Two Commonly Overlooked Types of Disability Insurance

Medical practice owners and executives must look beyond the just the personal disability insurance coverage of doctors to address two specialized kinds of risk: disability overhead expense coverage and key-man disability coverage for high-value employees.

While most doctors are familiar with and hopefully have sufficient personal disability insurance coverage in place to offset any loss to their income due to illness or injury, there are two other key areas of disability coverage that could seriously, if not fatally, affect your practice. For detail on these issues I visited with financial advisor Arvind Maddur with Northwest Mutual in Phoenix, Ariz., whose practice centers on helping business owners and physicians address such risks.

Protecting Yourself Against The Loss of an Important Employee: Key Person Disability Insurance

Many practices have doctors, practice executives, and other employees key to significant revenue covered with “key-man” life insurance coverage that provides payment to help offset the economic effects of the loss of a employee (death). This insurance death benefit is meant to help cover temporary income loss and the costs or locating, recruiting, and training a suitable successor. The population at large is twice as likely to become disabled than they are to die by age 65. Despite these statistics and the fact that most physicians are already familiar with them, I find that many practices have failed to address either one of these exposures, with the key–man disability issue being most commonly overlooked.

Employees are among any practice’s most valuable assets. Medical administrator duties are increasingly specialized and require a higher level of knowledge and compliance than ever before and when providers have greater patient contact and billing rates, the loss of more than just the doctor is a serious risk that needs to be addressed. As with the key man life insurance coverage mentioned above, the key-man disability component can help offset the significant investment required to replace important staff as well cash to offset the losses you may actually sustain if they are disabled. Madur suggested practice owners and managers consider some specific questions when considering which employees would be wise to insure this way:

• Would our patients leave the practice? 


• Would business continuity be affected and would revenue and profitability be lost?

• Do other employees have the training, time or legal capacity to perform those responsibilities? 


• Do you have the excess cash to cover the costs of locating, hiring or training a replacement? 


Protecting Your Practice Against The Loss of Your Income Production With Disability Overhead Expense Insurance

As mentioned above, doctors must have personal disability insurance coverage that’s adequate to maintain their fixed personal overhead in the event of a disability. What about the portion of the revenue you generate that stays in the practice and is vital in covering a variety of fixed recurring business overhead expenses? For the few medical practices that have vast amounts of reserve capital and/or owners that are willing and able to capitalize those expenses out of their personal savings, this isn’t a significant issue. The other 95 percent of you should consider this very carefully.

In the best cases, the disability will be short term and you’ll be able to return to your practice at full capacity with minimal loss of income. In other cases, where the disability is either longer term or permanent, the lack of this coverage could significantly have an effect on your personal assets and force the sale or dissolution of your practice at an unfavorable time or term, under severe financial pressure. I encourage practice owners and managers to do the math and consider that this expense looks like as part of their business plan and will be using this checklist, provided by Madur, to help them get a specific number on this exposure on a monthly basis.

Add Up These and Any Other Significant Recurring Costs

Rent

Utilities

Professional dues and license fees

Maintenance (including repairs, cleaning services, etc.)

Loan Payments

Taxes (including real estate, property, payroll)

Interest on business loans

Insurance premiums (including liability, casualty, malpractice)

Legal and professional fees (including accounting, legal, billing, etc.)

Employee salaries and benefits

The total is the exposure that must be considered in protecting your business and personal financial solvency. If you’re uncomfortable with the exposure that either scenario above presents, the time to act is today, proactively, we see too many doctors looking for heroic solutions to simple problems only after problems arise, including the three physicians I’ve already had to personally pass on helping because of their pre-existing exposure so far this year, that’s an average of one a week, at my office alone.