Solutions to cover the protection spectrum

Business Assurance workshop

Welcome and introduction

The Business Protection solution

PruProtect product spectrum

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3

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Sections

Welcome and introduction

The Business Protection solution

PruProtect product spectrum

Sections

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3

1

1. People are living longer but in ill-health

2. Increased burden on the individual

Key trends impacting protection

3. Regulatory change

4. Increase in owner managed business

5. Change in health and wellness

New markets

Increasing need for protection cover

Opportunity for intermediaries

1. People are living longer but in ill-health

2. Increased burden on the individual

3. Regulatory change

4. Increase in owner managed business

5. Change in health and wellness

Key trends impacting protection

Helping you cover the full spectrum of your clients’ needs

Accelerator Family Income Cover Education Cover Whole of Life Cover

Personal Protection

Business Cover Relevant Life Policy

Business Protection

Vitality Plus

7 new opportunities

Business Protection, an opportunity

Opportunity to grow your business financially through new revenue streams.

Opportunity to differentiate yourself from the rest of the market.

PruProtect is committed to supporting you as we enter a new market together.

Are you open for business?

Understanding the business protection market

Recession stimulates SMEs: encourages entrepreneurial owner managed businesses

SME footprint: 4.8 million business enterprises in the UK at start of 2008

March 2010: 2.10 million enterprises registered for VAT / PAYE

SME growth rates: Over 500,000 people start up their own business every year

SMEs are significant economic contributors: employ 60% of the private sector workforce

Corporate business = 59%of total business

Sole traders = 25% of total

Partnerships= 16%

Source – BIS Department for Business Innovation and Skills 2010

A large and potentially lucrative market

Need to stimulate client into action

Need to categorise market

Need to understand the business solution

Need to know how to apply those solutionsShowing you

the money

Business Protection – taking the next step

Three Key Questions

What are the barriers?

Why isn’t more business being done?

How can we change this?

1. What are the barriers?

Business OwnerInsufficient anxietyCost

AdvisorsDifficultyConfidenceProfitabilityLow priority“Out of practice”Low collaboration

Other professionalsNon coreLow trustInsufficient anxietyLow collaboration

2. Why isn’t more business being done?

Important UnimportantUnimportant

UrgentUrgent

Non-urgentNon-urgent

Success in the protection market requires proactivity

Make it: Real

Relevant

Accurate

Professional

Anxiety = ActionCreating a clear picture of the consequences of not acting

As a survivor With a serious

illness/ disabilityWho dies leaving a dependent family

arranges for implementation / execution

How can we change this?

As a survivor With a serious

illness/ disabilityWho dies leaving a

dependent family

Adviser

creates solution

through

Own business Solicitor Accountant

What do you add? The value of advice...

Understands client and client objectives

Assesses and establishes risk

Explains risk

Creates solution

Understanding & Clarity: The key to the business market

How to get ‘business risk’ on

the agenda

How to construct legal and tax

effective solutions

How to explain (and prove) “what

would happen if...”

How to deliver the solutions

How to communicate

Protection objective:

Right money Right hands Right time

However, as with all financial planning, providing cash is only half the story.

That cash needs to be provided at the right time and, to be tax efficient, in the right way.

Creating a solution to meet your client’s objectives with maximum tax efficiency

Business Protection planning

Business

Why your clients need your help

Continuation Solution

Need cash to meet: repayment of loans loss of profits recruitment loan accounts

Why your clients need your help

Business

Continuation Solution

Need cash to meet: repayment of loans loss of profits recruitment loan accounts

Succession Solution

Need cash to enable: purchase of share of deceased / ill owner

Why your clients need your help

Business

Continuation Solution

Need cash to meet: repayment of loans loss of profits recruitment loan accounts

Succession Solution

Need cash to enable: purchase of share of deceased / ill owner

Relevant Life Cover

Need cash for: family of key employee on death

The PruProtect Solution

The PruProtect solution

Appropriate for: Sole trader Partnership (or limited liability partnership) Limited company

Offering a complete solution

TrustsOption

agreementsGuidance and tools

The PruProtect Solutions

PruProtect Plan – Life Cover & Serious Illness Cover(Discretionary Trust)

