Have you considered key person insurance? - Veterinary Practice
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Have you considered key person insurance?

DYLAN JENKINS urges practices to identify who is “key” to the business and ensure the appropriate protection is put into place

MANY businesses overlook the
obvious reality that certain
members of staff are key to
profitability and therefore the
ultimate success of the

They could be difficult to replace
because their specific
skills or client
relationships are all but unique. Their
death or injury could
have a drastic effect
on cash flow and
damage profitability –
but don’t panic as
there are solutions.
This month I aim to
provide a brief
overview of the
benefits that “key
person” insurance can
bring and look at the
potential tax
implications if a
policy is taken out.

Losing a key
member of staff due to unforeseen
death or illness can be a tragedy for a
business, but with a less emotional eye
any personal loss can also turn to
financial loss as well. Staff morale
could be drastically affected, causing
delays to the normal running of the
business, which can result in a loss of
goodwill, or even a loss of clients. In
addition, recruiting and training a
replacement member of staff can
prove costly.

It is well known that the British
royal family forbids senior members
from flying together in case an
accident should destroy the “brand”
and heritage for ever. The 2010 Polish
Air Force crash painfully showed the
inherent dangers of concentration risk
by letting a number of key people
travel together.

Key person insurance is one way
that businesses can protect themselves
from the financial implications of
these unfortunate circumstances, but it
is often overlooked. In most cases this
is because many organisations do not
understand what it is or how it can be

What is key person insurance?

Key person policies are designed to
offset any negative impact on
profitability to a business following the
loss of a member of staff who is
essential to its running, through death,
serious illness or an accident. It should be noted, however, that
this type of policy only
covers unforeseen
problems and cannot
be used if the person
simply decides to leave.

It is often thought
that key person
insurance only applies
to directors or partners.
This is not the case,
but who can be
covered will vary
depending on your
business. The policy
can apply to anyone
whose loss would have
an immediate impact
on profits, such as a senior practice manager or
a specialist surgeon.

Some organisations have key person
policies that pay out on death but do
not cover critical illness, which can be
just as great a risk. Consider, for
example, what would happen if the
managing director (MD) of a small
company had a stroke and was
incapacitated. It could cause a loss of
confidence among clients with whom
the MD had a close relationship.
However, if the business had included
critical illness cover as part of its key
person policy, it would have been able
to make a claim and use any proceeds to
compensate for the loss of profitability
whilst the MD was incapacitated.

Identifying a key person

In order to identify individuals who are
key to the business, start by considering
who creates and drives your business.
This will vary, depending on your
practice and any areas of speciality, but
in addition to directors, partners and
senior staff, this might also include
individuals in client relationship or
practice management without whom the
business could lose clients or profits.

There are all sorts of reasons why
an individual can be essential to a
business. Perhaps he or she is
responsible for a certain niche area that
brings a lot of revenue into your
practice, has specialist skills it would be
difficult to replace or has built up
significant client relationships over a number of years that are key to the
success of the business.

Even when key personnel have been
identified, whether or not key person
insurance is the best way to proceed will
depend on how the case is viewed by
HM Revenue and Customs (HMRC).

Tax issues

Depending on the terms of agreement,
payouts under key person policies may
also qualify for tax relief. HMRC
decides on a case-by-case basis which
payouts are eligible but unfortunately
there are no official guidelines issued on
this matter. However, past cases indicate
that tax relief is most likely in the
following circumstances:

  • the only relationship between the
    business and the key person whose life
    is being insured is that of employer and
    employee (except in the case of
    shareholding directors);
  • the policy covers loss of profits only;
  • the term covered under the policy is
    reasonable – periods of five years, and sometimes up to 10 years, are generally
    deemed acceptable;
  • the employee being insured does not
    hold a significant shareholding in the

Tax relief will not usually be available
if the policy is intended as security for a
loan or is on the life of a proprietor.

These are general guidelines, so in
order to clarify the situation for an
individual business, it is important to
talk to the local inspector of taxes.

If the staff member to be insured is
unlikely to be defined as a key person
under these rules, it may prove more tax
efficient to look into other policies, such
as shareholder protection policies, as key
person policies which do not qualify for
relief can incur corporation tax of up to
40%, leaving considerably less money in
the pot to cover the losses incurred.

Therefore, in all cases professional
advice is vital to ensure that the most
appropriate type of policy is taken out
and the cover is appropriate for the
organisation’s unique circumstances.

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