are not subject to Income Tax in the hands of the recipient.  

Where life policies are written into trust and thus payable to someone else, whilst premiums are paid for the benefit of others there are no inheritance tax (IHT) implications if the arrangement is purely commercial. This condition is taken as fulfilled if all shareholders participate. Where premiums are unequal, adjustments can be made to salaries to allow for this.

What is Partnership Protection?

On the death of a partner, in the absence of an agreement to the contrary an ordinary partnership (as opposed to a limited liability partnership or LLP) is dissolved under the Partnership Act 1890 and partners receiving their share of the proceeds. 

This probably would not suit surviving partners who would generally want to continue in business. 

Premature closure of the business can be prevented if there is a partnership agreement in place. Such an agreement should include a cross option where one party is given the option to sell and the other has the option to buy, but this is not always possible if the funds are not available to buy out the deceased’s share.

Partnership protection arrangements are designed to allow the remaining partners to take over the deceased’s share in the partnership by providing the necessary funds to make such a purchase. 

How does Partnership Protection work?

Life assurance is arranged alongside the corresponding cross option in the partnership agreement.  At the point of death, the insurance pays out a cash sum which can be used to purchase the deceased’s partnership share, providing protection for the ongoing business in the same way that shareholder protection provides security for shareholders of a company. 

There are no IHT consequences provided that all partners participate. 

The policies can be on an own life in trust basis, or life of another and the same considerations apply as with shareholder protection. The individual partners pay the premiums rather than the business and these can be adjusted to reflect each partner’s share in the business.

If you want to protect yourself and your family and are looking for a competitive life cover quote, contact our sister company, A4G Wealth today.

Want to find out more?

Call us on (01474) 853856 and we will put you in contact with one of our advisers, or send us an enquiry by clicking below.

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