AMA Insurance Agency, Inc.

The Role of Disability Insurance

By Scott Nelson-Archer
Senior Partner, M.D. Financial Services, Inc.

For physicians in medical practices, the concept of a "buy-sell" agreement is not new. In fact, if you're like most medical practices you probably already have such an agreement in place. But are you sure it's structured & funded appropriately?

A buy-sell agreement should typically be structured to cover four situations that physicians may incur within their group practices:

1. The death of a partner
2. The retirement of a partner
3. The termination of a partner, or
4. The disability of a partner

While the first three scenarios are likely contemplated in most buy-sell agreements, the disability component is often overlooked. So what is it? Why do you need it? Why do you want it? Is it just another insurance product the insurance industry is trying to convince us we need? Well let's pull back the covers a bit and take a look.

Are you in a solo practice with no partners? If so, stop reading now. If however, you have a partner or partners then I'd encourage you to read on.

The disability area of the insurance industry is one of the most overlooked areas in regards to protection. We all start businesses or enter into partnerships with a blind eye not wanting to think about the "what ifs". Even if you do a good job setting up your buy- sell agreement to handle the death of a partner, most never address "what if my partner or I become disabled, what then? How do we dissolve the practice fairly?"

Let's walk through this scenario in more detail. Your group practice has physician salaries of $200,000 per year and splits the profits after all expenses have been taken out in the form of a quarterly or year end bonus. What happens if your partner is disabled and not able to contribute to the bottom line? Do you see all of the patients, run the practice, pay the bills; do all the administrative work, then split the profits at the end of the year with the non-working partner per your agreement? Would you think it fair that they split the profits with you if you were disabled? It's your practice too, right? So how do you dissolve the partnership correctly since all parties put money and energy into building the business? Well the answer is pretty easy, you should structure your buy-sell agreement to cover the potential disability of a partner and then fund it through disability "buy-sell" insurance.

What it is disability buy-sell insurance? Well simply put it's an insurance contract that states that after a period of time being disabled; you, your practice or your partners will be given a benefit amount that was predetermined in order to buy the disabled person's share of the practice. Once again no need for negotiations at this point since a value was pre-determined. This creates a smooth transition for all parties involved.

Why do you need disability buy-sell insurance? If you have a value established and a policy in force, it provides peace of mind for all partners. Knowing there will be funds to payout a disabled partner makes it less stressful for the practice and eliminates the concern of where you'll come up with the money. It also benefits the disabled physician, knowing the practice will have the money available to pay them out. And the practice is able to continue on with minimal interruption, allowing it to now go out and find a replacement physician, if needed, without worrying about the disabled physician's potential interest in coming back to the practice 2-3 years from now. Disability buy-sell insurance is a win-win for all parties.

What are the chances of a disability that would trigger a claim for a disability buy-sell insurance policy to be paid out?

Probability of at Least One Long-Term Disability prior to Age 65

Number of People in a Group

(Source: Based on 1985 CIDA, Male, Class 1 and 2 with a 90 Day Waiting Period)

Sure most of us have disability insurance to help keep our personal lifestyle afloat. Your practice, on the other hand, is a different matter. Should you become disabled, wouldn't you want to get value (i.e, a specified payment) for the practice you have helped build? And should your partner become disabled, wouldn't you want your practice to receive the money needed to pay out the disabled partner instead of pulling money out of capital reserves or getting a loan from your bank?

Disability insurance, disability overhead, and disability buy-sell agreements are some of the most complex and difficult products in the personal insurance market. They incorporate not only mortality risk, but also morbidity risk, occupational risk, financial risk; but can often be overlooked. So make sure you consider the impact a partner's disability can have on your group practice; and make sure your buy-sell agreement is structured to appropriately handle it. And if you haven't done so in a while, I'd encourage you to get a check up to make sure you, your family, and your practice are covered correctly. Haven't you invested too much time and energy in your career and practice not to?

M.D. Financial Services, Inc., is a member of the Agency's Trusted Source Network. The views expressed herein are those of the author and do not necessarily reflect the views of AMA Insurance Agency, Inc.

June, 2009