PruProtect Business Protection Plan – Life Cover & Disability Cover for Business (Business Trust)

Relevant Life Cover – Life Cover only(Discretionary Trust for use with a Relevant Life Policy)

Terminology – getting you started

Gift With Reservation (GWR) Previously Owned Asset Tax (POAT) Inheritance Tax (IHT) Nil rate band (325K) Chargeable Lifetime Transfer (CLT) Income Tax (20% / 40% / 50%) Corporation Tax (26%) Capital Gains Tax (28%) Entrepreneurs relief (reduces CGT to 10%) VAT registered companies (73K trading income) Business property relief (own company for 2 years can pass on to

family without IHT as no transaction has taken place)

Sole Trader

Business Continuation – Key Person Cover

The Sole Trader: The most key person But frequently it is protection for family/dependants

IncapacityDeath

Family and dependants

Owner

£ £ £ £

Why your clients need your help

Business

Continuation Solution

Need cash to meet: repayment of loans loss of profits recruitment loan accounts

Where does the money come from if something bad and unplanned happens giving rise to financial loss?

Owner Employee

Key Person Cover

An insurance policy taken out by a business to compensate that business for financial losses that would arise from:– the death – or extended incapacity

of the member of the business specified on the policy. The aim is to compensate the business for losses and facilitate

business continuity. An employer may take out a key person insurance policy on the life

or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company.

Do I need Key Person Cover?

Ask the following questions:  If they went tomorrow would there be a negative impact on the

business? What effect will this have on clients, sales, turnover and profit? Do they have a unique skill or knowledge that cannot easily be

replaced? Is there someone already on the team who could do their job? If there is a team member who can take over, who will do their

job? Will you have to recruit a replacement? If you have to recruit how much will it cost, how long will it take

and how will you pay them?

A question of protecting (compensating)

the family on death.

Cover on the life of a Sole Trader

Death BenefitsDeath

Benefits

Policy

Discretionary Trust

Split trust to meet serious illness and death benefit needs:

SI DB

Trust

Cover on the life and serious illness of the Sole Trader

Life Assured Beneficiaries

No:• GWR• POAT

Policy

NB:• MPA• PLC

OwnerOwner

BusinessBusiness

Child AChild A

Sole Trader Example

OwnerOwner

BusinessBusiness

Child AChild A

Sole Trader Example

SpouseSpouse

TrustTrustPolicyPolicy

OwnerOwner

BusinessBusiness

Child AChild A

Sole Trader Example

SpouseSpouse

TrustTrustPolicyPolicy

Child B/CChild B/C

TrustTrustPolicyPolicy

Or one policy in one Discretionary Trust with a Letter of WishesOr one policy in one Discretionary Trust with a Letter of Wishes

Tax Considerations

Premiums not deductible Premiums are gifts for IHT but;

– £3,000 annual exemption– normal expenditure out of income exemption

Taxation of the policy proceeds– Usually completely tax free

Owner

POLICY

Deductible

Key Employee

Taxable/TaxFree?

If an employee is key?

Sole trader - Summary

No

YesYes

To employeesPossible buy out need – life of another policy and/or policy in discretionary trust as family compensation

To employeesPossible buy out need – life of another policy and/or policy in discretionary trust as family compensation

To family member?Financial compensation for other family members-policy in discretionary trust

To family member?Financial compensation for other family members-policy in discretionary trust

Financial compensation for family – policy in discretionary trust

Financial compensation for family – policy in discretionary trust

Will the business continue on

death?

Will the business continue on

death?

Partnerships

Business continuation

Business succession

Cash for the business on the death or illness of a

keyperson

Money for the continuing partners to “buy out” a deceased or seriously ill

partner

Partnerships – Two key needs

Partners as key people

When Partners are key…?

remember a partnership is not recognised as a separate legal entity

each partner effects own policy under business trust

surviving partner(s) make loans to the business to cover the business need

Business continuation

Cash for the business on the death or illness of a

keyperson

Business

£

Partners’ loan

Premiums – not deductible

Sum assured – tax free

A

Trust

P

Partnerships Business Continuation Solution

Partnerships Business Continuation Solution

B

£

C

£

Partners

Policy

Key employeeA

Life of another

And if employees are key?

