FINANCIAL UNDERWRITING · Business Cover • Partnership • Co Directors • Keyperson •...

FINANCIAL UNDERWRITING:It’s all about the money, money

Colette Houton, Head of Underwriting

Maria Calvo, Underwriting

WHAT ARE WE GOINGTO TALK ABOUT TODAY?

1. What why and how –Financial Underwriting

2. Personal Cover• Life Cover• Replacement income• Mortgage• Inheritance

3. Large cases and what to expect

4. Business Cover• Partnership• Co Directors• Keyperson• Corporate Co Directors

5. Underwriters guidelines

UNDERWRITING

3

WHAT IS IT?

Occupation Medical

Pursuits

Financial

Travel & Residency

FINANCIAL UNDERWRITING

4

WHAT AND WHY

What:

The evaluation of the risk in terms ofeconomic loss to both insured and insurer.

Why:

Ensure the protection need is being met:

• Insurable interest

• Reducing Anti Selection and moral hazard

• Reduction in overheads and lapsed plans

• Avoid Jumbo limits


1. https://www.mirror.co.uk/news/uk-news/mum-faked-death-140000-

insurance-10783701

2. https://www.bankrate.com/finance/insurance/8-extreme-cases-of-

insurance-fraud-1.aspx5

WHY? - IT NEVER HAPPENS

1. The furniture debt death1

2. Clayton Daniels and the dug up body2

3. John Darwin – the canoeing accident

4. John Stonehouse – Miami Beach

Desperate people do desperate things

Large policies can be linked to increased fraud, and sometimes murder or suicide

https://www.mirror.co.uk/news/uk-news/mum-faked-death-140000-insurance-10783701

https://www.bankrate.com/finance/insurance/8-extreme-cases-of-insurance-fraud-1.aspx


• “Man who killed wife for insurance pay out jailed for minimum of 30 years.” Guardian 5/7/11

• “Husband who took out life insurance for his wife two days before battering her to death is jailed for 22 years.” Daily Mail 24/2/12

• “A wife who plotted to murder her husband so she could claim his £250,000 life insurance money was caught when the hit man changed his mind and went to the police instead, a court has heard.” Telegraph 18/9/13

Source: Pacific Re presentation

WHY? - INSURANCE FRAUD HAPPENS…

FINANCIAL UNDERWIRING

• Offer, recommend or provide a product that is appropriate to the consumer – basis of fact find.

• Requires the regulated entity to ensure the consumer is likely to be able to meet the financial commitment associated with the product on an ongoing basis.

• Product or service must meet the consumer needs and objectives.

August 2017 Royal London 7

WHY? - CONSUMER PROTECTIONCODE


• A need to make advance provision for the potential consequence of loss of earned or unearned income.

• Unearned likely to continue beyond death or illness.

• Death – results in total and permanent loss if earned income.

• Serious Illness – pay cause partial or total loss especially if self employed.

• Employees often have an employee benefit allowing for some income for a period but possibly on a reduce basis.

• Long term disability is likely to cause a total loss of income eventually.

August 2017 Source: www.mycpd.ie Protection Module

WHY? - ENSURING PROTECTION NEED

http://www.mycpd.ie/

FINANCIAL UNDERWRITINGHOW

How:

• Application

• Discussions with brokers

• Background information

• Financial Questionnaires

• Loan agreements

• Accounts – vision net

• Copies of legal Agreements

PERSONAL COVER

There is no financial underwriting unless:

• High level of cover/premium compared to occupation.

• High level of existing cover.

• History of mental health issues associated with finance.

• Hits the financial limits.

Can add residence mortgage and Inheritance Tax as separate and in addition to the personal protection need.

August 2017 10

UNDERWRITING CONSIDERATIONS

PERSONAL COVER


THE PROTECTION NEEDS

1. Loss of earned income

3. Loans and Mortgages

5. Provisions for a

dependent

4. Inheritance Tax

2. Cost of replacement

care

PERSONAL COVER

AugustSource: www.mycpd.ie Protection Module2017

Royal London

DEATH BENEFIT

Underwriting of personal cover

• Varies with age.

• Allowances for children and ages.

• Allowances for special needs child/elderly parent.

One formula -

• 65-current age *salary.

