R05 Key person insurance: free practice questions

1. Question 1 of 5

   Who can be a 'key person' for key person insurance purposes?

   Option A: Only employees who hold no shares in the businessOption B: Only employees earning above the higher rate tax thresholdOption C: Only the managing director of a limited companyOption D: Anyone whose loss would seriously harm the business financially

   Show answer

   The answer is D: Anyone whose loss would seriously harm the business financially

   Key person cover should not be limited to employees. It can apply to directors, shareholders, partners, LLP members or others whose absence would lead to serious financial loss for the business.

   Why the other options are wrong

   A

   Key persons can be shareholders too.

   B

   Earnings above a tax threshold aren't the test.

   C

   It isn't limited to the managing director.

2. Question 2 of 5

   A company insures its sales director, a non-shareholding employee earning £70,000 a year, using a typical multiple of salary of five times. What sum assured does this give?

   Option A: £350,000Option B: £140,000Option C: £700,000Option D: £210,000

   Show answer

   The answer is A: £350,000

   The multiple of salary basis normally uses five times salary, sometimes up to ten: £70,000 × 5 = £350,000. Total remuneration may give a fairer figure.

   Why the other options are wrong

   B

   £140,000 is only twice salary; the usual multiple is five.

   C

   £700,000 is ten times salary, the top of the range.

   D

   £210,000 is three times salary; the usual multiple is five.

3. Question 3 of 5

   Which of the following key person policies is LEAST likely to qualify for corporation tax relief on premiums?

   Option A: A whole of life policy on a director owning 40% of the sharesOption B: Annual renewable term cover on a key design engineerOption C: Short-term cover on a working director with a 2% shareholdingOption D: Five-year term assurance on a non-shareholding sales manager to cover lost profits

   Show answer

   The answer is A: A whole of life policy on a director owning 40% of the shares

   Relief generally needs an employer-employee relationship, a loss of profits purpose and short-term cover. A significant shareholding, usually over 5%, and a whole of life policy with a capital element would both prevent relief.

   Why the other options are wrong

   B

   Annual renewable cover on a key employee usually qualifies for relief.

   C

   A shareholding of 2% is small, so short-term cover on this director may still qualify.

   D

   Short-term cover on a non-shareholding employee for lost profits usually qualifies for relief.

4. Question 4 of 5

   Which of the following would NOT prevent corporation tax relief on key person premiums?

   Option A: The policy is a convertible term assurance on the key person's lifeOption B: The policy is annual term cover on a key employee to protect profitsOption C: The policy is taken out as security for a business loanOption D: The policy has a surrender value as well as life cover

   Show answer

   The answer is B: The policy is annual term cover on a key employee to protect profits

   Annual or short-term cover on an employee to protect profits meets the conditions. Surrender values, loan security purposes and conversion options all suggest a purpose other than replacing lost profits.

   Why the other options are wrong

   A

   A conversion option suggests a longer-term purpose and prevents relief.

   C

   Using the policy as loan security points to a capital purpose and prevents relief.

   D

   A surrender value suggests an investment purpose and would prevent relief.

5. Question 5 of 5

   A new business applies for large key person cover but has no audited accounts yet. What could be used to support the sum assured for financial underwriting?

   Option A: A personal bank statement from the key personOption B: Nothing, as financial underwriting does not apply to new businessesOption C: A business plan showing projected trading and profitsOption D: A letter from the company's landlord

   Show answer

   The answer is C: A business plan showing projected trading and profits

   Financial underwriting checks the sum assured is not excessive. Evidence can include accounts, a business plan for new businesses, loan agreements and, for larger sums of around £250,000 and above, a financial questionnaire.

   Why the other options are wrong

   A

   A personal bank statement doesn't show the business's value.

   B

   Financial underwriting does apply to new businesses.

   D

   A landlord's letter doesn't support the sum assured.

R0 Exam Prep is an independent revision tool. It is not produced, endorsed by or affiliated with the Chartered Insurance Institute (CII). Questions and explanations are original. Use it alongside the official study text. About R0 Exam Prep