Insurance Planning for Dentists and Dental Practices

There are a myriad of insurance products available for the dentist and his dental practice. Care must be taken to ensure that all risks have been reviewed and the appropriate risks covered with an insurance plan. Taking the time to solidify your base helps to ensure a strong financial plan for years to come.

When it comes to overall financial planning, insurance planning is often given little or no attention when, in fact, it is one of the most important parts in the financial planning process. As the old adage goes, a house is only as strong as the foundation it sits upon. The same holds true for your financial livelihood. Insurance planning for the dentist and his or her dental practice should be a top priority for all practitioners.

Hierarchy of financial planning

Proper financial planning follows a defined structure: visualize the future, develop the strategies to accomplish this vision, and then implement the strategies. A dentist would not perform a procedure without first conducting a comprehensive examination and making a diagnosis. Financial strategies, which are among life’s most important decisions, must also be made through a coordinated plan based on the same analytic process.

The financial pyramid concept illustrates the hierarchy of financial planning. A proper base forms the foundation to support any strong structure. Financial planning follows the same formula. Start with the base and then move to the next level once the foundational steps are completed. Unfortunately, some dentists skip some elements of the base and move to the next level, ultimately leaving a shaky foundation.

Build your base

The financial base covers five important areas.

Emergency fund

All dentists should maintain a strong cash position. Set aside and leave 3 to 6 months’ of living expenses in a liquid account, such as a savings account, money market, or other liquid account. This account is not an investment or spending account but rather a fund for emergency expenditures, such as insurance deductibles, transitional expenses to a new practice situation, major home repairs, to cover the waiting period on disability insurance, and other unexpected needs.

Spending plan

Success of a financial plan stems from control of spending and good saving habits. Controlling spending habits and practicing the discipline of delayed gratification are often difficult financial tasks for a dentist. All practitioners should prepare a budget with a fixed spending limit. Spending can be adjusted upward as income increases. Consistency helps to ensure the discipline of a spending plan; thus, a predetermined monthly draw should be established to cover fixed spending.

Often, it helps to create a cash flow map—a predetermined distribution of your monthly and periodic income. For instance, a certain amount of dollars might be directed each month to:

  • Monthly checking for spending purposes

  • A tax account

  • A college savings account

  • A periodic spending account for vacations and other recurring expenses

Quarterly and annual distributions might be earmarked for retirement and other accumulation accounts.

Follow wise debt rules

Generally, personal debt, not including practice acquisition loans, should not exceed 30% of gross income. This may be unrealistic in the first year of practice but should be adhered to in following years. Additional debt rules to observe include the following:

  • Recognize the difference between “good debt” and “bad debt.” Good debt buys an appreciating asset, such as your home, or an income stream, such as your practice income. Good debt includes student loans, practice loans, and home mortgages. Bad debt purchases include depreciating assets or expenditures with no residual value, often at high interest rates. Credit card debt and consumer debt are examples of bad debt.

  • Do not accelerate debt payment if the interest rate on the loan is less than the rate of return of a moderate growth investment.

Create a basic estate plan

Most new practitioners do not think much about estate planning; in fact, most new practitioners do not even realize that they have an estate. Considering that many finish dental school or residency with loans in excess of $200,000, it is easy to see why many believe they do not have to plan for their estate distribution.

Many of these individuals actually have items that they would like to pass to an intended recipient, however. Thus, no matter the net worth of an individual, a will is often the minimum estate planning strategy needed by all. Later in life, and beyond the scope here, there are other estate planning tools necessary to ensure that an estate is distributed in the intended and most tax-efficient manner.

When an individual dies without a will, it is known as dying intestate. If a person dies intestate, his or her estate is distributed by the laws of the state in which he or she resides. Often, the distribution rules established by the states are not in sync with how a decedent would like to have his or her estate distributed. For example, most new practitioners would like to have their spouses receive their entire estate on their death. Some intestate laws distribute these funds to the spouse and to children and other family members, however. Additionally, a will provides a vehicle for parents to determine who takes care of their children on their death. Without a will, the courts determine who the guardian is for minor children.

