R05 Business loans protection: free practice questions

1. Question 1 of 4

   A business has an overdraft facility of £150,000, but its average balance is £60,000. What level of cover is generally appropriate?

   Option A: £30,000, a fifth of the facilityOption B: £105,000, the midpointOption C: £150,000, the maximum facilityOption D: £60,000, the average balance

   Show answer

   The answer is C: £150,000, the maximum facility

   Overdrafts fluctuate, so cover should generally reflect the maximum facility rather than the average balance.

   Why the other options are wrong

   A

   A fifth of the facility is far too little.

   B

   The midpoint could still leave a shortfall.

   D

   The average balance could leave a shortfall if the overdraft is fully drawn at death.

2. Question 2 of 4

   Two business owners must protect a £500,000 loan. What is the main drawback of each insuring only £250,000?

   Option A: The lender may not accept part repayment if one dies, leaving a shortfallOption B: Single life policies cannot be used to protect business loansOption C: The premiums would not then be deductible for tax purposesOption D: It is always more expensive than one joint life policy for the full £500,000

   Show answer

   The answer is A: The lender may not accept part repayment if one dies, leaving a shortfall

   Splitting cover only works if the lender will accept repayment of a proportion of the loan on one owner's death. Full cover on each owner is more flexible, though more expensive, and a joint life policy is cheaper but less flexible.

   Why the other options are wrong

   B

   Single life policies can be used to protect business loans.

   C

   Tax deductibility isn't the main drawback here; the lender's attitude to partial repayment is.

   D

   Splitting the cover isn't more expensive; it's cheaper, but less flexible.

3. Question 3 of 4

   What term is usually appropriate for a policy protecting a business loan?

   Option A: A maximum of one year in every case, renewed annuallyOption B: Until the business owner reaches State Pension ageOption C: Always whole of life, whatever kind of loan it isOption D: The loan term if fixed, or else short-term renewable cover

   Show answer

   The answer is D: The loan term if fixed, or else short-term renewable cover

   The policy should match the loan term where fixed. Otherwise the term should be discussed, and a short-term renewable policy is often most appropriate. The amount should cover the maximum repayment cost, including any early redemption penalties.

   Why the other options are wrong

   A

   One year isn't right in every case; fixed loans need cover for their term.

   B

   State Pension age has no link to the loan.

   C

   Whole of life cover lasts far longer than most loans.

4. Question 4 of 4

   A company has a £200,000 fixed-term business loan. Repaying it early would trigger a £6,000 early redemption penalty. What level of cover is generally appropriate to protect the loan on a key owner's death?

   Option A: £206,000Option B: £100,000Option C: £194,000Option D: £200,000

   Show answer

   The answer is A: £206,000

   Cover should normally meet the maximum cost of repaying the loan, which can be more than the borrowing where early redemption penalties apply: £200,000 + £6,000 = £206,000.

   Why the other options are wrong

   B

   £100,000 would leave half the loan unprotected.

   C

   £194,000 deducts the penalty instead of adding it.

   D

   £200,000 would leave the £6,000 penalty unpaid.

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