By Jim Biesterfelt
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Are you getting the most from your life and disability insurance? Beyond just covering your claim in the event of a catastrophe, your insurance can have several important business uses in your practice.
When Dr. Tod Bigelow decided to expand his practice in Hattiesburg, Miss., the bank required him to use life insurance as collateral to qualify for the construction loan. Dr. Bigelow already had a substantial amount of term life insurance through a group policy sponsored by the American Dental Association (ADA), so he split part of the coverage into a separate life insurance certificate to serve as collateral.
Dr. Bigelow is both the owner and the insured for this portion of his coverage. His wife is the named beneficiary, and the certificate is assigned to Dr. Bigelow’s bank as collateral for the construction loan. When the loan is repaid, the collateral assignment will be removed; however, if Dr. Bigelow were to die in the interim, the bank would have first rights to the proceeds to pay off the balance of the loan. Any amount remaining would go to his wife.
Dr. H. Jeffrey Lindsey, an orthodontist in Carrollton, Ga., faced a different challenge. “When my partner passed away after a long battle with cancer and many months of disability, I became the sole practitioner,” he says. “I quickly realized that if I became disabled, my practice would be exposed to even more risk than before. Who would keep things going? How would I pay my employees? If I couldn’t pay my staff and keep my patients treated, how would my practice survive?”
Dr. Lindsey solved his risk exposure in two ways. First, he and several other orthodontists in the area entered into an agreement: If one of them becomes disabled, the others will help run their colleague’s practice for up to six months. Second, he purchased business overhead expense insurance.
When a dentist becomes disabled, business overhead expense insurance provides a monthly benefit to help pay certain practice operating costs while the dentist recovers or makes plans to sell. The amount of coverage depends on the expenses of the practice and the extent to which the dentist can pay for a portion of these costs out-of-pocket if a disability were to disrupt revenue flow.
“Business overhead expense insurance is important for my practice’s financial security, just like personal disability income insurance is important for my family’s security,” Dr. Lindsey says. “I’m a strong advocate of having both.”
Whether you own a practice with a partner or on your own, you should have a written succession plan in the event of an unexpected disability or death.
One way to accomplish this is with a legally binding buy-sell agreement, stipulating 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 at an agreed-upon price. Life and disability insurance are often used to guarantee the funds.
Dr. Timothy Seidenstricker entered into such an agreement with his partner, Dr. Michael Lim, when the younger dentist had the opportunity to buy into Dr. Lim’s established practice in Chico, Calif. Dr. Lim is carrying the loan Dr. Seidenstricker needed for the buy-in. In addition, the doctors put in place a business succession plan funded with life and disability insurance.
With the life insurance, each dentist is the designated beneficiary on the other’s policy. That way, if Dr. Seidenstricker were to die while in debt to his partner, the proceeds would go to Dr. Lim to pay off the loan. If Dr. Lim dies first, the life insurance would be paid to Dr. Seidenstricker, who would use the money to buy Dr. Lim’s share of the practice from his estate. In addition, business overhead expense policies purchased on behalf of each partner will help keep the practice running if either one becomes disabled. “It’s a safety net for each partner,” Dr. Seidenstricker says. The practice can treat the premiums as a business expense.
The key to putting life and disability insurance to work in your practice is knowing how and when to use these versatile products to your advantage. To learn more, go to www.insurance.ada.org or call (866) 607-5330.
Editor’s Note: This article does not constitute legal, tax, or financial advice. Please seek professional input as appropriate to your situation.
Jim Biesterfelt is vice president of Group Special Accounts at Great-West Life & Annuity Insurance Company, which underwrites and administers the ADA Insurance Plans, and is sole provider of ADA-sponsored life and disability insurance.