The Disability Component of Buy-Sell Agreements (Part 2 of 2)

Physician Disability in Buy Sell Agreements
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In our last post, we started the discussion of buy-sell agreements for physicians and explained how the disability component of these agreements is often overlooked. Disability buy-sell insurance is, simply put, 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. In this final part of the series, we’ll cover other reasons why you need disability buy-sell insurance and share some probabilities that a disability would trigger a claim.

If you have a value established and a policy in force, disability buy-sell insurance provides peace of mind for all partners. Knowing there will be funds to pay out 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
Per Number of People in a Group

Age 1 2 3 4 5
25 31% 53% 68% 78% 85%
30 30% 52% 66% 77% 84%
35 29% 50% 65% 75% 82%
40 28% 48% 63% 73% 81%
45 26% 46% 60% 71% 78%
50 24% 42% 56% 66% 74%
55 20% 36% 48% 58% 67%

(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?

Physician 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 contact us and 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?

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