Article - Key man insurance

If your small to medium size business relies heavily on one or more individuals then your business is at serious risk should anything happen to that individual. Key man (person) insurance is an insurance product which will provide the business with protection should the worst happened to your key individuals.

Many small to medium size businesses have started from a small group of employees who have specialists skills and knowledge fundamental to the running of the business. Whether this be financial, technical, sales & marketing these skills may not be transferred to another individual quickly. This therefore leaves the business relying on one or two key individuals to ensure correct operation, maintaining cash-flow and keeping a steady growth within the business.

When assessing your business to see if you have any key individuals, it is important to think how long it would take the business to recover to normal operation if the particular key man was removed from your day-to-day operations? Does the key person significantly contribute to the profits of the business? Is there significant cash-flow to maintain the profits during the period of handover if the key person died or took a serious illness such as cancer? What would the cost of training a replacement be? These are all important questions you should be able to answer for your business to ensure the risk to the business has been managed.

How key man insurance works

Key man insurance can be used to mitigate the risk to the business of losing a key person within the firm. It would provide a lump sum amount to aid cash-flow which can then be used to ensure projects continue as planned, provide funds to recruit and train a replacement. If your key person has taken ill with a serious illness such as heart attack, stroke or cancer the funds can be used to recruit and train a temporary replacement whilst still offering your key man a salary whilst they take a timely recovery. Think of how important this benefit would be to the individual as well as the business.

Lets take a look at an example. Mr Jones works as an Electrical Engineer for ABC Alarm Systems he is responsible for the design of new alarm systems and is currently heavily involved on a new high profile project which has buy-in from an number of customers already. Looking at two examples, one where ABC Alarms Systems have no key man insurance in place and one where they do: -

ABC Alarm Systems own a policy on Mr Jones' life:
Mr Jones dies -> Policy proceeds paid directly to AAS -> AAS have funds to maintain profits -> AAS have funds to find and train a replacement

ABC Alarm Systems have no cover:
Mr Jones dies -> Emergency cover needed £ -> Loss of customers/reputation in the market/No confidence from creditors

It would be a good idea for ABC Alarm Systems to contact their local tax inspector. This will help them to understand tax relief on the policy premiums and the tax liability on any payments made in the event of a claim.

On a normal Key Person policy, the benefit paid to ABC Alarm Systems would be treated as a trading receipt. This means it would be subject to corporation tax at the company’s rate for that financial year. It would therefore, make sense if the sum assured was based on gross profits so any tax liability at point of claim will be accounted for.

How much cover is needed?
This would depend on a number of factors, some of which you have already considered above: -

• Key persons salary
• Total payroll for the business
• Gross profit of the business
• Recovery period (time to return to normal operation)

The following calculation will provide a guide to how much cover would be required for a key individual in your business: -

Sum assured = (Key Persons Salary / Total Payroll) * Gross Profit * Recovery Period

For example if the key person had a salary of £35,000 and the total payroll was £250,000 with a gross profit of £350,000 and recovery period of 3 years.

Sum assured = (35000/250000)*350000*3

Sum assured = £147,000

To summarize

This is an insurance product which can protect your business from the risk of loosing your key individuals who are fundamental to your businesses profits. The lump sum amount received from a policy payout can ease cash-flow and provide the funds to recruit and train a replacement.

About the author:

Steve Wentworth formed his firm Wentworth Financial Services in November 2007 having been in the industry since November 2002. If you require a meeting to discuss key man insurance or other forms of business protection visit our business website.

Read the original artcle in context at http://www.wentworthfs.co.uk/articles/key-man-insurance-004.aspx 

Article - Importance of Independent Mortgage Advice

The purpose of this article is to explain the benefits of seeking independent mortgage advice when looking to either purchase or remortgage a property. The Financial Services Authoriy (FSA) have set out a number of key words which represent the numerous types of advice an individual can seek. This article will try to explain these, however our focus is on the most important and customer beneficial of these 'Independent Mortgage Advice from the whole of Market'.

Types of mortage advice

So what are the different types of mortgage advice and where would you expect to find them?

