You have found the partner for your dental partnership. They are someone you trust, with your vision, who shares your passion, and who complements your skill set. You get along well and it’s easy to envision working together, providing valuable health-care services to your patients, managing the team, and growing the practice. It’s going to make all the difference when it comes to building your business, your reputation, and maximizing the value of your practice.
Now that you’ve got your dental partnership agreement signed, sealed and delivered, it’s important to protect it. That’s where insurance can help.
Planning for ‘What If’ and ‘When’
Insurance industry professionals recommend that dentists should plan for two types of events.
'What-ifs'
These are the things that could happen to you or your practice but also may not. Typical scenarios include accidents, illness, damage to property and cybercrime.
'Whens'
These are the anticipated and inevitable events in life. For example, when you retire, sell your practice or activate your succession plan.
Dentists in a partnership should also consider insurance that provides living benefits in the event of illness or injury either with disability insurance or a critical illness policy.
Life insurance helps you cope with the 'whens'
People often think of life insurance as something that only matters when you die. In the context of shareholder/partnership agreements, however, it’s an important financial tool because it can provide the money needed to help one partner buy out another’s share.
The importance of insurance to fund shareholder and partnership agreements
Joint shareholders use buy/sell agreements to make it clear when one will be expected to “buy out” another—this can be anything from one wants to retire, one suffers a disability, or a multitude of other reasons that can be outlined in the agreement.
All of these events have one thing in common: They trigger the need for someone to sell their shares and the agreement spells out how that will happen and where the money will come from. Without adequate insurance, the stage could be set for a contentious battle over money and control of the business. And no one wants that.
A Cautionary Tale
To illustrate the importance of life insurance as a foundational element in a shareholder/partnership agreement, consider this hypothetical situation.
Two like-minded dentists join forces to open a practice in a major market and estimate the value of the business at $1-million. Each partner takes out a life insurance policy for $500,000, naming the other as the beneficiary. This gives them both the ability to buy each other out should one die.
Over time, the business flourishes. They purchase a building with a 25-year mortgage, hire associates, and run a healthy, lucrative practice.
Both enjoy watching the business grow, and appreciate how much it has increased in value, helped in part by the booming real estate market. But, preoccupied with their busy, successful practice, neither stops to update the value of their life insurance policies.
When the younger partners dies unexpectedly, the older one is expected to buy out their shares. In the years since it was founded, the practice has grown to $3-million in value. The buyout costs $1.5-million but insurance only provides $500,000, leaving a $1-million shortfall for the surviving partner or shareholder.
As the example above shows, financial problems can happen when partnership agreements and supporting life insurance policies are not reviewed annually and adjusted to reflect the current value of a practice.
Review, review, review
If you have an up-to-date partnership or shareholder agreement funded by life insurance coverage, you’re in good shape. But that’s not the end of it. Whenever you review your agreement, here are some important questions to discuss with your Advisor:
Who should own the policy?
Is this the right kind of coverage for our situation?
Does it address what happens in the event of a disability or critical illness, a marriage breakdown or bankruptcy?
Is the company, or other shareholders, obligated to buy back the shares upon a death or a prolonged disability?
Have share values increased beyond what insurance can cover?
Does the ownership of the insurance reflect the wording of the partnership agreement?
Is the agreement clear as to how the payout from a life insurance policy will be allocated?
The Advisors from CDSPI Advisory Services Inc. will work with you, your partners and professional advisors to help keep agreements up to date and insurance coverage at the right levels. Even if you have insurance from other providers, our Advisors can provide an objective, no-cost review of your portfolio.
To speak with an advisor at CDSPI Advisory Services Inc. about your insurance needs as part of a partnership agreement, please book a meeting or contact us at 1.800.561.9401 or cdspi@cdspi.com.