Inside Dentistry
Nov/Dec 2006
Volume 2, Issue 9

Business Succession: Life Insurance Makes It Happen

David H. Shantz

Vice President of Group Special Accounts, Great-West Life & Annuity Insurance Company, Greenwood Village, Colorado

Two years ago, a pair of dentists merged their talents to open a practice. Thinking ahead, they also agreed to a business succession plan. Drafted by their attorney, the succession plan required that if either partner died while the practice is in operation, the business interest had to be sold to—and purchased by—the surviving partner. In their buy-sell agreement, the partners also stipulated a method for valuing the practice.

So what is missing from this example? The partners needed to address the issue of how the purchase price will be paid.

Connecting the Dots

This is where life insurance comes in. Typically, life insurance benefits supply the funds to carry out the buy-sell agreement, providing the surviving partner with cash to purchase the other partner’s share of the business. The stipulation to own life insurance could even be added to the terms of the buy-sell arrangement to guarantee that funds for the purchase will be available at the exact time they are needed.

The partners in the example above have two options regarding how to own, pay for, and name a beneficiary for the life insurance. They could use a cross-purchase arrangement, meaning that each partner owns and is named beneficiary of the insurance on the life of the other partner. Or, they could use a redemption arrangement in which the business entity is the owner and beneficiary of the policies on the lives of both partners. Both approaches have advantages and disadvantages from a tax standpoint, which vary depending on the type of business entity involved and the various contingencies covered. These tax aspects should be analyzed by a professional advisor.

Following the Money

Ideally, the two dentists will own sufficient life insurance to pay the full agreed-upon purchase price on the death of either dentist. If the insurance proceeds do not cover the entire price, the buy-sell agreement should direct how the balance will be paid (ie, from cash reserves, a loan, or in installments).

In addition, the agreement should specify what to do with any insurance proceeds that exceed the purchase price. For example, the extra money could be paid to the deceased dentist’s estate or heirs or it can be retained by the practice. This decision may largely depend upon the manner in which the insurance premiums were paid.


Whether you are a sole practitioner, an owner of a corporation, or a partner, a buy-sell agreement is an element of business succession planning that can ensure your practice will continue according to your design. The beauty of this agreement is that it can be customized to meet your specific needs, preferences, and financial objectives. And life insurance can make it happen.

Editor’s note: This article does not constitute legal advice. Please seek professional input as appropriate to your situation. Great-West underwrites and administers the ADA Insurance Plans. For more information, call 888-463-4545 or go to www.insurance.ada.org.

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