Regardless of how your professional and personal life unfolds, you will have to manage your risk throughout your career. In this article, we will take a brief ‘risk management’ journey– from training, to practice and through to retirement.
Right from the start: protect your most valuable asset
Insurance should be familiar to you, even as a resident. To begin with, you should have health insurance for yourself and your dependents, and that will remain a constant throughout your career.
Your ability to generate revenue is your greatest asset and is based on your health. If something were to happen to you, it would have a significant impact on your cash flow. Whether you’re just starting your training, or if you’re already in practice, one of the first things you need to do is to protect your ability to earn an income. While health insurance will help pay to get you back to good health, an entirely different type of insurance is required to replace the income you forego while you are unable to work. This insurance is called disability income, or “DI” for short.
Protect the ones you love
It is possible that during your residency you will have dependents – a spouse, children, and financial obligations, such as a mortgage. Should this be the case for you, you would want to provide for your loved ones in the event of your death. A relatively inexpensive way to address this need is through the purchase of term life insurance. This particular type of life insurance is affordable in part because it provides coverage for a specific duration – or ‘term’ – after which it expires.
Protect yourself from lawsuits
Professional liability insurance, in the medical and dental professions frequently called malpractice insurance, is an absolute necessity for your practice – from the moment you start working, even while you’re a resident. Having the right type and right amount of professional liability in place will help protect your assets and prevent you from potential insolvency in the event of a lawsuit. The time to understand your malpractice insurance coverage is not during a lawsuit, when it’s too late to make any changes. Research your options and shop carefully.
While most practitioners understand the need for professional liability insurance, it is also vital to maximize your liability limits on your auto and home owner’s coverage, as well as obtain a personal umbrella policy. A lawsuit can occur many different ways and it is important to have these exposures covered.
Starting a practice? Protect your business
Today’s dental professional faces several problems when sickness or injury results in a total disability. Income ceases immediately but both personal and office expenses continue, becoming an added drain on resources of the disabled and his/her family. One may have even purchased disability income insurance to replace lost earnings, but how will that cover ongoing practice expenses or practice loan payments? For this reason, business overhead expense (often referred to as BOE) coverage and business loan protection (also referred to as reducing term disability insurance) must not be overlooked.
It is important to understand that business overhead expense insurance is not income replacement coverage and is not covered under your business office package. Business overhead expense is a completely separate policy, and its purpose is to provide a mechanism for paying office overhead expenses that continue when you are disabled. Business loan protection disability insurance is designed to pay your monthly practice loan payment in the event of a total disability.
A business owner’s policy (frequently abbreviated to ‘BOP’) is an insurance policy you would buy to protect your business from a wide variety of property and casualty risks. Bundled into a single package, a BOP typically covers you for events ranging from fire, to theft, or a general liability claim against your office.
EPLI, data breach, and worker’s compensation
Within the Business Owner’s Policy, there is also Employment Practice Liability Insurance (EPLI) and Data Breach protection. Employment Practice Liability Insurance provides you with coverage against claims made by employees alleging wrongful termination, harassment or discrimination. Data Breach insurance has become a necessity as your practice handles sensitive personal and medical patient data. This insurance mitigates the costs associated with data loss or data theft, and also protects against potential litigation.
Last but not least, Workers' Compensation is a form of insurance that provides wage replacement and medical benefits to employees injured in the course of employment. It is a separate policy from your BOP.
If you are going into practice with a partner…
All multi-professional practices should have a buy-sell agreement that addresses both death and disability.
Buy-sell agreements are contracts between business owners for the purchase and sale of a practice in the event of death, disability or retirement. The buy-sell agreement will establish a pricing formula for the practice, serve to have a ready buyer for the practice and may be used to value the business interest for federal estate tax purposes. In the event of death or disability the buy-sell agreement is typically funded via insurance.
In a life buy-sell arrangement, the life insurance is either owned by the business or owned by a partner. In the event of one partner’s death, a lump sum is given to the owner of the policy who uses the funds to purchase the practice from the deceased's family.
A disability event is more complicated because most buy-sell arrangements suggest that a buyout is not triggered until a partner is disabled for twelve months. During those twelve months, you have the ongoing concern of the practice's expenses (which is why you should carry business owner expense insurance). At the end of 12 months, the non-disabled partner has a contractual right to purchase the other half of the practice. In this instance, disability buy-out insurance provides two essential functions. First, the insurance company’s determination that a partner is disabled relieves the non-disabled partner from having to prove it themselves. And second, the policy can help fund the buy-out.
Managing personal risk as your career evolves
In the early years of your practice, you are bound to have many expenses – whether from starting a new practice, or from changes in family and lifestyle: supporting a spouse, children, and carrying mortgage and other financial obligations. If cash flow is tight early on, make sure to protect yourself with sufficient term life insurance, so that your family is protected and provided for.
Mid-career: the growth years
Once your cash flow stabilizes and shows an increasing positive trend, consider purchasing permanent life insurance (such as whole life) to supplement the term life insurance you originally obtained in your early career.
By offering permanent protection with premiums that never increase, whole life allows you to provide for your family even when you can’t be there for them. Unlike some other forms of life insurance, whole life policies build cash value you can use while you are living to help meet a wide range of your financial goals.
Think about long term care while you still qualify to obtain it
Planning for longevity is essential in today’s environment of steadily rising health care costs. It’s best to develop a care plan while you are healthy.
After retirement most of your living expenses can be controlled within your budget. However, an unforeseen expense may trigger the need for long term care. Today’s facilities can cost upwards of $100,000 a year. If you were to extrapolate these figures at a 5% inflationary rate, the cost would be over $400,000 per year in 30 years. This would be a prohibitive expense even for a very large estate.
How much long term care planning is appropriate for you is very dependent upon the region of the country you live. A financial service representative can review the various features of a long term care plan and help you design a strategy that is appropriate for you.
Transitioning to retirement? Re-assess your exposure
As you plan for retirement, take the opportunity to re-assess your risk exposure. This means adjusting your professional and personal coverage to meet your needs. Insurance is an important component of estate planning, and may be used to provide for your loved ones, and causes for which you care deeply, well after you are gone.
A special kind of insurance, called survivorship insurance protects two lives – typically that of a husband and wife – under one policy and pays out to third parties, such as children and grandchildren once both survivors have passed away. It is frequently used in estate planning scenarios to cover tax and settlement expenses.
There are many decision points and circumstances to consider: there is no ‘one size fits all’ strategy. It is important to work with an experienced professional who truly understands the business of dentistry, will help you identify your individual needs, and be able to partner with you with viable solutions throughout your career and beyond.
About the author
Shawn Johnson is Vice President of Sales at Treloar & Heisel, Inc., the premier financial services provider to dental and medical professionals across the country. He has assisted hundreds of clients from residency to practice and through retirement with a comprehensive suite of financial services, custom-tailored advice, and dedicated client service. For more information visit www.treloaronline.com.