Shareholder Protection Suitability Letter Template



Shareholder Protection Suitability Report

Dear (All Shareholder names)

It is our intention to offer you the best possible service and financial advice.

As a consequence of our recent meeting I have produced this report of suitability setting out my recommendations regarding your Company’s current financial position, aims and objectives.

My recommendations are based on the information you provided during our meeting on XX/XX/XXXX.

Introduction

I am now in a position to make my recommendations to you. This report is tailored to your Company’s specific needs and circumstances. It is an important document, which should be retained for future reference and read in conjunction with the Terms of business letter, Key Facts about our Services, Key Features Document(s), and your Personal Illustration(s), already provided to you, and your Policy Documents when they arrive.

Please note that all of the above documentation should be kept in a safe place.

Select one option below

Commission: We have discussed the various ways in which I am to be remunerated for the work I have carried out. You agreed that the product provider pay commission rather than you to pay a fee.

Fee: We have discussed the various ways in which I am to be remunerated for the work I have carried out. You agreed to pay a fee for the work carried out on your behalf.

Fee & Commission: We have discussed the various ways in which I am to be remunerated for the work I have carried out. You agreed to pay a fee offset by commission from the product provider.

In this report I have presented my understanding of your current situation and your aims and objectives. This forms the basis for my recommendations and suitability report. You should check carefully that the information is correct and inform me of any alterations which need to be made.

Please read this suitability report carefully before making any decision to proceed to ensure my assumptions are correct and that you have understood the issues and any risks involved.

The service that we provide falls into two parts: -

• A Financial Planning Service. This involves an examination of your needs and objectives by conducting a review of your Company’s financial position and future plans. This may highlight areas of financial planning where a need / shortfall exists which, when compared to your objectives, you may wish to address immediately or defer discussion to a later date.

• Research. In addressing your objectives, where a need for any type of product is identified, we research the market place and recommend a company that will provide the product best suited to your needs. When a recommendation is made, the specific reasons for selecting the product type and the product provider are clearly stated within the recommendation section below.

My understanding of your current circumstances

You are all director shareholders in your company, XXXX Limited. Your percentage share ownerships are as follows:

 

Mr. AAA XX%

Mr. BBB XX%

Mr. CCC XX%

Mrs. DDD XX%

XXXX Limited has been trading for XX years, employs XX people and is a (state type of business). It has an average turnover and net profits for the last two accounting years of £XX,XXX and £XX,XXX per annum respectively.

The Company has total assets of approximately £XXX,XXX and total liabilities of £XXX,XXX. The Company’s Accountant, (name of Accountant) has recently valued the business at £X,XXX,XXX.

Existing protection arrangements (delete if not applicable)

You currently have the following policies in force:

Insurer: Company Name

Policy end date: XX/XX/XXXX

Monthly premium: £XXX

Life assurance sum assured: £XXX,XXX decreasing/increasing/level

Basis: Single OR joint life

Premium Basis: Guaranteed OR reviewable

Reason for Policy: Shareholder protection/ Keyman etc

(Repeat for more plans, and give details of any trusts or agreements already in place)

Needs and Shortfalls

We discussed all aspects of your Company’s financial situation and from the information gathered in the Business Information Form, I have identified the following needs and shortfalls:-

Or

Due to your specific request several areas of the Business Information Form were not discussed, this resulted in advice being provided on a limited basis, had the Factfind been fully completed the advice provided to you may well have been different.

From the limited information gathered in the Corporate Fact Find, I have identified the following needs and shortfalls:-

Shareholder Protection (Life and/or Critical Illness Cover)

To put plans in place and to ensure that funds are available to allow the remaining Shareholders to buy the shares of a Shareholder who has become critically ill or has died. Without this cover, there could be serious consequences for the financial security of the business and also the Shareholder’s family/beneficiaries. (delete if not applicable)

Key Person Protection (Life and/or Critical Illness Cover and/or Income Protection)

To protect the company against the financial impact of losing a key employee, including one of you, through death, critical illness or long-term illness. (delete if not applicable)

(Include here any other areas identified in the Fact Find, even if not a priority now)

Objectives and Priorities

Following our discussions, I have identified that your objectives and priorities are as follows:

• You have told me that it is your Company’s primary objective to provide Shareholder protection, whereby if one of you were to die, funds would become available to the surviving shareholders to purchase the shares of the deceased from the executors of the estate. (amend if priority includes critical illness)

Where items identified as needs in the previous section are not to be addressed immediately, you have agreed to look at these at a future date.

