25 Apr 2019

Physicians Insurance – How Doctors Can Avoid Costly Mistakes

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As a medical professional, you’ve invested time, money, and effort to build a thriving practice. As a practice owner, you are both a doctor with medical expertise as well as an owner of a profitable business. Additionally, if you’re in business with one or more doctors, you’re also a partner. 

The massive investments made in your practice deem it worthy of protection. Insurance, in many forms, is an absolute essential when planning for the long-term viability of your business partnership as well as for your personal financial health and that of your family and other heirs. Life insurance provides income for your heirs, as well as for business partners, in the event of your death. Disability insurance provides income for you and your family, as well as for your business partners, in the event you can no longer practice medicine.

We all know death is certain. Most of us spend far less time considering the possibility of a disability and the effects on the ability to earn an income. According to the Social Security Administration’s Disability and Death Probability Tables for Insured Workers Born in 1997, the risk of disability is over 25 percent; more than one in four of 20-year-olds will be out of work for a minimum of a year due to a disability before they reach normal retirement.

Life Insurance for Doctors

As a professional, you must consider two sides of the insurance coin: protection for yourself and your family in the event of disability or death, as well as protection for yourself, your business partners, and your practice, in the event of death or disability. 

On the personal side of the coin, you should consider several factors. If you are carrying loan debt, you must ensure that debt can be repaid. Additionally, you should consider family financial needs --- translated as: what lifestyle do you desire for your family if you become disabled or pass away?

While the general rule of thumb of having six to 10 times annual income is a good range, physicians who customize that amount can either save themselves some money on premiums or prevent hardship.

Source:  Medical Economics - https://www.medicaleconomics.com/medical-economics-blog/how-physicians-can-determine-life-insurance-need.

Advice varies and the rules of thumb that may apply to one person may not apply to your situation. Work with a trusted financial professional to discuss your financial obligations and goals and create a plan for growing and protecting your income and wealth. Enter your text here...

Physician Disability Insurance | Medical Practice 

Disability insurance for physicians can be purchased in a couple of ways: as part of a group policy and as individual coverage. Most individual coverage is offered at 60 percent monthly income replacement. Group coverage can supplement coverage owned by an individual, but may not be transferable if you change jobs or leave a partnership. When calculating benefit amounts, be sure to consider taxation: if premiums are paid with before-tax dollars, or by an employer or business, the benefits may be taxable. Be sure to discuss the tax ramifications of your insurance decisions with a qualified tax advisor. 

When purchasing disability coverage, be sure you know how the insurance company defines disability: own occupation means that, due to a disability, you are unable to perform the duties of your trained profession. This means that the company will pay your benefits if you cannot practice as a doctor, even if you could work as a consultant or manager.

Understanding residual disability is an additional consideration when purchasing insurance as a medical professional. Consider this example from the American Medical Association: a physician suffers a disability. Residual coverage pays a benefit if the physician is able to work, but in a limited capacity. 

For self-employed professionals whose incomes are based solely on the number of clients or patients they see, it is important to understand how recovery benefits work. While some policies have an unlimited recovery benefit built into the residual disability rider, others make the recovery benefit available as a separate rider. A residual disability is typically defined as a loss due to a sickness or injury even when the injured person remains employed and is not completely disabled. The residual disability rider provides monthly supplemental income to match the loss of earnings in an attempt to repair the injured person’s income.

Source:  American Medical Association - https://www.ama-assn.org/residents-students/career-planning-resource/understanding-disability-insurance-physicians

Additionally, recovery benefits help the physician rebuild her income if, after returning to work fully, her patient and referral lists have dwindled. Residual and recovery benefits can fill the gaps in a self-employed physician’s income, which can make or break the physician’s personal practice and that of the partnership. 

Some companies offer protection options for your retirement plan contributions. While disability income insurance protects against the loss of income, on its own it does not consider contributions made to a retirement plan. Consider insuring the contributions made to your retirement plan to ensure income in retirement, even if you become disabled. 

Buy Sell Agreements for Medical Practices

Now, for business considerations: you don’t build a successful, reputable medical practice to watch it languish or potentially close if a partner dies or becomes disabled. Executing and properly funding a legal buy-sell agreement is key to the strength of your practice. Hopefully, you’ll never need it, but if you do, you’ll be prepared. A buy-sell agreement stipulates how partners will value a business at the time of a death or disability and puts in place the method “surviving” partners will use to buy out shares of the practice from a disabled partner or the family of a deceased partner.

To build a buy-sell agreement, work with a reputable attorney. According to Patrick Phancao, JD, a solid buy-sell agreement should include some basic components, such as: the cost to buy out a partner’s share due to disability or death, the ability to buy out ownership interest in the event of insufficient capital, financial provision for surviving family members, and early buy-out options. The care of your patients, as well as of the families of yourself and your partners, relies upon a plan to keep the “train on the tracks.”

Source: Estate Planning - https://www.estateplanning.com/The-Buy-Sell-Agreement-for-Physicians/

Life insurance coverage, owned by business partners on the lives of the other partners, can provide funding to buy ownership of the practice from surviving heirs. You may like your partner’s spouse, but you probably don’t want to be in business with them, especially after the death of their spouse. Life insurance benefits can provide the needed capital to ensure your practice survives the transition.

According to Ike Devji, JD, writing for Modern Medicine Network, the “disability of a partner is nine times more likely than death before the age of 65.” While life insurance coverage to fund the buy-out of a practice upon a partner’s death is one piece of the puzzle, the higher likelihood is that you’ll need to fund the buy-out upon the disability of a partner. Disability can happen as a result of a medical condition or from an injury or accident. Your asset as a physician lies in your expertise and ability to treat patients; if you are unable to do so because of a disability, your partners need to buy out your ownership in the practice.

Source:  Physicians Practice - https://www.physicianspractice.com/law-malpractice/buy-sell-agreements-are-vital-asset-protection-medical-partnerships

Business disability insurance can provide funding to pay employees’ salaries, overhead expenses, or business loans in the event of short-term or long-term disabilities. Removing the financial stress if disability strikes you or a business partner is crucial to the long-term viability of your business. Losing employees or patients and incurring damage to the reputation of the practice creates financial hardship from which it may be hard to recover without proper financial planning.

Perhaps your business will never experience the death or disability (short- or long-term) of yourself or a partner. While you can hope for sunny skies, you and your partners must plan for the rainy day: the statistically-likely event that buy-sell planning is required. Certainly, no amount of money can take away the emotional pain of losing a loved one or a cherished business partner. However, proper buy-sell planning and funding removes the financial headache of those situations, and that relief is worth every premium dollar paid.