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. Most agreements do a good job covering how to handle the death of a partner, but most never address the questions, “What if my partner or I become disabled, what then? How do we dissolve the practice fairly?”
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 if’s”. What if you or your partner become disabled? Let’s walk through a scenario in 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 was 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 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.
Curious about other reasons why you need disability buy-sell insurance? Do you wonder what the chances are of a disability that would trigger a claim? Stay tuned for our next post later this week that answers these questions. In the meantime, feel free to contact us to get a check up to make sure you, your family, and your practice are covered correctly.