Premiums – deductible

Sum assured – taxable

The Anderson tests

Anderson Rules – how are premiums taxed?

Sir John Anderson – Chancellor of the Exchequer 1944

Employer / Employee Cover loss of revenue / trading profits / income Reasonable sum assured Short / Reasonable term (originally 5 years however HMRC

accept retirement age as reasonable)

Note: Must satisfy Anderson rules for tax relief on premium

No premium tax relief if: Policy set up to cover a loan (Capital loss) Major shareholder (above 5%)

Employee(s) Partners

Determine potential cash need

• Loan repayment

• Profit replacement

• Other

• Use guidance

• Use tools

• Use guidance

• Use tools

• LOA policy

• No trust required

• Own life policy

• Business trust

Who is key?

Partnership Continuation Summary

Completing the picture – LLPs

LLPs

(Separate legal entity)

As for partners As for companies

Limited Liability Partnerships

Common in accounting and legal practices

Liability is the same as companies ie: limited

Taxed as partners are:

LLP

Policy on Life of Key Person

Benefits

Limited Liability Partnerships - An option

LLP recognised as a separate legal entity therefore has contractual capacity

LOA policy (Life of another)

No trust required

Premiums – non deductible

Proceeds – tax free

Business continuation

Business succession

Cash for the business on the death or illness

of a keyperson

Money for the continuing partners to “buy out” a deceased or seriously ill

partner

Partnerships – Two key needs

Business succession

Money for the continuing partners to “buy out” a deceased or seriously ill

partner

Partnerships – Business Succession

What needs to be covered:

Simply the value of the shareholding.

What needs to be covered:

Simply the value of the shareholding.

Partner(Father)

Business InterestPolicy in

Discretionary trust

SonNo IHT BPR

Spouse or non-business relatives:

IHT efficient

Example: Father and son business

Normally a question of compensation

Family Partnership Succession

Buy out on death (or serious illness)

Continuing partners retain ownership

Deceased partners family receive financial compensation

Buy / sellBuy / sellPartnerships agreementPartnerships agreement

So that…….

Surviving partners/shareholders can continue the business without unwanted or unqualified interference from third parties.

The deceased’s estate receives monetary value of the shareholding as recompense

So that…….

Surviving partners/shareholders can continue the business without unwanted or unqualified interference from third parties.

The deceased’s estate receives monetary value of the shareholding as recompense

OWNER A

LPRs

FAMILY(No IHT)

Business interest

AGREEMENT (D/O)

No CGT

CONTINUING OWNERS

CashWill

POLICY

BUSINESS TRUST

Business Succession on Death

Double Option Agreement

Option to continuing partners/ legal personal representatives

If one side exercises option other side is bound

Price Market value; fair but keep cover up-to-date Specified value; certainty but needs review

No family beneficiaries

All partners in business

Settlor

Other partners in appropriate shares

But if settlor leaves business, benefits revert to him/her

The Trust

BeneficiariesDefault

beneficiaries

Business Succession on Serious Illness

The choices

No agreement

Double option

Single option

Owner A

Continuing owners

B & C

Single option agreement

CashShares

Care:

Serious Illness

Business Succession on Serious Illness

CGT

FutureIHT

Disability Cover for Business

Designed specifically for Business Protection

Full benefit paid for 48 conditions

Whole of body coverage (9 body systems)

Permanent disability (own occupation)

The following can be selected: Life Cover Life Cover and Disability Cover

for business Waiver of Premium on Incapacity

Automatically included: Guaranteed Insurability Benefit Immediate cover Vitality

Why Disability Cover for business

Why your advisers should recommend Disability Cover for Business

A unique product – specifically designed to protect your client’s business from the financial impact of an illness

Add value to your clients – recommend a product that is tailored to the needs of their business

Opportunity to maximise revenue – upsell on a Business Protection Plan

Supports advice-led solution – recommend a product to your clients that they cannot buy direct

Why your clients should buy Disability Cover for Business

Peace of mind – benefit is paid on diagnosis of a disabling condition Relevant Cover – We cover specific illnesses that are likely to stop

your client from working, unlike traditional plans that cover a generic range of illnesses

Business succession planning – benefit can be used to buy- the disabled member’s share of the business

Business continuation planning – benefit can be used to fund additional resource ensuring that the business continues to trade if your client becomes disabled.

