Put Life and Disability Insurance to Work in Your Practice
While dental insurance has evolved significantly over the past 10 years, the basics of life and disability insurance have remained fairly constant. Still, dentists may not be getting maximum productivity from these versatile, time-tested products. We frequently meet dentists, for example, who do not realize that life and disability insurance can serve a purpose in their practices. The following is a brief overview of how you could take advantage of disability and life insurance in three business situations.
Keeping a Practice Open
Look around your office and think about all of the monthly expenses involved in keeping the practice running. How would you cover those expenses if you were injured or experienced a serious illness and could not work for several months?
The solution for many dentists is to purchase business overhead expense insurance, a very affordable type of disability insurance. With this insurance, you are reimbursed for certain monthly office expenses (such as rent or mortgage payments, utilities, a replacement dentist’s salary, employee salaries and benefits, student loans, and practice loans) if you are disabled. The influx of cash buys you time to recover and return to full-time clinical work, or to make suitable plans to sell your practice. In the meantime, the practice remains a viable business, and your personal income and savings remain intact.
Business overhead expense insurance is relatively inexpensive—a fraction of the cost of a disability income policy. In addition, premiums are fully tax deductible as a business expense under current law and can be paid out of the practice’s cash flow. However, you may be responsible for income tax on benefit payments, so be sure to consult your tax advisor regarding your personal situation.
Providing Loan Collateral
If you anticipate expanding your practice, buying an existing one, or starting a practice from scratch, you likely will need a sizeable loan. When applying for that loan, the lender typically will ask for collateral—a guarantee that the debt can be paid if you die or become disabled before the loan is retired.
In our experience in working with American Dental Association (ADA) members, we have observed that loan collateral is a very common use for life and disability insurance among dentists. One practice financing firm, for example, stipulates that life and disability insurance be used as collateral for any loans that exceed $300,000.
When a lender requires insurance as collateral, you can purchase the amount you need or tap into policies you already own. Either way, the insurance company will work with you to get the necessary paperwork in place. Typically, this involves completing a collateral assignment form, in which you temporarily assign your insurance to the lender as security for your loan. The agreement specifies the terms under which the insurance proceeds will be paid to the lender if you die or become disabled before your debt is paid off. If death or disability does not occur and you repay the loan, you simply notify the insurance company to remove the collateral assignment from the policies. At that point, you will be free to use the insurance for any other personal or business purpose you wish.
For loan collateral, term life is usually recommended over other types of life insurance because it is less expensive. Similarly, business overhead expense insurance is a less costly (and commonly acceptable) alternative to disability income insurance. Note that using business overhead expense insurance as loan collateral keeps your disability income insurance available for your personal living expenses if you become disabled—a must if you would rely on 100% of that disability income benefit to preserve your standard of living.
Funding a Succession Plan
If you own a practice, whether with a partner, shareholders, or solo, it is important to have a succession plan in place in the event of death or disability. One way to accomplish this is to draw up a buy-sell agreement, requiring that the business interest of an owner who dies or is permanently disabled must be sold to, and will be purchased by, the remaining co-owner(s) or another named purchaser. This binding legal document, which is usually drafted by an attorney with input from an accountant, should also establish a purchase price or the method to be used to determine the value of the ownership share at the time of purchase.
But how will the purchase price be paid? That is where insurance comes in. Life and disability insurance can provide the funds to carry out a buy-sell agreement. A stipulation to own insurance can even be added to the terms of the agreement, as a way to guarantee that funds for the purchase will be available at the exact time they are needed.
To illustrate how a buy-sell agreement funded with insurance works, consider two hypothetical partners, Dr. Older, age 60, and Dr. Younger, age 29. Dr. Younger has the opportunity to buy into the practice of Dr. Older, who has agreed to carry the loan for the buy-in. To protect both parties, the dentists negotiate a buy-sell agreement and purchase life and disability insurance.
For their life insurance, each dentist is the designated beneficiary on the other’s policy. That way, if Dr. Younger were to die while in debt to his partner: the life insurance proceeds would go to Dr. Older to pay off the loan. If Dr. Older dies first, the life insurance would be paid to Dr. Younger, who would then have the money needed to buy Dr. Older’s share of the practice from his estate.
In addition, business overhead expense policies purchased on behalf of each partner will help pay the practice’s operating expenses if either one becomes disabled. For both the life and disability insurance, the practice pays the premiums as a business expense.
Sole practitioners also can use insurance in a business succession plan. For example, a dentist could pre-arrange a buy-sell agreement with a colleague and stipulate that upon the owner’s death, the practice must be purchased by the colleague from the dentist’s estate. Insurance on the sole practitioner’s life, made payable to the buyer, guarantees that funds will be available to carry out the agreement.
Life and disability insurance play an important role in protecting you and your family, but they also can go to work in your business. The key is knowing how and when to use these versatile products to your advantage. For suggestions specific to your practice and unique circumstances, contact an ADA Plan Specialist at 888-463-4545 or by e-mail at firstname.lastname@example.org. More information about other practical uses for insurance can be found at the ADA Insurance Plans’ Web site, www.insurance.ada.org/uses.php.
Editor’s note: This article does not constitute legal or financial advice. Please seek professional input as appropriate to your situation.
Great-West Life underwrites and administers the ADA Insurance Plans and is the exclusive provider of ADA-sponsored life and disability insurance to ADA members and their families. For more information on the ADA Term Life Plan (Group Policy #104TLP) and the ADA Office Overhead Expense Plan (Group Policy #1106GDH-OEP), call 888-463-4545 or go to www.insurance.ada.org.
About the Author
Vice President of Group Special Accounts
Great-West Life & Annuity Insurance Company
Greenwood Village, Colorado