Service and support - business protection frequently asked questions
Your questions answered
1. How do I submit business protection applications?
You can quote and apply for our Business Menu Plan, accessed through our online service (opens in a new window), 24 hours a day, 7 days a week. Paper applications can be sent to: Royal London Group, 22 Haymarket Yards, Edinburgh, EH12 5BH.
2. How do I complete your application form for a key person policy?
If it is a company that is applying on the life of a key person, then you simply put the company's details in the section 'About the other applicant' on page 3 and then put the details of the person covered on the following pages.
If it is a partnership and the key person is a partner, this would normally be arranged by the partner taking out the plan on their own life and putting this under trust for the benefit of the other partners. You would therefore leave the section 'About the other applicant' blank and complete the rest of the form in the normal way. It is however important to make sure we receive the trust form before the plan starts.
3. Do you have a business trust?
Yes, our business trust is designed specifically for use with business protection plans. You can download a copy of our business trust form here (PDF).
4. Can my client keep any payment on diagnosis of a critical illness for themselves, but give away any payment on death to their co-owners?
No. In business protection arrangements it is usual to have any critical illness benefit paid to the beneficiaries. This makes sure that the proceeds are available to them to either buy the share of an ill owner or to invest in the business to replace the ill person. If this didn’t happen, the other owners could find themselves with an obligation to buy the share of the ill person but with no money available to them to actually do this.
5. How is your business trust different to your other trusts?
There are 2 main differences.
The first is that the trust only includes people actually involved in the business as possible beneficiaries. This maintains the commercial nature of the arrangement making sure that no inheritance tax will be payable following a claim.
The second is that the trust holds any benefits payable on death or diagnosis of a critical illness for the benefit of the other owners but retains any other cover for the partner or shareholder taking out the plan (the split trusts keep any critical illness payment for the plan owner). This allows your client to include benefits such as Income Protection to replace an ill partner's or shareholder's income within a share purchase arrangement and this will be held under trust only for them, not the other owners in the business. The trust also reserves any Children's Critical Illness Cover for the partner or shareholder whose child is diagnosed with a critical illness instead of this being paid to the other owners.
6. Can I put an existing plan under your business trust?
We do not recommend that our business trust is used with an existing plan. This is because in the event of a claim this could lead to a liability to Capital Gains Tax (CGT) on the proceeds. This liability can arise because of the reciprocal nature of the arrangement. Each owner of the business is taking out a plan and putting it under trust for the other owners in return for the others doing the same. The putting of the plan in trust after it has started would therefore be an assignment for money or money's worth. Any subsequent disposal under that plan, including a claim would give rise to a capital gain calculated as the sum assured less the premiums paid, which is likely to give rise to a significant liability to Capital Gains Tax (S210 Taxation of Chargeable Gains Act 1992).
We therefore recommend that if using the business trust, it is always completed before the plan starts so that the plan is issued under trust from its commencement date and there is no assignment.
8. Do you have a single option agreement for critical illness?
Yes, this is part of our draft cross option agreement. If the client wants to include an option for them to be able to sell their share of the business on diagnosis of a critical illness they simply need to include the relevant paragraphs in the agreement.
However, our draft agreement can also include what we call a deferred double option on critical illness. If this option is chosen the partner or shareholder will have an option to sell their share of the business as soon as they qualify for a payment under their plan. But if they do not return to work within a specified period, usually 12 months, the other partners or shareholders then have an option to buy the ill person's share.
9. I've got three directors/partners in a business and I want to set up a share purchase agreement, how do I do it?
12. What are your business cover increase options?
Your client's plan comes with Cover Increase Options. This means they can increase their cover in certain circumstances, without giving us any medical information.
How it works
The following covers come with Cover Increase Options if we gave your client standard terms:
- Key Person Income Protection
- Life Cover
- Critical Illness Cover
- Life or Critical Illness Cover.
