Doctor’s Rounds™

*The views expressed by the authors below do not represent the views or opinions of MD Preferred Services.


Using Term Insurance for Business Continuation


Monday, May 22, 2017

For any medical practitioner, having a business continuation plan can make the difference of whether your business survives the death of a key person, partner, or owner. Most small medical practices are owned by a single owner or a partnership. Regretfully, medical practitioners die unexpectedly, and for unforeseen reasons, just like anyone else so it makes excellent financial sense to provide a defined business continuation plan that includes key-person insurance to ensure the survival of the business if the worst should happen. There are various ways to accomplish this, all of which can be funded with affordable term life insurance.


Key Person Insurance for Business Continuation

Typically, every medical practice has a key individual (other than the owner) who produces a considerable amount of the practice’s revenue. Physicians should buy life insurance most of the time.  In many cases, the busiest health practitioner is likely to outperform many of the others combined. If this key person should die unexpectedly, your business could be at risk because of the immediate loss of revenue from patients.

Key Person Insurance Examples:

Premium Care Services is owned by Dr. Ricardo Perez, an internal medicine specialist, and has recruited Dr. John Jones, a gastroenterologist to join the practice. John, a motivated go-getter, with a substantial patient list, has within five years produced more revenue for the practice than most of the other doctors combined. As the practice owner, Dr. Perez is aware that if something happened to John, his practice would substantially suffer financially and he wants to mitigate this risk.

After speaking with a business expert, Dr. Perez elects to buy Key-Person Insurance on Dr. Jones to mitigate the risk of financial problems if he dies unexpectedly. Dr. Perez’s insurance agent recommends that he purchase a 20-year term policy equal to the expected financial losses that Premium Care Services would suffer in the event Dr. Jones dies.

Dr. Perez’s insurance agent helps him to value the lost revenue and additional expenses that he would suffer and recommends that he insure Dr. Jones’s life for $750,000 using term life insurance. Premium Care Services would own the policy, pay the premiums for it, and be the primary beneficiary on the policy. This way, if Dr. Jones were to die, Premium Care Services would receive the $750,000 death benefit and use the funds for recruiting a replacement medical practitioner, thus helping the practice to continue meeting their obligations and needs of the patients.


Buy-Sell Agreement

For small businesses that are owned by a partnership or LLC with only a few members, they can easily ensure the continuation of the practice by implementing a buy-sell agreement. The agreement would define what would happen in the event a partner or LLC member dies unexpectedly and the steps for buying back the company shares from the deceased’s heirs. Once again, term insurance is the most affordable method to fund the buy-sell agreement.

Buy-Sell Agreement Example:

Premium Care Services was founded and now owned by three medical practitioners with considerable experience in various medical specialties. Their names are Dr. Perez, Dr. Jones, and Dr. Rodriguez. All three doctors are married and have children. Their buy-sell agreement outlines what will happen to shares in the partnership if one of the partners dies unexpectedly. 

Dr. Perez, Dr. Jones, and Dr. Rodriguez each own one-third of the business which over time has built considered value. If one of the partners dies, the remaining two would have to come up with the money to purchase the shares of the deceased partner’s heirs. Knowing that this buyout would be substantial, the partners decided to use affordable term life insurance to fund the business continuation plan. 

Premium Care Services takes out a term insurance policy equal to one-third of the company's value on each partner. The practice owns and pays for the policy and is the beneficiary on each policy. This way, if either partner were to die during the term of the policy, the death benefit would be paid to the company (the two remaining partners) who could then use the funds to purchase the shares of ownership from the deceased partner's heirs. This would allow the company to continue its operations without taking a substantial financial hit and provide the funds to bring in a new partner if needed.


Which is Better for Business Continuation – Term or Permanent Insurance

The type of policy used to fund either Key Person insurance or a Buy-Sell agreement depends on the intent and needs of the owner(s). If the intention is to fund either plan at the most affordable cost to the practice, term insurance will work the best because of its affordability.

If, however, the partners wanted the insurance investment to accommodate other needs of the practice, Universal Life insurance may be the better solution. With Universal Life insurance, the policies being purchased would be permanent, so each insured person could take over the policy if they left the practice or decided to retire.

Since Universal Life builds cash value over time, the practice would have access to the available cash in the policy in the event of a financial emergency through a non-taxable policy loan. The loan could be repaid by the company in monthly or yearly payments or not at all. The death benefit, however, would be reduced by the amount of any unpaid loans. 

Where Can My Company get the Best Rates on Insurance?


To get the most affordable rates on a business continuation insurance policy, the owner(s) should look to an independent insurance agent who represents the top highly-rated insurance companies that offer term insurance and universal life. This will allow the business owner(s) to shop their insurance business with all the carriers at once and take advantage of the agent’s independence to deliver an insurance solution to fill the needs and budget of the practice. 

An independent agent will put the needs of their clients and prospective clients first rather than the needs of an insurance carrier. Independent agents typically know in advance which company is going to deliver the better solution which will simplify the shopping process.

Your experienced and reputable independent agent will also walk you through the underwriting process and facilitate the issuance of the insurance policy. 

For more information on insurance products that can fund your business continuation plan, please contact the insurance professionals at InsuranceQuotes2Day at (800) 712-8519 during normal business hours or you can contact us through our website anytime.

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