I’m assuming that you purchased disability insurance before, or at the latest, as soon as you started practicing. Now that you understand your cash flow better, and have started to build that practice and get your revenue to stabilize, now is a good time to revisit the coverage you bought all these years ago. If all you have is coverage through your medical association, then a review of that coverage is highly recommended as well.
Depending on the risk you want to protect against, and the structure of your business/clinic/practice, you should have either two, or three of the strategies listed below.
Personal Disability Insurance
As a medical doctor, you are key to your business, and should something happen to you (injury or illness), that would prevent you from working, you’d want to know two things: first, your income wouldn’t stop, second, you wouldn’t need to drain your corporate account to cover for your expenses while off sick.
Having a personal disability insurance allows you to achieve both results:
- you will receive a tax-free income from the insurance company once you’ve satisfied the requirements listed in your contract,
- you won’t need to draw an income from your business since you’ll receive it from the insurance company, allowing you to keep that money in the business to hire your replacement or more drastic measures.
Personal disability is a policy that is owned personally, and paid personally. This way, if the time comes that you need to receive the benefit, it won’t be taxed.
It usually kicks in after 30, 60 or 90 days (depending on how you’ve designed it), and lasts for 2 years, 5 years, or till age 65.
Business Overhead Expenses Insurance
Business Overhead Expenses insurance is a policy that is owned and paid by the company/corporation/business. You can only apply for that coverage if you are incorporated, because the company has to own and pay for the policy.
What this coverage will do for you is very important! Since your personal disability will never match you pre-tax income (gross income), and since your expenses at the corporate level wouldn’t just stop because you can’t work, having a corporate policy to cover your corporate expenses allows you to keep the entire income received by your personal disability policy for your personal needs.
That policy will allow you to receive reimbursements for overhead costs like staff salaries, utilities, rent, loan repayments, accounting and legal fees… For example, the last thing you’d need if you became disabled, would be to have to worry about paying for your medical association fees from your personal bank account.
This coverage offers a tax deduction to the business, so it is usually very well received!
It usually gets triggered after 15 or 30 days, and last for 15 months, 18 months or 24 months, after which duration you’re pretty much expected to either have gone back to work, moved on and have been replaced by someone else, or have closed the company.
Buy-Sell Disability Insurance
This policy is only applicable for doctors who have partnered with other doctors or individuals in a clinic, or any other type of business for that matter. If you fall into that category, I would assume that you’ve hired a lawyer to draft a Buy-Sell agreement (if you haven’t, get on it right away!). That agreement usually does a good job outlining how you would handle a situation should you, or one of your partners, become sick or died. The challenge is that it often completely misses the question of where the money would come from.
This is where Buy-Sell Disability Insurance comes in. It is a policy that would allow you to buy the shares from a partner who has become disabled after a period of 12, 18 or 24 months (depending on what the shareholder’s agreement states).
This coverage requires you to have a personal disability or a group disability policy first. It pays a lump sum or a series of payouts or a mix of both, to the remaining shareholders if held personally, or to the company if the company is the owner of the policy. You need to be in business with your partner(s) for at least 2 years before you can apply for that coverage.
That coverage is probably one of the most misunderstood policies in the market place, and is often discarded despite its significant important for a business owner. It doesn’t matter much what your shareholder agreement says, if you don’t have any money to back it up! That insurance coverage helps you ensure that you have the funds necessary to fund these shares back should something happen to one of your partners.