• Mortgage additional to this .

Warnings –

• Students – limit to student loans – minimum cover.

• Unemployed – back ground might be required – carer of children.

• Housewives- Cover is appropriate – max is generally €1m.

It has to make sense


PERSONAL COVER

Adjust for:

• Employer sick pay

• State illness Benefit

• State invalidity Pension

• Employer ill health early retirement

2 ways to insure:

• Income Protection – gross income at risk to max that the IP plan will allow.

• Serious Illness plan - approx. 5 to 8 times salary.

Varies with age

August 2017 13

REPLACEMENT INCOME – WHEN SICK/DISABLED

PERSONAL COVER

• Consumer Protection Code - offer, recommend or provide a product that is appropriate to the consumer – basis of fact find.

• Loans and mortgage generally linked to earned income – this is the often the primary protection need.

a quantifiable protection need

• Consumer Credit Act 1995 –requirement to insure the mortgage.

• Some companies offering dual for joint life.

Source: www.mycpd.ie Protection ModuleAugust 2017 Royal London

MORTGAGE


PERSONAL COVER

• Transfer of assets on death can result in an immediate lump sum Inheritance Tax Liability (IHT).

• Insurance required to ensure real value of assets not reduced by IHT.

• Capital Acquisition Tax (CAT) is a tax that is charged on money or property that is gifted or inherited.

• The value of the estimated Tax liability has to be calculated on the estimated value of the assets that may pass on death and based on the relationship with the beneficiary.

• Taxed at 33%.

A quantifiable protection need.


INHERITANCE

PROTECTION NEED


INHERITANCE

Beneficiary Relationship Tax point

Spouse/Civil Partner Unlimited

Son/Daughter €320,000

Other blood relative €32,500

No blood relationship €16,250

INHERITANCE

€466m in IHT and €52m in gift tax 2018.

1. Parents funding for their children’s tax bill.

2. Adult children who have an inheritance tax on their parents death.

3. Business owners who wish to ensure survival of their business on their death.

4. Farms owners wishing to protect the value of their land and agricultural assets when being passed onto next generation.

5. Anyone planning to pass an Approved retirement fund to a child over 21 years old.

August 2017

Source: www.mycpd.ie Protection ModuleProtection Module

THE MARKET


UNDERWRITING

• Dedicated Underwriter

• Access of Underwriter

• Expectations Lead

• Priority Service

• Personalised Service

22 October 2019 Presentation info in footer 18

LARGE CASE SERVICE

The facts you need to know:

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LARGE CASE

• Large premiums = good news for all involved!

• There is an appetite for accepting attractive business.

• Insurers compete to have a reputation for being pragmatic and easy to deal with.

• Insurers want to help you/sellers place these risks.

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SERVICE COUNTS

LARGE CASE ATTRIBUTES

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BUSINESS COVER

22 October 2019 Presentation info in footer 21

THE NEED

Insuring against potential consequences should an integral employee die.

BUSINESS COVER

What if?

• The person with the contacts or knowledge gets seriously sick or dies?

• Where will the money come from to get going?

• The business has building insurance but is death or illness a more significant risk?

Questions business owners need to consider:

• What will happen if the business partner goes?

• What will happen to your share of the business?

• How will it affect your family?

Objective of business cover:

• Right amount of money in the right hands at the right time in most tax efficient way to allow business and/or remaining family members survive

A quantifiable protection needAugust 2017 22

CONSIDERATIONS


BUSINESS COVER

Type of Business

Potential Business Protection Need

Sole trader Personal Cover

Partnership Partnership Cover

Limited company

Keyperson Cover – (business owned)Co-DirectorCorporate Co Director – (business owned)

A partnership is:

the relation which subsists between persons carrying on a business in common

with a view of profit.

• Not a legal entity so cannot have a policy in its own name.

• Common arrangement for solicitors, doctors accountants.

Source: http://www.irishstatutebook.ie/eli/1890/act/39/enacted/en/print.html

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BUSINESS COVER PARTNERSHIP PROTECTION

• The death of a partner can cause the immediate dissolution of a partnership, unless there is prior agreement to the contrary (Partnership Act 1890).

• The next of kin of the deceased partner may want to come into the business with the surviving partners, do they want them?