Why PruProtect’s Disability Cover for Business

Appropriate cover – whole of body coverage with benefit payable on diagnosis of one of the 48 disabling conditions

Affordable solution – with cover provided for disabling conditions rather than less severe illnesses’ the premiums are lower than traditional plans

Fair claims assessment – conditions based on objective medical definitions rather than a subjective assessment of a client’s ability to work which may be used in traditional plans

Guaranteed insurability options – cover can be increased without further medical underwriting following certain events such as a new or increased business loan or mortgage

Cover for large businesses – cover for up to £2,000,000 available

Business Protection needs are tightly defined

Whole of Body Coverage for 48 disabling conditions in 9 systems

Advanced cancer 8Cardiovascular 8Digestive 7Mental & behaviour disorders 2Musculoskeletal system 4Stroke & nervous system 9Renal disease 3Respiratory disease 5Permanent disability 2

Business Protection needs are tightly defined

Whole of Body Coverage for 48 disabling conditions in 9 systems

Advanced cancer 8Cardiovascular 8Digestive 7Mental & behaviour disorders 2Musculoskeletal system 4Stroke & nervous system 9Renal disease 3Respiratory disease 5Permanent disability 2

Why Disability Cover for business

Provides a cost-effective, simple and relevant solution

Life and DCB compared with Life and CICLife and DCB compared with Life and CIC

PruProtectPruProtect

Competitor ACompetitor A

Competitor BCompetitor B

Competitor CCompetitor C

Competitor DCompetitor D

Competitor ECompetitor E

Competitor FCompetitor F

Competitor GCompetitor G

Competitor HCompetitor H

Competitor ICompetitor I

Why Disability Cover for business

40bnSource – Exchange March 2011

Relevant Life Policies

A means by which an employer can provide:

lump sum protection for employee’s family via a discretionary trust in a highly tax-efficient way

A simple individual life policy with tax advantages

Relevant Life Policies

Benefits of a RLP

A perfect complement to

Business Protection

Premiums are a business expense for employer Premiums not taxed on employee Benefits are paid free of income tax No IHT if benefits paid to a discretionary trust Premiums not part of annual allowance Death benefit/terminal illness benefit not part of employee’s

lifetime allowance

Premiums are a business expense for employer Premiums not taxed on employee Benefits are paid free of income tax No IHT if benefits paid to a discretionary trust Premiums not part of annual allowance Death benefit/terminal illness benefit not part of employee’s

lifetime allowance

Relevant Life Policies – the rules

A Relevant Life Policy is specifically defined in

HMRC regulations

Only provides Life Cover

Only one life assured

Payable to an individual or a charity

Specific RLP Trust from outset

Does not acquire a surrender value

Policy ceases before the age 75

The main purpose of the policy must not be tax

avoidance

PruProtect RLP

Discretionary trust Life cover to age 75 at latest Terminal illness benefit Life cover/TIB ceases if employment ceases Option to effect personal cover without medical evidence on

ceasing employment Flexibility on appointing personal trustees after employee’s death

Discretionary trust Life cover to age 75 at latest Terminal illness benefit Life cover/TIB ceases if employment ceases Option to effect personal cover without medical evidence on

ceasing employment Flexibility on appointing personal trustees after employee’s death

The opportunity within the market

A different perspective

Need for Business Protection

Business Continuation– Key Person Cover– Locum Cover

Loan Protection– Business loans/mortgages

Succession Planning– Shareholder/Partnership Protection

Relative size of market for each need

Business Continuation

Succession Planning

Loan Protection

For further information

Service and support

Online tools – Value of business– Value of Key Person– Relevant Life Tax calculator

Dedicated technical support helpline

Dedicated microsite

Range of trust documents

Technical guides

Dedicated underwriting team

PruProtect’s full product spectrum

7 new opportunities

Helping you cover the full spectrum of your clients needs

Accelerator Family Income Cover Education Cover Whole of Life Cover

Personal Protection

Business Cover Relevant Life Policy

Business Protection

Vitality Plus

Marketing support

Thank you