Disability Buyout Insurance – Protecting Yourself And Your Partners
Most doctors are familiar with individual disability insurance policies, in which you insure against your own disability. Many doctors are also familiar with business overhead disability insurance, which will replace your practice’s revenue in the event that you are unable to continue working. However, there is a third category of disability policy that doctors, particularly doctors in smaller practice groups, may want to consider to protect themselves in the event of disability: disability buyout policies.
Imagine that you are in a small practice, with one or two other doctors, and one of your partners unexpectedly becomes disabled. Not only will this throw your practice into chaos, with you scrambling to find coverage and meet the demands of your patients, but you may also be faced with a difficult financial decision. Many shareholder agreements contain provisions requiring the other doctors in the practice to buy out the disabled doctor in the event of a prolonged period of disability, usually three to six months.
Therefore, even if you have a business overhead policy, your partner’s disability can cause a serious short-term financial challenge. This is the circumstance for which disability buyout policies are designed, much like so-called “key man” life insurance policies protect businesses in the event of the death of one of the partners, in order to buy out the deceased partner’s interest in the business. The buyout policy will provide the funds necessary to buy out the disabled doctor’s interest in the practice, usually in a lump sum, so that the other doctor or doctors do not have to come up with the hundreds of thousands of dollars out of the practice or their own personal accounts to buy out the other disabled doctor.
There are some things you should keep in mind when considering these policies:
- Waiting Period or Elimination Period: In many cases, these policies require the disabled doctor to be continuously disabled for 180 or 360 days in order to qualify for the benefit. You can contract for a shorter elimination period, at an extra cost. You should align the waiting period with the term of the shareholder or partnership agreement triggering the buyout provision. Therefore, if you have a shareholder agreement that requires a buyout if the doctor has been disabled for 180 days, you should purchase a policy that has a waiting period of 180 days or less, to ensure that the funds will be available when payment is due.
- Beneficiary: Typically, the beneficiary should be the same individual or entity who is responsible for paying the buyout. Therefore, if you have a PLLC or a PC set up, and it will be paying the buyout expense for the disabled doctor, it should be the beneficiary of the policy.
- Death Benefit: Some of the policies we have seen allow for payment of double the buyout amount in the event of the insured doctor’s death. This can be a good way to combine protection in the event of death or disability, especially if your shareholder agreement contains terms that require a buyout be paid to the doctor’s surviving spouse.
- Whether To Amend Your Shareholder Agreement. Since the purpose of the disability buyout policy is to protect your obligations under the shareholder agreement, you should also consider whether to amend the shareholder agreement to make sure it lines up with the disability buyout policy. For example, consider whether you can re-structure any buyout provision to allow for payments over time, or for payments to be deferred until after the buyout policy pays, or even make the buyout contingent upon receipt of the proceeds from the disability buyout policy.
- Collectability Concerns: In deciding whether to purchase any insurance policy, but especially with disability insurance policies, you have to consider the risk that the insurance company will deny the claim. Disability insurers frequently deny claims on the basis that they believe the disabled doctor is able to continue performing the duties of his occupation. For additional information regarding the problems facing doctors in collecting on their disability insurance claims, please visit www.disabilitycounsel.net/publications.
In managing the risks of a modern practice, it is important to consider the benefits and consequences of a disability buyout policy, and to ensure that your practice, your partners, and most importantly you, are protected in the event of an unforeseen disability. You should consult with an experienced attorney in making these decisions.