Non-advice
This type of mortgage broker offers the least consumer protection, they will simply ask a set of questions to narrow the customers requirements and thus filtering the number of mortgages available. They then present the customer with a small list of possible mortgages for the consumer to choose one appropriate. The consumer protection here is based on the script of questions the broker asks. The script is a process determined prior to the consumer appointment, and is impersonal. Therefore specific personal cirmcumstances are unlikely to be assessed. It also assumes that the customers answers are factually correct and the final choice is made solely by the consumer. Although no advice is offered these brokers do handle the arranging of the mortgage on the consumers behalf, and therefore dealing with all the chasing and removing stress from the process.

Where would you expect non-advised brokers to exist?
Well believe it or not many non-advised brokers are within the high street banks and building societies.

Advice-only
This type of services is where a mortgage adviser uses their knowledge and skills to provide the most suitable mortgage to suit a consumers personal circumstances. This will involve a full fact finding interview, affordability assessment, discussion on the consumers future plans and aspirations, all of which provide key facts on a consumers requirements, and therefore a means for the adviser to identify suitable products. The adviser will not however, handle the arranging of the mortgage, and therefore the consumer would need to deal directly with the bank or buildings society to arrange the mortgage.

Where would you expect advice-only advisers to exist?
These advisers generally do not exist alone this is often a service provided through the 'Independent Mortgage Adviser' type below. And often comes about when the most suitable mortgage is only offered direct through high street (i.e. not through mortgage advisers/brokers). The adviser would therefore offer an advice-only option to the client and often charge a fee for this service. Although the client must deal directly with the bank or building society their mortgage adviser often provides support to the consumer.

Tied mortgage advisers
Tied mortgage advisers come in two forms 'only offering mortgages from one lender or its own mortgages' or multi-tied 'only offer mortgages from a limited number of lenders'. This clearly limits the number of mortgage products available to match a consumers personal circumstances and in a lot of cases they may not be able to offer the most suitable mortgage product and therefore advice may result in the best mortgage they can offer, being woefully inadequate.

Where would you expect tied mortgage advisers?
High street branches. A consumer calls into their local building society branch and their in house mortgage adviser can only offer mortgage products from that building society. Consumer choice and mortgage product suitability are considerably reduced. Whats more, high street branches often offer low mortgage rates/fees as a loss leader (marketing term to bring in business) and then try to sell their tied insurance products which are often also woefully inadequate and expensive.

Whole of market advice
By far the best coverage these advisers can offer mortgages from all the UK mortgage lenders (having mortgage adviser/broker routes). The vast amount of mortgages available through these advisers is likely to cover the individual circumstances of a consumer. Whole of market mortgage advisers offer advice through conducting a full fact finding interview, affordability assessment, discussion on the consumers future plans and aspirations and then can arrange the mortgage through the lender thus aleviating the stress which comes when purchasing a house.

Where would you expect whole of market advisers?
These advisers are usually separate firms often found in the yellow pages or through the internet they are sometimes linked to estate agents. On an initial meeting mortgage advisers should declare if they are whole of market and this will be disclosed in the 'Initial Disclosure Document' they provide you. If you are not sure if an adviser is whole of market then ask them.

Independent whole of market mortgage adviser
Finally this type of adviser has the ultimate scope of the mortgage market, not only can they offer mortgage advice from the whole of market (lenders with mortgage adviser routes) but can also offer an advice only process if they identify a high street direct deal is more suitable. The 'Independent' statement indicates that the adviser must offer the consumer a fee based service if required. This means that rather than the adviser taking commission as payment for the mortgage advice, the consumer can opt for paying a broker fee and any commission is rebated to the consumer. The benefit of the fee based service is the consumer knows the adviser will not be swayed by higher commssion mortgage products when selecting a suitable mortgage, however these days this is highly unlikely as the mortgage adviser must prove to the regulator why a particular mortgage is most suitable. Some occassions where the commission is quite considerable this would mean the consumer could receive more money than the broker fee paid and therefore would be better off taking the fee based approach.

Where would you expect to find Independent Whole of Market Advisers?
Like the author of this document Independent Mortgage Advisers are usually separate firms often found on the high street, yellow pages or through the internet and they are sometimes linked to estate agents. On an initial meeting an independent mortgage adviser would declare that they are whole of market and that they offer a fee based approach if required and this will be disclosed in the 'Initial Disclosure Document' they provide you. If you are not sure if an adviser is independent and/or whole of market then ask them.