Your Attitude to Risk

You have (all) confirmed your attitude towards risk for your Company’s Shareholder Protection requirements is as follows: (select one below)

• Cautious Risk - premium rates are guaranteed and will not increase throughout the term of the plan (except as a result of changes in the cover or indexation).

• Fairly Cautious Risk - You would prefer that premium rates are guaranteed and will not increase throughout the term of the plan (except as a result of requested changes in the cover).

• Medium Risk - You do not feel strongly about guaranteed or variable premium rates. If variable you would wish to minimise the risk of future fluctuations in premium.

Affordability

XXXX Limited has sufficient capital funds available immediately or at short notice with which to meet any foreseeable contingency. In addition you have confirmed that the Company is making a regular profit.

Based upon the Company’s current circumstances and any foreseen changes, you confirmed the Company has in the region of £XXX per month in available money, this being amount it can comfortably afford from it’s current budget towards XXXX Limited’s current protection needs. You anticipate this will continue to be the case for the foreseeable future.

Possible solutions

There are a few possible solutions that would help you achieve your objectives.

(Please consider the following and give reasons for discounting/not selecting them)

• Whole of life – these plans could supply the protection you require but you are not looking for an investment return from your protection policies, and this would generally be a more expensive option. OR (insert client specific reason)

• Family Income Benefit – these plans could provide an income to your family or beneficiaries in the event of your death, this would be a cheaper option than providing for a lump sum benefit, however a Family Income Benefit plan was not recommended because you require a lump sum benefit available to the remaining Shareholders with which they can buy the shares. OR (insert client specific reason)

• Increasing term assurance – this was not recommended because you did not want an automatically increasing plan, as this would not accurately reflect the value of the shares and the business. You would prefer to review the level of cover regularly. OR (insert client specific reason)

• Decreasing term assurance – this was not recommended because your need for cover is unlikely to decrease in the future, therefore an automatically decreasing plan would not accurately reflect your ongoing circumstances. OR (insert client specific reason)

Recommendation

Taking into account the Company’s objectives, attitude to risk and affordability as set out in this report, I am recommending a Term Assurance Plan for each of you as the most suitable product to meet your needs and the details are as follows:

Life Assured Mr. AAA

Term of plan XX years

Monthly premium £XXX

Life assurance sum assured £XXX,XXX on a level basis

Basis Single life, written in trust

Premium basis Guaranteed OR Reviewable

Life Assured Mr. BBB

Term of plan XX years

Monthly premium £XXX

Life assurance sum assured £XXX,XXX on a level basis

Basis Single life, written in trust

Premium basis Guaranteed OR Reviewable

Life Assured Mr. CCC

Term of plan XX years

Monthly premium £XXX

Life assurance sum assured £XXX,XXX on a level basis

Basis Single life, written in trust

Premium basis Guaranteed OR Reviewable

Life Assured Mrs. DDD

Term of plan XX years

Monthly premium £XXX

Life assurance sum assured £XXX,XXX on a level basis

Basis Single life, written in trust

Premium basis Guaranteed OR Reviewable

Term Assurance provides a tax-free lump sum in the event of the death of the life assured within the pre-selected period of the contract, in this case, XX years. As each of you own a proportion of the company, I have recommended you are each insured for the individual proportion owned.

The life sum assured has been selected as this matches the value of the company as assessed by the Company’s Accountant, based on your respective shareholdings. OR (insert client specific reasons)

Term till retirement: The term has been selected as this matches the number of years until your earliest expected retirement.

Term in line with business plan: The term has been selected as this is in line with your business plan and will be reviewed and potentially extended at the end of the term.

OR (insert client specific reason)

Each policy will be written in the name of one Director Shareholder only and each will be placed in trust. See ‘Trusts’ later on this report.

The Reviewable / Guaranteed premiums are suited to your attitude to risk as stated above.

Recommended Provider(s)

I have identified that the features of a Term Assurance plan will best meet your needs and requirements. From my research, I drew up a shortlist of potential Providers.

From the shortlist I have selected (insert Insurer(s)) because

• They provide the most competitive premium for the cover required OR

• They provide a competitive premium together with a more flexible product OR

• They provide a competitive premium and fast underwriting, which was the most important consideration for you OR (insert client specific reason).

