All applications for Life or Critical Illness cover are subject to some degree of financial assessment to ensure that the amount of cover requested is reasonable in relation to the circumstances of the life assured. As the sum assured increases so does the amount of information we require and a more detailed financial assessment is carried out.
In many cases we will be able to make a decision based on a financial questionnaire and application form but for higher levels of cover we may need additional information such as company accounts, copy of relevant loan offer, or perhaps copy business plans. The exact information we require will vary dependent on the circumstances of a particular application.
The main areas of business assurance we are involved in assessing are Key Person Assurance, Business Loan Cover and Shareholder Protection. The amount of cover appropriate to these circumstances is assessed in different ways:
Key Person Assurance
We look at the way in which the amount of cover requested was calculated to ensure that the basis used and the amount of cover requested can be justified by the circumstances of the particular case.
Two of the more common ways of calculating the amount of cover needed are a multiple of the:
While neither approach may be perfect for every case, they do offer a reasonable starting point and may help in establishing the actual amount of cover required.
The same principles apply to the calculation of both Critical Illness and Life cover. However, throughout the insurance market, the multiples of salary or pre-tax net profits that can be accepted are generally lower for Critical Illness than those of life cover.
Business Loan Cover
Here the amount of the loan is an obvious measure of how much cover is required. However it should also be kept in mind that the total amount of cover on all lives should not exceed the loan and that the life or lives assured for Business Loan Cover should be a Key Person to the company. It will have to be clear that their loss would affect the company’s ability to repay the loan.
Shareholder Protection
The total amount of cover on all lives involved should not exceed the valuation of the company, and the cover on each life should be in line with their individual shareholding. One of the problems we find with Shareholder Protection is accurately identifying the value of the company involved. An accountant’s valuation of the Company is very useful in assessing this type of cover but is, unfortunately not always available. In the absence of a valuation it may be possible to use a multiple of the net pre-tax profits, proportionate to the shareholding of the life to be assured.
In summary we are trying to establish whether or not the request for cover is reasonable by using specific information which can be related to the lives to be assured and the business involved.
No guarantees are given regarding the effectiveness of any arrangement entered into on the basis of these comments.
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