CII R05 Business Protection 1 — Questions and Answers
Question 1: What is the primary purpose of key person insurance for a business?
- To compensate the business for financial loss caused by the death or critical illness of a vital employee (Correct answer)
- To provide personal life cover for the business owner's family
- To fund employee pension schemes on a group basis
- To cover business premises against fire and flood damage
Correct answer: To compensate the business for financial loss caused by the death or critical illness of a vital employee
Key person insurance compensates the business for financial losses resulting from the death or serious illness of an individual whose skills and knowledge are vital to its operations.
Question 2: In a key person insurance arrangement, who typically pays the premiums?
- The key person themselves from their salary
- The business, as it is the beneficiary of the policy (Correct answer)
- The government via a tax relief scheme
- A discretionary trust set up by the key person
Correct answer: The business, as it is the beneficiary of the policy
The business pays the premiums for key person insurance because it is the policyholder and the beneficiary of any claim proceeds.
Question 3: Which type of business protection is specifically designed to enable remaining partners to purchase a deceased partner's share of the business?
- Key person insurance
- Partnership protection (Correct answer)
- Relevant life insurance
- Group income protection
Correct answer: Partnership protection
Partnership protection, typically supported by a cross-option agreement, ensures remaining partners have the funds and legal mechanism to buy a deceased partner's share from their estate.
Question 4: What is a 'cross-option agreement' in the context of shareholder or partnership protection?
- An agreement allowing the insurer to cross-check claims with Companies House records
- An agreement giving surviving shareholders the option to buy and the deceased's estate the option to sell (Correct answer)
- An agreement between two competing insurers to share risk on large policies
- An agreement to cross-sell complementary financial products to business clients
Correct answer: An agreement giving surviving shareholders the option to buy and the deceased's estate the option to sell
A cross-option agreement creates a mutual option: the survivors can choose to buy and the deceased's estate can choose to sell, but neither is compelled — which preserves Business Property Relief.
Question 5: Under HMRC guidance, key person insurance premiums are generally allowable as a business expense only when:
- The key person owns less than 5% of the company's shares
- The policy term does not exceed five years
- The sole purpose of the policy is revenue protection rather than a capital purpose (Correct answer)
- The sum assured does not exceed ten times the key person's annual salary
Correct answer: The sole purpose of the policy is revenue protection rather than a capital purpose
HMRC's Business Income Manual (BIM45525) permits a deduction only when the policy protects revenue (e.g., profit replacement) and not when it serves a capital purpose such as repaying a business loan.
Question 6: What is the main tax advantage of a 'relevant life policy' for an employer?
- Premiums qualify for full corporation tax relief as an allowable business expense (Correct answer)
- The policy proceeds are always paid free of capital gains tax
- Employees receive the death benefit entirely free of national insurance contributions
- Premiums count against the employer's annual investment allowance
Correct answer: Premiums qualify for full corporation tax relief as an allowable business expense
Relevant life policy premiums are typically an allowable business expense, reducing the employer's corporation tax liability, provided the conditions set by HMRC are met.
Question 7: Which of the following best describes 'business loan protection'?
- Insurance covering the personal mortgage of company directors
- A policy that repays outstanding business loans if a key person dies or suffers a critical illness (Correct answer)
- Cover that protects the business against customers defaulting on commercial loans
- A policy insuring the business against currency exchange losses on overseas loans
Correct answer: A policy that repays outstanding business loans if a key person dies or suffers a critical illness
Business loan protection pays off outstanding business borrowing (including director-guaranteed loans) on the death or critical illness of a key person, preventing the lender from calling in the debt.
CII R05 Business Protection 1
What is the primary purpose of key person insurance for a business?