Business Disability Insurance Needs

When thinking of disability insurance, you cannot forget the importance of protecting your practice. There are four types of policies that protect the disability needs of a medical and dental practice which should be considered when reviewing your overall financial security.

Business Overhead Expense Insurance (BOE)

Are you a practice owner? If so, have you thought about what would happen to your practice if you became totally disabled? Who would pay your share of the business expenses? This is a particularly important concern if you are a solo practitioner, since there are no other providers to generate revenue for ongoing business expenses. However, it is also a consideration for group practices. How much harder and longer would you be required to work in order to generate enough revenue to cover the expenses of a disabled partner?

The Solution: A Business Overhead Expense (BOE) policy that reimburses the practice for covered business expenses paid during the disability of an owner.

The following are examples of business expenses covered by a BOE policy:

• Malpractice insurance premiums
• Employee salaries, payroll taxes
• Employee benefits
• Rent, depreciation, or mortgage payments
• Utilities
• Taxes
• Equipment leases
• Interest on debt
• Legal & accounting fees
• Business insurance premiums
• Other normal & ordinary business expenses

BOE policies for physicians and dentists usually have a 30 day elimination period, but 60 and 90 day options are available. The most common benefit period options for BOE policies are 12 and 24 months. The objective is to for the policy to cover your expenses until you are able to return to work or sell/close the practice.

Disability Buy-Out Insurance (DBO)

Does your medical or dental practice have a buy-sell agreement? A buy-sell agreement spells out the terms under which remaining owners will buy out the ownership shares of a deceased, disabled, or retiring owner. Many practices fund their own buy-sell agreements with life insurance in the event of the death of an owner. However, many practices fail to provide funding in the event of an owner’s total disability.

The Solution: A Disability Buy-Out (DBO) policy that specifically reimburses the funds used to buy out a disabled owner.

Most DBO policies have a one or two year elimination period. The elimination period of your policy would match the buyout date in your buy-sell agreement. After one or two years of total disability, you would usually have a good idea whether or not you would be returning to work or leaving the practice. The policy benefit would be paid to the practice or the remaining partners, depending on the type of buy-sell agreement you have executed. The benefit would be paid as a lump sum or as a monthly benefit over several years.

Group Long-Term Disability Insurance (LTD)

Have you been told that you’ve maxed out your own individual disability coverage, but still feel that you don’t have adequate coverage to meet your personal needs? While you are not eligible for more individual disability coverage, there is an option for physicians and dentists who own part or all of their practice.

The solution: Many insurance companies will issue Group Long-Term Disability (LTD) policies – without regard to the amount of individual coverage you already have. The strategy of adding group LTD on top of your individual coverage offers much higher benefits than what you could get with individual coverage alone.

Another advantage of group LTD is that it may be offered on a guaranteed-issue basis. That means the insurance company will not ask about any medical conditions and does not require an exam or blood tests. This is appealing to physicians and dentists who have been declined for individual policies due to their health conditions. Group LTD policies have pre-existing limitations, but the limitation period is usually limited, and after that period, the pre-existing condition should be covered the same as any other condition.

Group LTD policies usually cover all full-time employees of the practice, unless it’s a large practice, and in which case, different classes of employees may be covered exclusively.

Most group LTD policies cover a percentage of your income, such as 60% or 70%. There is usually a stated dollar maximum for the monthly benefit as well, such as $5,000, $10,000, or $15,000, so that you would be covered for the lesser of the percentage of income or the stated dollar maximum. You can expect a good LTD policy to pay benefits until your normal retirement age.

Key Person Disability Insurance (KPDI)

Many medical and dental practices have a key employee who is essential to the success of that practice. Should that person become totally disabled and unable to work, it would have severe financial consequences for the business.

The Solution: Key Person Disability Insurance (KPDI) provides needed funds – directly to the practice – in the event of the total disability of the key employee. The practice may then use the funds in the most advantageous way to help absorb the financial loss of the key employee.

The benefit amount of the KPDI policy many be based on the annual income of the insured key person or some calculation of the financial loss to the employer. The benefits may be paid monthly, as a lump sum, or as a combination of both. The elimination period for monthly benefits is usually 30, 60, or 90 days. The monthly benefit will usually be paid from 6-24 months and the lump sum is usually not paid prior to the 180th day of total disability.

If the policy has a combination of monthly benefit and lump sum, it might have an elimination period of 90 days for the monthly benefit. Then the monthly benefit would be paid until the remainder of the total benefit is paid as a lump sum after 180 days.