What do independent whole of market mortgage advisers do for consumers?
The benefits of opting for an independent whole of market mortgage adviser include but are not limited to the following: -

• Treat customers fairly.
• Take time to gain key factual details of the consumers personal circumstances and aspirations.
• Support and inform the consumer from initial enquiry right through to completion and beyond.
• Provide an informed view on the housing market in general (price negotiation, leasehold issues etc).
• Provide a individually tailored service specific to the customers needs, not a faceless "one size suits all" (non-advised) service.
• Advise consumers to thing about their long-term intersts as well as the short-medium term thus minimising risks.
• Work for the consumer – estate agents, lenders and insurance providers have a different agenda.
• Explain the features and benefits of different mortgage and protection options.
• Free to act based on conscience and fairness as not usually directly targeted on specific areas.
• Protect consumers data and privacy.
• Provide general support during what is acknowledged to be one of the most stressful events in life.
• Provide a knowledgeable "Ally" in what can be a very worrying process.
• Provide proficient, impartial, examination of mortgage products.
• Identify when specific lending criteria restricts consumers personal circumstances.
• Expert guidance in complex scenarios (shared ownership/shared equity, right-to-buy, adverse credit).
• Identify the potential lender in unusual situations, thus avoiding the need for multiple credit checks.
• Select the best protection providers for consumers with health issues or unusual insurance histories.
• Choose the most appropriate products, from the whole of market for each aspect of a consumers mortgage and protection needs, and thus increasing their ability to afford their commitments, even when things go wrong.
• Highlight unusual exclusions on protection and general insurance products.
• Ensure the provision of appropriate and customized protection products.
• Quickly find an alternative lender if declined without wasting the consumers time.
• Can arrange property insurance in ample time to be ready for exchange of contracts on purchases.
• Encourage competition and innovation from lenders.
• Assist in calculating affordability, ensuring that consumers can afford their mortgage and protection commitments, along with their other commitments.
• Perform data input/entry for the consumer, reducing errors, omissions and most importantly non-disclosure.
• Take responsibility for the advice and recommendation provided, thus increasing consumer protection.
• Protect the consumer from corporate sales tactics used by some lenders and estate agency chains.
• Understanding the urgency of some transactions and "go the extra mile" to meet deadlines.
• Collate, verify and suuply documentation for the lender, thus reducing delays in processing and expedite the process for the consumer.
• Liaise with third parties in the transaction, tracking progresss and any developments updating consumers throughout.
• Use past knowledge and awareness to predict problems and resolve them in advance.
• Act as advocate for the consumer during the application process.
• Explain the mortgage offer and assist in fulfilling the offer conditions.
• Can find appropriate lenders and insurers for unusual properties ( thatched roof, flying freehold flats etc).
• Protect consumers from aggressive third-party marketing.
• Often personally available outside of normal working hours to answer questions or resolve issues.
• Care about consumers and provide an ongoing long-term service, often several generations of the same family.

About the author

Steve Wentworth formed his firm Wentworth Financial Services in November 2007 having been in the industry since November 2002. If you require an independent mortgage advisor or if you'd like to browse typical mortgage rates then take a look at our website.
Read the original article in context at http://www.wentworthfs.co.uk/articles/independent-mortgage-adviser-003.aspx

Article - What is Critical Illness Cover

According to the Association of British Insurers' (ABI) 'Statement of best practice for Critical Illness Cover' Critical illness cover means insurance which pays out on meeting the policy definition of a specified critical illness and where all of the following illnesses are included: -

• Cancer - excluding less advanced cases.
• Heart attack - of specified severity.
• Stroke - resulting in permanent symptoms.

Therefore if you have an insurance policy were the insurance provider pays out a lump sum amount if you suffer any of the above then it is likely to be a critical illness cover policy.

What other critical illnesses are covered?

Many critical illness insurance providers include many more illnesses than the minimum required of Cancer, Heart attack and Stroke in their policies. However the list of critical illnesses varies between provider therefore, if you are unsure which provider offers the most appropriate cover for you then you should seek advice from an independent insurance adviser. However, this article should assist with how to compare providers based on the critical illnesses covered.