• Even if the next of kin are willing to sell their share of the business back to the surviving partners, do they have the liquid capital or borrowing capacity to purchase this share of the business?

BUSINESS COVER PARTNERSHIP PROTECTION

No. of Directors Probability of at

in Company least one Director

dying before age 65

No. of partners in firm Probability of at least one partner dying before age 65

2 21%

3 29%

4 37%

5 44%

6 50%

7 55%

8 60%

PARTNERSHIPPROTECTION

Source: CSO Table 16 on Irish Life 2010/12. All partners assumed to be aged exactly 40 and males.

• Partnership Act 1890 rules unless there is a partnership agreement.

immediate dissolution of a partnership, unless there is prior

agreement to the contrary (Partnership Act 1890).

• Ensure agreement in place which outlines the rules governing how business is conducted in the event of death.

• Double Option arrangement (Buy/Sell).

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PARTNERSHIP

August 2017 Royal London

• Money required on death of one partner to but out the deceased’s share.

• Type of insurance is partnership insurance.

• Value generally determined by an accountant and covered under the partnership agreement.

• The cover should equal the value of the partner’s share of the business which would have to be bought out by the surviving partners will have to have to.

• Each partner is insured for the value of his share of partnership.

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PARTNERSHIP

August 2017 Royal London

PARTNERSHIP COVER

• Goodwill is the name, tradition, reputation a form holds in the community.

• Difficult to calculate.

• Seek Professional advice from an accountant.

• Often a multiple of fee income of the firms.

• Goodwill can be:

• Included

• Ignored

• Insured via self insurance


GOODWILL

• Similar situation to a partnership on the death of a co-director / shareholder.

• Possible drop in business activity, recall of loans and/or reduced creditworthiness.

• Outsiders may buy the shares.

• Surviving directors may want to purchase the shares.

Do they have money available to finance this?

• There may be a legal requirement for a deceased director’s shareholding to be purchased by surviving directors.

Are funds available?

PERSONAL SHAREHOLDER PROTECTION

• Personally owned –owned by the other directors

• Sum insured relates to the value of those shares

• Identical to partnership

CO-DIRECTORCOVER

Co Director Partnership

Policy Owner/Proceeds to The directors The partners

Life insured The director The partner

Payment of premium by The directors The partners

Purpose Purchase shares on death Compensate estate of deceased

Tax relief No No

Proceed taxable No No

Setting up the life assurance policies: Two options.

Life assurance can be arranged as either Own Life in Trust or on a Life of Another basis.

• The level of cover should be equal to the current market value of their share.

1. Own Life in Trust

Each policy is arranged under trust for the benefit of the other partners/shareholders so that on death, the proceeds are paid to the trustees.

The trustees then pay the proceeds to the surviving partners/directors, who use them to buy the deceased partner/shareholder’s share of the business.

2. Life of Another

Each partner/director insures each of their fellow directors, for a sum equal to the amount needed to buy out that partner/director’s share of the business.

Small number of partners/directors.

PERSONAL SHAREHOLDER/PARTNERSHIP PROTECTION

BUSINESS COVER – PERSONALLY OWNEDWHICH ONE

Own life in trust Life of Another

Policy Numbers

1 per partner Each partner insures the other

Forms Application and trust for each policy

Application only

Distribution of cost

Older lives pay higher premiums

Older lives pay the lower premiums

Flexibility New partner – just new policy

Rearrange existing and remember to do so.

Tax Policy must be part of commercial arms length/reciprocal agreementSurplus – liable for IHT

No liability to CAT as paid for by the persona who benefits

BUSINESS COVER

• A Keyperson is anyone who the company depends on for its continued success and on whose death that business would suffer a financial loss.

• Loss of Specialised skills.• Loss of Reputation.• Loss of Contacts.• Loss of projects if creative• Recall of Loans, personal or guaranteed.• Cost of recruitment

• Result – loss of profit and value of company.

A quantifiable protection need


KEYPERSON


BUSINESS COVER

Type of Business

Potential Business Protection Need

Sole trader Personal Cover √

Partnership Partnership Cover √

Limited company

Keyperson Cover – (business owned)Co-Director √Corporate Co Director – (business owned)

BUSINESS COVER

• Keyperson insurance is life cover.

