In this month’s blog we look at the potential financial pitfalls shareholders and partners would face, should one of them become seriously ill and be unable to work, or the death of that individual.

All veterinary practices must have insurance of their premises, equipment and vehicles, but often personal life insurance is over looked or delayed, particularly for new starts.

So what could happen to your business in the event of one of these two events.

  • Potential dispute of the value of those shares
  • Business disruption
  • Loss of control
  • Unable to offer the full value of the estate
  • What would be the value of the business without that key individual?

An ownership protection policy can solve all of these issues.

What is it?

A life insurance policy for each shareholder/partner that will provide a lump sum to purchase the deceased persons share from their estate.

For a number of reasons the value of veterinary businesses has grown significantly in the last decade with the result that existing shareholders protection policies have become seriously inadequate.

A regular review of the sums insured of existing life policies is recommended, particularly to consider the tax position of the payment on death.

If no protection exists (because the business may be newly established) under an existing shareholders agreement then action should be prioritised.

A critical illness policy may also be appropriate in the event that the key person is permanently disabled or ill.

Case study

John is married to Janet and Rosie to Jim and each of them own 25% in a veterinary practice. John and Rosie are more active in the business than Janet and Jim. If either John or Rosie were to leave the business through death, or critical illness, their respective spouses may want to leave as well, even though they could stay in the business. However if Janet or Jim were to die, John and/or Rosie would want to receive their spouses shares and probably continue running the business.

Generally, cover would be arranged on the lives of John and Rosie with the sums assured equal to the total combined value of their shareholdings and that of their spouses. For example, if John’s shares are worth £250,000 and Janet’s are worth the same, John’s life would be insured for £500,000.

As the shares of Janet and Jim would pass to their surviving spouses in their wills, there is no need for protection on their lives.

A bespoke cross option agreement would be put in place to enable Rosie and Jim (or just Rosie if Jim dies first) to buy John and Janet’s shares on John’s death or critical illness and the opposite in respect of Rosie’s shares.