The ABI have defined a list of standard definitions called the model critical illnesses, whereby insurance providers must use these definitions if they offer cover of that particular illness. A total of 23 model definitions exist in the ABI's Statement of best practice for critical illness cover. These are: -

• Alzheimer’s disease [before age x] – resulting in permanent symptoms
• Aorta graft surgery – for disease
• Benign brain tumour – resulting in permanent symptoms
• Blindness – permanent and irreversible
• Cancer – excluding less advanced cases
• Coma – resulting in permanent symptoms
• Coronary artery by – pass grafts-with surgery to divide the breastbone
• Deafness – permanent and irreversible
• Heart attack – of specified severity
• Heart valve replacement or repair – with surgery to divide the breastbone
• HIV infection – caught [in the UK] from a blood transfusion, a physical assault or at work in an eligible occupation
• Kidney failure – requiring dialysis
• Loss of speech – permanent and irreversible
• Loss of hands or feet – permanent physical severance
• Major organ transplant
• Motor neurone disease [before age x] – resulting in permanent symptoms
• Multiple sclerosis – with persisting symptoms
• Paralysis of limbs – total and irreversible
• Parkinson’s dise ase [before age x] – resulting in permanent symptoms
• Stroke – resulting in permanent symptoms
• Terminal illness
• Third degree burns – covering 20% of the body’s surface area
• Traumatic head injury – resulting in permanent symptoms

When comparing insurance providers critical illness cover policies, you should read their Key Features Documents and check for the list of illnesses covered by the policy against this list, if the provider offers all and more then it is likely to be a comprehensive policy. Where more illnesses are listed there are no further model definitions through ABI therefore the insurer will use their own wording so you should investigate these further. Many insurance providers include 'Total Permanent Disability' as an illness, this illness may be measured by assessing the person's ability to perform certain of the following: -

• The insured person's "own occupation".
• "Suited occupations".
• "Any occupation" whatsoever.
• Number of specified activities – for example, activities of daily living or functional ability tests.

Insurance providers can use one or more of the above definitions for their Total Permanent Disability illness definition.

What other benefits may be included?

Critical illness cover policies include a number of further benefits again these vary by insurance provider. Some of these benefits include: -

Child critical illness cover – an identical or subset list of critical illnesses for the children of the policy owner, provides a payout of typically 25% of the policies sum assured or to a specific capped amount.

Waiver of premium – the insurer will cover payments should the policy owner falls ill and is unable to work. This benefit usually is subject to an additional premium.

Indexation – an option to allow the sum assured to increase each year with inflation this can be by a set percentage or the retail prices index RPI.

Option to increase cover – allows increases to the sum assured amount without further medical evidence subject to a life changing events such as getting married, becoming a parent or moving home.

What you should look out for.

As well as the illness definitions the ABI have also defined model exclusions to be used on policies where they apply. These will appear under the heading 'When will the plan not pay out?' in the policies Key Features Document.

• Alcohol or drug abuse
• Criminal acts
• Flying
• Hazardous sports or pastimes
• HIV/AIDS
• Living abroad
• Self inflicted injury
• Unreasonable failure to follow medical advice
• War and civil commotion

Insurers will use these definitions where they apply and include some of there own exclusions where necessary, a typical exclusion often included is non disclosure of medical facts. You should be comfortable that these exclusions do not put you at risk.

What else

Critical illness policies are often combined with some or all of the following thus providing a full protection plan to suit your requirements: -

Life cover

Income protection (or Permanent Health Insurance)

About the author

Steve Wentworth formed his firm Wentworth Financial Services Ltd in November 2007 and has been in the Mortgage Industry since November 2002. For an immediate quote for the best critical illness cover then take a look at our website.

Read the original article in context at http://www.wentworthfs.co.uk/articles/critical-illness-cover-002.aspx

Article - How UK Mortgage Lenders Calculate Mortgage Payments

An article providing guidance on how mortgage lenders in the UK calculate your mortgage payments.

