Chase Brakke DIA, DIF

	The most important questions to ask and answers to know to see if you're really prepared for a disability

	In our years working as financial advisors for dentists, we’ve seen a lot of unfortunate

	things happen to great people. Fortunately, with proper preparation, illness or injury does

	not have to end with a financially devastated family or a broken practice. Most dentists are

	aware of the risks when it comes to protecting their income, but not all take the steps to

	fully protect their families and practices. If you are curious if you have covered your

	financial affairs from all angles in the event of a disability, here are some of the questions

	you should ask yourself as a dental practice owner when you think about protecting your

	family and practice. If you haven’t reviewed your coverage for a few years, you might be

	Q: How much individual disability insurance do I need?

	A: It depends. Early on in your career, you should try to obtain as much benefit as you can

	because your earning potential will go up over time. You can also consider adding

	additional benefit in the form of catastrophic coverage and retirement protection for the

	more severe disabilities that could last a lifetime. The goal is to make sure that you don’t

	have a change in your family’s lifestyle and savings goals, along with building in some

	added flexibility to your finances during what surely is a difficult time both financially and

	emotionally. Later on in your career as you build assets and pay down debts, you might

	be able to live with a little less insurance and can try to self-insure where possible. If you

	have not insured your retirement plan contribution, it is possible to acquire coverage that

	funds an investment account directly while you are disabled.1 This allows you to not only

	cover your monthly bills but also a portion of your savings. Catastrophic disability benefits

	function similar to a long-term care policy and pay additional benefits to cover the cost of

	care if you suffer a particularly severe disability.

	1 The benefit is placed into an irrevocable trust with fund options to choose from, it is not

	invested directly into your existing accounts.

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	Q: What happens to my practice if I get disabled?

	A: This is usually the first thing to get overlooked by dentists, especially solo practices or

	practices with only a few partners. Protecting your personal income is a great start, but not

	all disabilities last forever. When you recover, you’ll want to have a practice to return to so

	you can continue earning a living. When a practice owner becomes disabled, it can put a

	lot of stress on the practice. Employees begin to feel uncertain of their employment

	situation, patients start to wonder if you are coming back, revenues start to drop, and

	creditors start to call. A product called Business Overhead Expense insurance will

	reimburse you for your fixed monthly expenses that you continue to incur every month

	even when you are not producing due to a disability. This includes employee wages and

	benefits, insurance premiums, lease payments, equipment loans, taxes, utilities, and even

	the salary of a replacement dentist to step in and help out in your absence. This will help

	you cover the tens of thousands of dollars a month spent to keep your practice operating

	while you are disabled. This product, however, has a limited benefit period of at most 24

	months. It’s purely meant to buy you TIME … time to recover and return to your practice,

	or time to keep expenses paid and your practice running while you find a suitable buyer for

	your practice at fair market value. A practice without a dentist loses value very quickly

	leaving you little leverage when negotiating any sale during that time. As an added benefit,

	the cost of obtaining business overhead expense insurance is tax deductible to your

HOT READ: 4 ways to make it easier for your patients to pay for treatment

	Q: Can I cover loan payments on my practice if I am disabled?

	A: Yes, but not always the way the bank may want you to protect it. Oftentimes, a bank

	may require that you purchase some disability insurance to protect your practice loan, but

	they have minimal requirements just to get the loan approved. They might ask you to

	assign your personal benefits over to the bank, which is fine for the bank because it pays

	for your practice loan, but not good for you if it causes you to default on your mortgage or

	other loans. Your personal policy is to pay personal expenses such as student loans,

	groceries, and household expenses … NOT a business loan. The bank might also ask for

	Business Overhead Expense coverage to cover a loan, but this provides a limited amount

	of protection (a maximum of 24 months) that doesn’t cover a practice loan when used to

	buy into an existing practice. The insurance company considers that a capital investment,

	not an overhead expense. The good news is insurance companies over the last few years

	have created business loan protection policies that will cover practice loans and tie the

	payments and the benefit period directly to the terms of the loan. This ensures the bank

	gets paid the exact amount of the loan payment each month for the entire duration of the

	remaining loan, if necessary. These policies are also quite inexpensive if you are buying a

	practice at a young age. This is because the policy covers you only for the period of time

	you will have a loan on the practice. For example, if you buy a practice at age 30, with a

	seven-year loan, the policy is only inforce from age 30 to 37. This is considered a low risk

	phase of your life for disability, so the cost is minimal. By contrast, your personal policy

	typically covers you until you reach age 67. This means it will cost much more per dollar of

	coverage since it covers you during the age of life when you are much more likely to file a

	Q: I have a business partner, what happens if either of us gets disabled?

	A: If you have a business partner (or partners), you should have a buy/sell agreement in

	place. This is a legal document that specifies what happens to each owner’s shares of the

	business in the event of a divorce, death, disability, disagreement, or a desired exit.

	Specifically when it comes to a disability, things can get complicated. The disabled person

	might still have decision-making power, which can be challenging if he or she is acting

	irrationally during a difficult time. Many buy/sell agreements we see don’t actually define

	what a disability is, leaving it up to the owners to sort things out. Additionally, when a buyout

	actually occurs, there is rarely a funding mechanism put in place to cover the cost of

	the purchase. Disability Buy-Out Insurance will accomplish two very important things. It

	will clearly define whether or not an owner is disabled, taking the subjectivity and emotions

	out of the equation. It will also fund a buy-out in part or in whole to keep the owners from

	having to touch cash flow. Since this is a reimbursement policy, the practice will still have

	to fund the buy-out up front, but it’s a lot easier to walk into a bank and get a temporary

Articles

In our years working as financial advisors for dentists, we’ve seen a lot of unfortunate
things happen to great people. Fortunately, with proper preparation, illness or injury does
not have to end with a financially devastated family or a broken practice.