Your client can increase their cover, without giving us any medical information, if there's an increase:
- in the value of a key person
- to their business mortgage or loan but not if there's an increase in their overdraft
- in the value of a partner's, limited liability partnership member's or shareholder's interest in the business.
All we need to see is some evidence of the event. This could include:
- how the value of the key person has been calculated, and we might also need to see copies of the business accounts
- written confirmation from the lender or a copy of the new loan offer
- evidence of the increase in the value of partner or shareholder interest.
You or your client will need to ask us to increase their cover within six months of the event happening. And the person covered must be under 55 at the time - if there are two people covered, both of them must be under 55. We'll work out a new premium for your client's cover, and your client can decide whether they want to go ahead with the increase.
Limits on increasing your client's cover
Your client can increase their cover more than once. The total increase is the lowest of:
- half the original cover amount
- £200,000 for cover payable as a lump sum
- £10,000 a year for cover payable as regular payments.
If they have more than one type of cover or more than one plan on the life of the same person covered with us, the limits apply to all of them added together – not separately to each of them.
Key Person Income Protection comes with some extra limits, so that the total increase is no more than the lower of:
- the maximum percentage of pre-incapacity profit we originally agreed to cover, and
- our maximum cover amount.
Limits for an increase in the value of a key person
Your client can increase their cover by a maximum of:
- five times the amount of increase in salary, or
- twice the increase in gross profits attributable to that person
subject to the limits above.
They can't increase Key Person Income Protection using this option within 12 months of us stopping paying a claim or if the person covered meets the definition of incapacitated.
The new cover will have the same additional features as the original cover. And it will be on the terms and conditions we offer at the time of the increase. It must last at least as long as our minimum term at that time, but no longer than the time remaining on their original cover. So if the time remaining on their original cover is less than our minimum term, the cover can't be increased in this way.
Your client's premiums will be based on:
- the terms we applied to their original plan – or, at the time of any restart
- our pricing when we increase their cover
- the person covered's age when we increase their cover.
We can't offer your client Cover Increase Options if:
- we accepted their plan on non-standard terms – for instance, if we had to charge the person covered a higher premium, or if we had to apply some exclusions
- we're paying a claim, considering a claim, or if a medical practitioner has given the person covered a diagnosis or possible diagnosis that would allow your client to claim
- they're not resident in the UK, Jersey, Guernsey or Isle of Man.
If your client claimed for incapacity, they can't use Cover Increase Options within 12 months of us stopping the payments.
Your client won't be able to increase any of the covers if the person covered is already suffering from an illness or condition covered by the plan for which they have or have not yet submitted a claim.
13. Can I combine my client's personal protection with their business protection in the same plan?
The only time this can be done is where the client is a sole trader. In all other cases the 2 needs should be addressed separately.
This is because it is essential that business protection arrangements are established on a purely commercial basis. This will make sure that there are no problems with inheritance tax being charged unexpectedly. To keep an arrangement on a commercial basis only those who actually own shares in the business should be able to benefit from the arrangement. You should not therefore include a shareholder’s or partner's spouse or children as beneficiaries under any trust arrangement unless they also own a share of the business as this would prevent the arrangement from being purely commercial.
If the arrangement is not commercial it could be argued by HMRC that a gift with reservation by associated operations has been established. That is because each partner/shareholder is taking out a plan and putting this in trust for the benefit of the others in return for them doing the same thing. This is an associated operation and so if there is an element of gift (i.e. someone who is not themselves taking out a similar plan being able to benefit), a gift with reservation will arise. This would mean if the partner/shareholder died HMRC would treat the policy proceeds as part of their estate for inheritance tax. It is therefore advisable to keep personal protection arrangements separate from business protection arrangements.
However for a sole trader they are the business and there are no other owners. Their protection plan would therefore simply be placed under a normal split trust for their family. The family then have the funds available to them outside of the business to maintain their lifestyle. It is therefore possible to combine cover for both personal and business reasons in these circumstances.