Corporate financial health check: Insurance matters
Richard Bertin explains why accountants should sit down with clients and reviewing their business and risk issues, such as insurance.
The Covid pandemic has highlighted all sorts of risk for businesses and their owners. For many, it has been as basic as survivorship risk and having sufficient liquidity just to get through it.
With the government announcing a roadmap to unlocking, the tax season behind us and the Budget dissected, it could be a good time to virtually sit down with clients and review their business and risk issues more generally – before your clients are too busy trying to get their businesses back on track again.
For a number, the pandemic shone a light on the importance of insurance. In this instance it was business interruption insurance. At one point it looked like some 370,000 SMEs were going to be denied cover, but the Courts provided a good outcome for businesses.
Many business owners will be reviewing their business strategy coming out of lockdown. Therefore, it could be a good time for accountants in practice to flag the benefits of clients reviewing general insurance policy requirements, over the next few months or at the next policy renewal point.
In many ways it is a hygiene check, as the last year has put both businesses and insurers under the microscope, so it feels logical for clients to kick the tyres and make sure that existing policies are fit for purpose, or indeed that there isn’t some gap in the cover held.
Key person insurance
The expression is almost self-explanatory. However, it is a risk that is often overlooked both by business owners and also their professional advisers, and there could be a reason for this.
The financial advisory industry often focuses on the private client and the management of wealth. When a business is in the early stages, there is little in the way of excess cash to invest and the business and its owner can go short on financial advice.
Lack of assets, does not mean lack of risk though.
When an enterprise’s assets are human centric rather than machine centric, it is logical to consider insuring those assets. Where a business’s profits are dependent upon key people then it is often possible to insure those individuals in the event of death or critical illness.
HMRC has a whole set of rules about the tax deductibility of insurance premiums. At a high level, key person insurance can be taken out on shareholding directors, not just employees. At a basic level, cover is taken out if there is a risk to profits or capital value, from the death or critical illness of the individual concerned.
As a rule, if the premiums are deductible as a trading expense, then the proceeds of the policy would be seen as a trading receipt and subject to tax. This latter point may not be such a big issue, as the cover is generally there to meet a fall in revenue and profits anyway.
The venture capital world often insists on keyperson insurance when putting money into a business. They are backing the management and want to make sure that they can plug a gap in the finances if something happens to one of the (human) assets.
It is a peculiarity of the legal world that subscription or debt agreements can require key person cover on specified management, but as a “condition subsequent,” rather than “precedent”. Practically, this would mean that the cover does not need to be in place before the deal happens.
However, the other peculiarity of the legal world is that lawyers rarely define what exactly they want for the key person cover in terms of policy type and often don’t follow up to see if it is in place. It is entirely possible that some of your clients are unwittingly in breach of a contract.
Death in service cover
It sounds like something James Bond should have before taking on a mission from M! The cover is also known as Group Life Assurance and typically covers employees whilst they are employed, and not just whilst they are working.
If you have a review meeting with your clients these schemes can have a part to play in protecting your client, their employees and their families.
The employer can put a group scheme in place to insure typically four times employees’ salaries (but can be higher). Such schemes will pay a tax free lump sum to the family of the deceased employee. What’s more, the premiums are tax deductible, and are not seen as a benefit in kind.
Putting a scheme in place not only looks after staff, but can also be a cost effective element of life cover for the business owner and their family.
Insurance probably does not sit comfortably with all practitioners, but perhaps the last year has highlighted that clients come to their accountant in the first instance to discuss key matters, and insurance or risk management sits right up there, as a discussion topic.
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Richard Bertin is a Chartered Accountant, former chair of various committees and current ICAEW Personal Financial Planning Advisory Group member. He established and built up a successful fee-based wealth planning business, selling a stake in 2016 to Stonehage Fleming, the largest independent family office in EMEA.
He continued to further...