R05 Business protection needs: free practice questions

1. Question 1 of 5

   Which is one of the most important aspects of business protection for many smaller businesses?

   Option A: Motor fleet insuranceOption B: Key person insuranceOption C: Buildings insuranceOption D: Travel insurance

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   The answer is B: Key person insurance

   The success of many smaller businesses depends on certain key individuals, so key person insurance, through life, CIC or IP, is a vital part of business protection.

   Why the other options are wrong

   A

   Motor fleet insurance is general insurance, not financial protection.

   C

   Buildings insurance protects property, not the people a business depends on.

   D

   Travel insurance isn't central to business protection.

2. Question 2 of 5

   Why are financial protection principles especially relevant to small and young businesses?

   Option A: They always pay lower rates of tax than large firms, so need less coverOption B: They are not permitted to borrow any moneyOption C: The owner's wealth and skills are tied up in a firm with few reservesOption D: They are legally required to buy protection policies

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   The answer is C: The owner's wealth and skills are tied up in a firm with few reserves

   In small businesses, the owner's wealth and the firm's success may depend on their skills. Young businesses often have few resources to absorb a loss.

   Why the other options are wrong

   A

   Tax rates aren't the reason; the owner's wealth and skills are tied up in the firm.

   B

   Small businesses can borrow, and often do.

   D

   There's no legal requirement for small businesses to buy protection.

3. Question 3 of 5

   What particular protection issue can arise for a partnership when a partner dies?

   Option A: All the remaining partners are required to retireOption B: The partnership automatically becomes a limited company on the deathOption C: The deceased partner's will may not meet the partnership's needsOption D: All of the partnership's debts are written off

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   The answer is C: The deceased partner's will may not meet the partnership's needs

   Partnerships have their own protection needs, because the deceased partner's will may not deal with their business interest in a way that suits the continuing partnership.

   Why the other options are wrong

   A

   The remaining partners don't have to retire.

   B

   A partnership doesn't become a limited company when a partner dies.

   D

   The partnership's debts aren't written off on a partner's death.

4. Question 4 of 5

   Key person insurance can take which forms? Identify the option that is NOT typically one of them.

   Option A: Buildings and contents insuranceOption B: Critical illness coverOption C: Income protection for lost profitOption D: Life assurance

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   The answer is A: Buildings and contents insurance

   Key person insurance can be life assurance, critical illness or income protection, depending on the individual's role. Buildings insurance protects property, not people.

   Why the other options are wrong

   B

   Critical illness cover is a common form of key person cover, paying out if the key person suffers a defined illness.

   C

   Income protection is a form of key person cover where the business needs to cover lost profit during long absence.

   D

   Life assurance is a common form of key person cover, paying out if the key person dies.

5. Question 5 of 5

   Dan and Eve each own half of a profitable company and both play key roles in running it. Which protection needs should their adviser explore first?

   Option A: Share protection so a survivor can buy the other's shares, plus key person coverOption B: None, as the company's assets would cover any loss if either of them diedOption C: Only a whole of life policy for IHT on their estatesOption D: Private medical insurance only, as it is the most common staff benefit

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   The answer is A: Share protection so a survivor can buy the other's shares, plus key person cover

   In a small owner-managed company, the death or illness of a shareholder-director creates two risks: the survivor may be unable to buy the shares, and the business may lose profits. Share protection and key person cover address these.

   Why the other options are wrong

   B

   The company's assets don't give a surviving shareholder the cash to buy out the deceased's family.

   C

   IHT planning may matter later, but the immediate business risks are ownership and lost profits.

   D

   PMI is a staff benefit; it doesn't address the ownership and profit risks here.

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