• Arranged by the company on one or more key employees, who may or may not be shareholders.

• Employer of the Keyperson pays the premiums on a policy and in turn the company receives a lump sum payment on the death of the individual on the policy.

• There is no payment to the next of kin from Keyperson policies.

• Policies on other keypersons may reduce overall sum insured.

• Not normally standalone.

• Limited term.

KEYPERSON INSURANCE

KEYPERSON

Do you need to confirm at the outset what the cover is for?

• It is recommended that the company pass a board resolution recording their intention to affect Keyperson insurance.

This ensures:

• The correct tax treatment of the premiums.

• That the Keyperson knows that the cover is not theirs personally and is there to protect the company.

• This protects against confusion at a later point.

INSURANCE

BUSINESS COVER

• Loans Value to the company or individual becoming payable.

or

• Profit – commonly a multiple of income.

Why?

• Remuneration is good indication of their annual value to the company.

How?

• Normally would be 10 times for death plans up to 7 times for SSI but insurers would impose upper limits – it has to make sense.


KEYPERSON – HOW DO I CALCULATE THAT?

KEYPERSON

Taxation on proceeds

• If the purpose of the policy was to replace lost profits, the proceeds will be treated as a trading receipt and corporation tax will apply.

• Proceeds could be used to buy a tax deductible item e.g. machinery.

• If the purpose is to repay loans then the proceeds should be treated as a capital receipt of the business and the proceeds are tax free.

• It is therefore recommended to use separate policies to protect both borrowings and profits.

We recommend companies consult with their relevant independent legal, taxation or financial advisers.

INSURANCE

Are premiums tax deductible?

For premiums to be admissible for deductions for corporation tax the following 4 conditions must apply:

1. Relationship between business and life insured is that of employer & employee (employee includes director).

2. Employee must have no more than 15% ordinary share capital.

3. The life assurance is intended to meet loss of profit resulting from the loss of services of the employee.

4. The policy is a Term Assurance contract with a term not exceeding retirement age.

In practice tax relief rarely applies.

KEYPERSONINSURANCE

• Must ensure legal and taxation background in order before setting this up.

• Double option or buy/sell agreement with each director must be in place.

• Comply with Companies Act 2014.

• Company then takes out life assurance for the sum insured equivalent to the full market value of the shareholding.

CORPORATE CO-DIRECTORBUSINESS COVER

• Company owns the policy.

• Company pays the premiums.

• Company receives the proceeds in the event of claim.

• The director is the life insured.

• Very similar to Keyperson.

BUSINESS COVERCORPORATE CO DIRECTOR PROTECTION

CORPORATE CO DIRECTORS


AND KEYPERSON

Corporate Co Director Keyperson

Policy Owner/Proceeds to The company The company

Life insured The director (s) The keyperson(s)

Payment of premium by The company The company

Purpose Purchase shares on death To protect profits/repay loans

Tax relief No Loss of profits only

Proceed taxable No May be tax applied


• Not very common – most below limits.

• Does it make sense?

Occupation, age, level of cover, match with loans or legal agreements, reason for plan, existing cover, total market cover…

• Contact with the broker.

• Minimum of evidence.

• Early rather than later.

• Guidance not advice.

KEY PRINCIPLES FOR UNDERWRITERS

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UNDERWRITING

• Commercial Approach

– proactive decision making and evidence requests

• Large Case service

– dedicated underwriter

AT YOUR SERVICE

• Underwriting Helpline: 01 429 3444

• Email: [email protected]

QUESTIONS&ANSWERS

THANKYOU

Royal London Insurance DAC is regulated by the Central Bank of Ireland. Royal London Insurance DAC is registered in Ireland, number 630146,

at 47-49 St Stephen’s Green, Dublin 2. Royal London Insurance DAC is a wholly owned subsidiary of The Royal London Mutual Insurance Society

Limited which is registered in England, number 99064, at 55 Gracechurch Street, London, EC3V 0RL.

09/2019 1649.1

FINANCIAL UNDERWRITING · Business Cover • Partnership • Co Directors • Keyperson •...

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Transcript of FINANCIAL UNDERWRITING · Business Cover • Partnership • Co Directors • Keyperson •...