(Explain here if different Providers are recommended for the different Shareholders and why)

Product features

We discussed how a Term Assurance plan on a level sum assured basis works and the list below reiterates its main features:

• Lump sums paid from this plan on death only during the term of the contract.

• The initial total premium is £XXX per month, this will increase as you all get older and is subject to the provider’s future premium rates at the review dates. (only relevant if reviewable premiums)

• Waiver of premium is included. This will be detailed separately within your personal illustrations. Waiver of premium is an optional benefit that will ensure your premiums are maintained in the event of you becoming disabled or long-term ill. The benefit will continue to pay your premiums (after a X month deferment period and up to XX years of age) (give details relevant to each plan) and subject to the basis of claim, until such time as you return to work, reach the end of the policy term or die. I would normally recommend that you take out this protection for peace of mind. The definition of not being able to work, which is applicable to this Waiver of Premium is the inability to perform your own occupation as opposed to any occupation. (Please refer to the policy conditions for full details and if applicable notify me if your circumstances change such as to affect your Waiver of premium entitlement.) In the event of a claim the benefit will be paid directly into your term assurance policy. OR waiver of premium is not included (insert reason)

• Options to increase your cover are available. (delete if not appropriate)

• Option to review the term of the plan is available. (delete if not appropriate)

• Total and permanent disability option: this element of the cover means that if you are in an accident and become totally disabled, the policy will pay out in full. (delete if not appropriate)

• (insert details of any other relevant options)

Caveats (delete if not applicable)

Waiver of premium was recommended but was declined by you because (insert client specific reason). You understand therefore that should you be unable to work because of injury/illness, the premiums are not protected.

Critical Illness cover was recommended to be included in the plans but was declined by you because the costs were prohibitive at this time OR (insert client specific reason). You understand, therefore that should any of you suffer a specified critical illness there is no cover for this within the plans.

(Detail any other benefits / options not recommended or declined)

Trusts

In addition to the life insurance applications, paperwork will need to be completed for both Business Trusts and a Double Option Agreement. (Sometimes known as a cross-option agreement)

 

A double option ensures that business property relief for inheritance tax purposes, if the company’s activities qualify, is maintained for the shares. This is because the agreement confers no legal right to any of the parties to either buy or sell their shares to any of the other parties. The agreement provides for options whereby the surviving director shareholders have an option to require the deceased person’s estate to sell and the estate has a corresponding option to require the survivors to buy, within a specified period from the death. If either party exercises the option, the other party must comply. This is in line with the Company’s Articles of Association.

 

Under the agreement, directors must effect and maintain or have maintained for them a life policy to provide the sum needed to purchase his/her shareholding in the event of his/her death.

 

The life policies are written under a business trust with the other directors as both trustees and beneficiaries according to the respective monetary share that corresponds to the value of their shareholding.

 

If the option is exercised the surviving directors will use the policy proceeds to buy the deceased director’s shares in the proportion to their existing shareholdings.

 

The business trust used is a flexible “power of appointment” interest in possession trust in which there will be a revertor to settlor clause that enables each director to be a potential beneficiary. In this way each director has the possibility of benefiting from the policy personally should the policy not be required for the purpose that was first intended. For example, this could occur where a shareholder sold his shares during his lifetime in which case the policy could be continued and used for other purposes, such as personal cover for the family. However, even though the trust is set up in such a way that it is not a gift with reservation for inheritance tax there could still be inheritance tax consequences and a charge to that tax could arise.

As it is a flexible interest in possession trust the trustees have scope to change the beneficiaries of the trust, if required. However, following the Finance Act 2006, the transfer of beneficial interests in trusts like these that are created on or after 22 March 2006 are now treated as chargeable lifetime transfers. In practice this means that any change made to the interest in possession beneficiaries will be deemed to be a chargeable lifetime transfer from the original beneficiary to the new beneficiary. In addition, ten-year periodic and exit charges may apply to the trust fund (see below). While you are alive and in good health, the value of the trust fund will be minimal, so no periodic charge will arise.

However, if the death benefit becomes payable and the insurance money was left in the trust until the 10th anniversary of the trust; the trust fund, depending upon a number of circumstances, could be liable to a periodic charge of up to 6% and subsequently every 10 years where, at each anniversary, the fund value is greater than the nil rate band at that time. In addition, an exit charge; generally based on the effective rate charged at the previous periodic date; could arise where funds are distributed after an earlier periodic charge has arisen.

