It may be difficult for some people to maintain clear blue water between their working and family lives. Of course this can vary depending on an individual's priorities and personal character. It is probably fair to say, however, that an influencing factor will be the individual's particular job.
As a result it is likely that those who own their own business, as individuals, partners or director shareholders, will experience this dilemma to a greater extent than employees might. Work and family life for these business owners will invariably have a number of overlaps.
In a similar way the protection needs of the business and of the family for that group of people can also overlap and are usually closely linked. Addressing one of these needs generally highlights the other. For example, arranging partnership or directors share protection will naturally lead on to raise family needs.
Protecting the business
One of the objectives of partnership or directors share protection is to generate a sum of money, in a tax efficient manner, at the time of critical illness or death of one of the partners/directors.
Writing the cover under trust for the benefit of co-partners or co-director shareholders will position them to purchase partnership shares on death or critical illness.
As far as their critical illness benefits are concerned the appropriate recommendation is a single-option agreement. This keeps the individual partner or director in control should they suffer a critical illness.
Being in that position is an extremely important factor in business protection arrangements. With regard to the benefits themselves, the basis should be a lump-sum pay-out.
Discussing the issue of what happens to the business on suffering from a critical illness provides the ideal platform to then move on to what happens to the family under these circumstances.
Protecting the family
In the same way as the single option agreement for business protection keeps the individual partner/director in control, so writing family cover (death and critical illness) under a “split” trust is important. By using this straightforward approach the benefits can be payable to the individual when he or she suffers a critical illness.
They can then use the policy proceeds to maintain their family's lifestyle following a life-threatening illness and, if death occurs, the benefits are payable to family beneficiaries and kept outside the estate.
The benefits for this type of protection arranged today, unlike business protection, might be more appropriate as family income benefits rather than as a lump sum.
There are a number of reasons for this:
Guarantees are extremely valuable. In a period of low interest rates and uncertainty of investment returns a “guaranteed” monthly income is attractive.
The selected monthly benefits can exactly fit the need. Using a lump-sum basis to cover the loss of monthly income might mean a shortfall, should the worst happen, in the early years but be higher than required in later years.
Lump-sum benefits can be confusing and may be perceived as excessive. Taking an annual salary of £35,000 and Limra-suggested levels the sum assured recommended could be as high as 15 times salary, e.g. £525,000.
Family income based cover is more understandable for clients. Instead of the above lump sum the benefits can be based on the net monthly income, say £2,250 per month. For additional security the benefits can also be linked to the RPI.
Finally, using different benefit bases can help create clear water between business and family protection plans – helping understanding on the specific objectives of both.
Small/medium sized businesses
With 2.6 million sole proprietor and partnership businesses currently established in the UK according to Small Business Service 2001, it is apparent that running a small business is a popular career path.
Many of the individuals running these organisations do have family and business protection needs. A combination of lump sum and family income based products can exactly meet those needs.