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

September 10, 2015

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.

 

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

surprised by what you find.

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

business.

 

 

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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

claim.

Read more on the next page.

 

 

 

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

loan when you have an insurance policy with the promise to pay in hand.

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Q: What other risks should I consider?

A: If you own a practice and have an associate dentist working for you with plans that he

 

or she will become a partner and buy-in or take over your practice someday, you may be

at risk if something happens to your associate. After years of training and relationship

building with your patients, your succession plan might be in jeopardy if the associate

becomes disabled. Finding, recruiting, hiring, and training a new associate can be very

time-consuming and expensive, not to mention the potential lost production that might

occur during their absence. For this situation, insurance companies have created Key

Person or Key Man disability insurance, which will compensate the practice in the event

the associate becomes disabled. This money can be used for whatever you need,

including making up for lost revenue, hiring a recruiter to find you a new associate, paying

a signing bonus for top talent, paying the departed dentist for any shares they may have

already purchased, building a PR campaign to ease patients’ minds, and much more.

Having an infusion of cash at the exact right moment can be the difference that keeps your

succession plans on track. Additionally, if the operation of your practice relies heavily on

your practice manager, this could be a good fit if the practice manager becomes disabled

as well.

A disabling event can cause problems for more than just your income, but too many

dentists do not go beyond protecting just their income. Having a solid action plan for you

and your practice will ensure that no matter what happens, you will be p