When most people think of life insurance they typically think of the protection it can help provide for their family. But if you are a practice owner life insurance can be valuable for another reason – it can play an important role in helping to provide financial security for your practice. In fact, life insurance can be as vital for the financial well-being of your practice as it is for your loved ones.
Ask These “What-If” Questions
When a physician starts or joins a medical practice it is common to plan for many eventualities. If there are one or more partners, it is important to consider the implications for the practice in the event of the death of one of the partners. Practice owners should consider:
- What would happen if one of your partners were to suddenly die?
- Would their spouse or one of their heirs now be your business partner?
- Would you have the funds to buy out your partner’s spouse or heirs?
- Would you have the cash to cover the overhead expenses without that partner?
- Would you be able to find and pay for a replacement physician?
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Establish Your Succession Plan
These types of questions are typically addressed as part of a succession plan that spells out what would happen to an owner’s share of the practice if he or she were to die suddenly. Here is where life insurance can be essential in helping to maintain the solvency of a practice and alleviating much of the financial stress that could accompany the loss of a partner.
Start With a Buy-Sell Agreement
As part of a succession plan most practices will develop a buy-sell agreement. The role of life insurance in buy-sell agreements is to provide funds for the remaining partner(s) to pay the estate of the deceased for a buy-out of those shares. There are two main ways partners can structure a buy-sell agreement. These are:
A Cross-Purchase Plan:
This plan is generally used for smaller practices with two or three partners. In this case, each partner would purchase life insurance on the other partner, designating themselves as beneficiary. If one of the partners dies, the other(s) can use the death benefit to purchase the deceased partner’s share of the practice.
Entity Purchase Plan:
When a practice has more than a few partners, it’s possible to set up an entity purchase plan. This means the practice would buy coverage and pay insurance premiums on each owner. In the event of a partner’s death, the benefit would go to the practice, which could then purchase the deceased partner’s share of the practice from their estate.
Key Person Insurance
Another option for a larger practice is key person insurance. This is a specific type of company-owned life insurance designed to help maintain a practice in the event of the death of an owner or another integral member of the team.
In this case, the practice/company pays the insurance premiums and is also the beneficiary. If an owner were to die, the death benefit is paid to the company. The benefit could be used in a few different ways, which include:
- Paying for the expense of looking for a replacement
- Covering loss-of-business costs resulting from the death
- Paying off debts or severance if the company were to close down
Without the financial means to purchase the shares of a deceased partner, it would be difficult for a practice to execute a buy-sell agreement. This is why, regardless of which type of plan is structured, life insurance can be considered integral to virtually any buy-sell agreement.
Please note: Before you choose a plan, TMA Insurance Trust recommends that you speak with a tax professional to understand the tax implications associated with any of these types of arrangements.
Life Insurance Brings Business Value
Beyond a succession plan, life insurance can have business value for a practice. For example, prior to approving a loan, many financial institutions will demand that a business have a guarantee of repayment in place in the event of the death of the person taking the loan. A term life insurance policy can be an affordable way to meet this requirement – giving your practice a cash reserve if needed.
Reward Your Employees
Practice owners may also incorporate life insurance into an employee benefits package. This can be an effective way to reward staff members, build loyalty and retain valued employees.
Speak With an Advisor
Trying to determine which type of life insurance plan is right for your practice can involve many decisions and individual considerations. Once you have agreed on a succession plan and have a buy-sell agreement in place, an experienced TMA Insurance Trust advisor can provide knowledgeable guidance and help you secure the life insurance plan that is appropriate for your practice.
They are here to help you make your best choices without any sales pressure or obligation. Please feel free to reach out to us for a conversation soon. Call us at 1-800-880-8181.
For over 60 years, TMA Insurance Trust advisors have been serving Texas physicians, their families and staff. TMA Insurance Trust prides itself on offering unbiased information and strategies to members, along with exclusive group rates on a range of the highest-rated plans in the industry.