Author Richard T Lishman, Managing Director of money4dentists, a firm of specialist Independent Financial Advisers who help dentists across the UK manage their money and achieve their financial and lifestyle goals.
When it comes to running a dental practice, there are countless factors that need to be taken into consideration, from patient care to maintaining staff, financial and tax planning and insurance. If you are the key person in the running of the practice, it is important that you also safeguard the business in the event of critical or terminal illness, and in the worst-case scenario, death.
Key Person Insurance
Key person insurance can help with this. Also commonly referred to as keyman or shareholder protection insurance, it is an important aspect of business management that it vital to the well being of a dental practice and its financial affairs. So who is considered to be a key person? Essentially, they can be anyone directly affiliated with the business – whether that is a single practice or group/corporate – whose loss or absence could result in financial strain and difficulty. Thus, this person could be a director, practice manager or owner. It is the business, however, that is the beneficiary of the policy, not the key person. It is important to note that key person insurance should not be confused with life insurance – if you have family that depend on your income, then the latter should be used for personal purposes, not the former.
How It Works
For a business to be covered, the company must purchase a policy and pay the premiums on its key employee – or in some circumstances employees. If that person should suddenly become gravely ill or dies unexpectedly, the business receives the decided insurance payoff. This can vary depending on what kind of policy has been taken out and with whom.
In the event that the payout is required, there are four areas in which key person insurance can be utilised. Firstly, if financial losses are as a result of an extended period of illness where the key person is unable to work, the policy can cover the provision of temporary personnel and where necessary, finance the recruitment and training of a replacement.
Secondly, the insurance can be used to protect profits. This may mean offsetting lost income or losses that have occurred because of delayed or cancelled business plans that the key person was involved in. In the dental practice, this could simply mean reduction in profits because of cancelled appointments due to loss of staff (if the key person is involved with the provision of patient care).
The policy is also there to protect shareholders or partners – it enables shareholdings or partnership interests to be acquired by those who have existing stakes in the business. For practices that have incorporated, this element of the policy is particularly relevant.
Lastly, the payout is to cover the repayment of any business loans or outstanding debt. It is also important to note that while a business can receive a fixed monetary sum that can be used in the above ways, key person insurance does not protect the actual losses incurred. Essentially, it provides a short-term solution for practices to avoid immediate bankruptcy and closure.
As highlighted, there are multiple reasons why key person insurance is important in the dental profession, and they all boil down to safeguarding the practice or practices against loss and financial devastation. Without it, the practice itself would not only suffer in the event of illness or death – with profits likely to plummet – but the staff would also be greatly affected. From increased workloads to loss of wages and even redundancy, the rest of the workforce is inevitably subject to the repercussions of the loss of a key person.
Taxation of Key Person Insurance
Unlike the benefits that the policy provides, the legislation surrounding the taxation of this type of insurance is not as clear. Instead, principles known as the 'Anderson rules', which were outlined in 1944 by Chancellor of the Exchequer Sir John Anderson, are used to determine potential outcomes. He said:
"Treatment for taxation purposes would depend upon the facts of the particular case and it rests with the assessing authorities and the Commissioners on appeal, if necessary, to determine the liability by reference to these facts."
Finding the Right Policy
There is no denying the importance of key person insurance to the overall stability and financial security of a practice or group of practices, and as a result, it would be prudent for all key persons to seek the advice of Independent Financial Advisers – such as those at money4dentists.
For more information about money4dentists please call 0845 345 5060, 0754 DENTIST, email firstname.lastname@example.org or visit www.money4dentists.com
For more information on other services available from the 4dentists group including accountancy, legal advice, practice sales, insurance guidance and business development, visit www.4dentistsgroup.com