There are no set rules defined by the Finacial Services Authority (FSA ), however lenders must be accurate on the illustrations and mortgage offer documents they supply to you.

 

How interest is charged

 

Mortgage lenders use a number of different methods for charging interest, these methods fall into one of three categories: -

• Daily interest charging.  
• Monthly interest charging.
• Annual interest charging.

Annual interest charging

 

The most simplest of these is the annual interest charging method, this is certainly the oldest method adopted by lenders. Interest is charged at the start of the year based on the mortgage balance figure. This interest amount is then divided through the 12 months of the year for each payment for an interest-only mortgage or combined with capital for each payment if a full repayment mortgage.

 

Interest-only calculation

 

 

So with a balance of £100,000 and a rate of 6.5%: -

 

  

Full repayment calculation

 

 

so with a balance of £100,000 and a rate of 6.5%: -

 

Monthly interest charging

 

With monthly interest charging, the annual interest rate is first divided by 12 to establish a monthly interest rate. This new monthly interest rate is then applied to the mortgage balance to calculate a monthly interest charge for each payment on an interest-only mortgage or combined with capital for each payment if a full repayment mortgage.

 

Interest-only calculation

So with a balance of £100,000 and a rate of 6.5%: -

Full repayment calculation

 

so with a balance of £100,000 and a rate of 6.5%: -

As you can see there are benefits to having a monthly interest charged mortgage over an annually charged one if your mortgage is a full repayment mortgage as this example shows a saving of £8 per month.

 

Daily interest charging

 

Many mortgage lenders in the UK have now adopted daily interest charging methods, this method is far more complicated and many lenders have their own rules on how they calculate daily charges of interest. Therefore for the purpose of this article the following method will be used, this should provide a guide to how much savings can be made with a daily interest charging method. In order to calculate the daily rate of interest we start with the annual interest rate and divide this through by 365.25 days (0.25 being the leap year). We must then multiply this by the days in any particular month. However you do not make mortgage payments every single day so these charges are rolled up and charged to you on a monthly basis. The main benefit with daily interest charging comes when you make over-payments reducing your mortgage balance immediately benefiting from lower interest being charged. Daily interest charging is often used with flexible mortgages, offset mortgages and current account mortgages as these present huge benefits to the borrower.

 

Dealing with rate changes

 

Most of today's mortgages start of with a special offer rate for a period of time then the mortgage often reverts to the lenders standard variable rate. For example a 4.5% fixed for 2 years followed by the lenders standard variable rate currently 5.6%. How do you calculate what payments will be in 2 years time once the special rate period has expired? Simply put you just start over using the new balance, and remaining term. So based on an original loan amount of £100,000 and mortgage term of 25 years

 

Interest-only mortgage

then mortgage payments after the first 2 years will increase to: -

Full repayment mortgage

 

In order to calculate the new mortgage payments after the first 2 years we must first calculate the new balance as capital will have been paid for 24 months: -

Now we have a balance for 2 years in the future we can start over with a new balance and a 23 year term: -

 

Lenders will use a similar process to this when a variable rate changes during the term of the mortgage. They will first inform you of the rate change and then calculate the balance and start over with the remaining term, balance and new rate.

 

About the author

 

Steve Wentworth formed his firm Wentworth Financial Services in November 2007 having been in the industry since November 2002. If you require an Independent Mortgage Adviser or wish to find typical mortgage rates then visit our website. Read the original article in context at http://www.wentworthfs.co.uk/articles/mortgage-calculator-001.aspx

Average first time buyer age rising

Average age of single first time buyers to rise to 43 according to research by theNational Housing Federation.

The Federation, which represents England’s housing associations, said the report highlighted the scale of the country’s housing crisis warning home ownership is becoming more of a dream than a reality for most young people. The average 21 year old will have to wait until there mid forties before they can afford to get the foot on the property ladder, and in London the expected average age rises to mid fifties.

The problem is related to the banks and buildings societies restriction on lending close to the value of the property. Lenders are requiring first time buyers to have large deposits, thus preventing many individuals to step on the property ladder. Individuals are unable to save as they are paying high rents, public sector pay freezes further more there is no incentive to save when saving rates are at an all time low.

For typical mortgage rates check our mortgages section.

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