I recommend that you seek the advice of your Company Solicitor, (name of Solicitor) to arrange the appropriate agreement and trust.

OR

I recommend that you use the forms from (Insurer) to set up the agreement and trust, however please check with your Company Solicitor, (name of Solicitor), that the trust wording is satisfactory, as we are unable to accept responsibility for the wording used by the Insurer.

(Amend this section if an alternative arrangement and trust is used – see Business Protection Suitable Advice Guide)

 

Payment and Taxation

The life insurance premiums can be paid either by the individual Shareholder directors or by the company. Because of the different sums assured involved and the different ages of the directors the premiums will obviously vary for each participant.

 

The simplest method of meeting the cost is for the company to fund the premiums. The tax situation will then be as follows:

 

The Inland Revenue treats the cost of each director’s individual premium as part of his remuneration for both income tax and national insurance contribution purposes. The personal cost to each Shareholder is, therefore confined to the income tax payable by him/her on the premium and any additional NI liability.

 

As an alternative, the company could increase each director’s salary by the amount necessary to fund the premium himself/herself.

Please note that in giving this advice I am not acting as a tax adviser and to ensure that my advice is appropriate for your Company’s and individual tax circumstances you should seek the advice of your Accountants.

Risk Warnings

I would like to draw your attention to the following risks that are applicable to Term Assurance protection:

• If you stop paying the premiums the life cover will cease.

• The benefits under these policies are guaranteed and do not depend on investment performance.

• The plan has no cash value either during or at the end of the term, other than in the event of a successful claim.

• The initial premium is reviewable after XX years and will be dependent on the provider’s future premium rates, which are not guaranteed. (Only applicable for reviewable premiums)

• Recommendations are based on my understanding of current legislation, which is subject to change.

• Protection policies are subject to underwriting. The providers may exclude certain circumstances or increase the premium. In either case I may be required to review my advice and make further recommendations.

• The benefits of these plans may not be paid out if it is subsequently discovered that you did not disclose full details of your medical histories at application stage.

• These plans will pay out a lump sum and not an income.

• Inflation may erode the effectiveness of the protection if increase options are not exercised.

• The cover provided may not always accurately reflect the value of the Company, therefore it is important that you have these policies reviewed on a regular basis.

• These plans will only pay out once.

• If at the end of the term you wish to continue the cover, you would have to be medically underwritten again.

• For detailed explanation and definitions of the features we have discussed about your particular plan, please refer to the Key Features Document.

• Any plans currently in force should remain in force until any replacement plan is actually on risk. Otherwise, there may be a period where you are uninsured. (Only applicable for replacement business)

• (Any other risk warnings applicable to the plan recommended)

Documentation

I have given you the appropriate Key Features Documents and specific quotations prepared by the product provider, which you should read carefully. If you have any questions on these or any of the other documentation provided, please do not hesitate to contact me.

When your plans start you will receive a notice of your right to cancel. You will have XX days in which you can change your mind and cancel your plan. You will receive a refund of any contributions made, should you decide not to proceed during the cancellation period.

Commission

For details of commission payable to us by the Provider(s), please refer to your Personal Illustration(s) for the (insert product provider) Shareholder Protection Plan.

OR

Shortly after your policy completes, we will receive a commission amount of £X,XXX from (insert product provider(s)), which is detailed in the Personal Illustration(s). This is in recognition of the work we have carried out in handling your application. This fee is not debited from your policy premiums and is only paid once risk is assumed.

Conclusion

I would like to thank you for seeking advice from (name of firm). The recommendations outlined in this report are based on my understanding of your personal circumstances and my assessment of your needs and hope you will agree that the recommendations I have made coincide with your current needs and future requirements.

If I have misunderstood any aspect of your needs please bring this to my attention as soon as possible. Please also contact me immediately if there are any inconsistencies or errors within this report.

I hope that you have been satisfied with the service that I am able to offer you. If you would like to forward my details onto anyone you believe that may benefit from the service I provide, please feel free to give them my contact details, as I would be happy to see them in the near future.

In the meantime if you have any questions regarding any of the above mentioned recommendations, please feel free to contact me and I will be more than happy to help.

Finally, thank you once again for your business.

Yours sincerely

(Adviser name and select your Title below)

Mortgage & Protection Adviser / Independent Financial Adviser

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