Furthermore, in the absence of a will, the state determines the executor, and it may not be the person the doctor desires. Initiating a will allows the doctor to choose the executor, saving his or her survivors significant legal footwork at an already difficult time.

Purchase insurance

Insurance is another important pillar of your financial base.

Everybody faces certain perils in life that can result in a significant financial loss. Examples of these perils are premature death, disability, catastrophic medical expenditures, property damage or theft, and professional and personal litigation.

The purchase of insurance transfers the risk to the insurance company, providing money when none exists to replace the loss from these perils. Insurance trades a potentially unaffordable loss, the cost of the peril, for a known affordable cost, the premium. Typically, only unaffordable losses should be insured, even if the risk for occurrence is relatively low. The remainder of this article discusses personal and business insurance plans that are required by most dentists.

Build your base

The financial base covers five important areas.

Emergency fund

All dentists should maintain a strong cash position. Set aside and leave 3 to 6 months’ of living expenses in a liquid account, such as a savings account, money market, or other liquid account. This account is not an investment or spending account but rather a fund for emergency expenditures, such as insurance deductibles, transitional expenses to a new practice situation, major home repairs, to cover the waiting period on disability insurance, and other unexpected needs.

Spending plan

Success of a financial plan stems from control of spending and good saving habits. Controlling spending habits and practicing the discipline of delayed gratification are often difficult financial tasks for a dentist. All practitioners should prepare a budget with a fixed spending limit. Spending can be adjusted upward as income increases. Consistency helps to ensure the discipline of a spending plan; thus, a predetermined monthly draw should be established to cover fixed spending.

Often, it helps to create a cash flow map—a predetermined distribution of your monthly and periodic income. For instance, a certain amount of dollars might be directed each month to:

  • Monthly checking for spending purposes

  • A tax account

  • A college savings account

  • A periodic spending account for vacations and other recurring expenses

Quarterly and annual distributions might be earmarked for retirement and other accumulation accounts.

Follow wise debt rules

Generally, personal debt, not including practice acquisition loans, should not exceed 30% of gross income. This may be unrealistic in the first year of practice but should be adhered to in following years. Additional debt rules to observe include the following:

  • Recognize the difference between “good debt” and “bad debt.” Good debt buys an appreciating asset, such as your home, or an income stream, such as your practice income. Good debt includes student loans, practice loans, and home mortgages. Bad debt purchases include depreciating assets or expenditures with no residual value, often at high interest rates. Credit card debt and consumer debt are examples of bad debt.

  • Do not accelerate debt payment if the interest rate on the loan is less than the rate of return of a moderate growth investment.

Create a basic estate plan

Most new practitioners do not think much about estate planning; in fact, most new practitioners do not even realize that they have an estate. Considering that many finish dental school or residency with loans in excess of $200,000, it is easy to see why many believe they do not have to plan for their estate distribution.

Many of these individuals actually have items that they would like to pass to an intended recipient, however. Thus, no matter the net worth of an individual, a will is often the minimum estate planning strategy needed by all. Later in life, and beyond the scope here, there are other estate planning tools necessary to ensure that an estate is distributed in the intended and most tax-efficient manner.

When an individual dies without a will, it is known as dying intestate. If a person dies intestate, his or her estate is distributed by the laws of the state in which he or she resides. Often, the distribution rules established by the states are not in sync with how a decedent would like to have his or her estate distributed. For example, most new practitioners would like to have their spouses receive their entire estate on their death. Some intestate laws distribute these funds to the spouse and to children and other family members, however. Additionally, a will provides a vehicle for parents to determine who takes care of their children on their death. Without a will, the courts determine who the guardian is for minor children.

Furthermore, in the absence of a will, the state determines the executor, and it may not be the person the doctor desires. Initiating a will allows the doctor to choose the executor, saving his or her survivors significant legal footwork at an already difficult time.

Purchase insurance

Insurance is another important pillar of your financial base.

Everybody faces certain perils in life that can result in a significant financial loss. Examples of these perils are premature death, disability, catastrophic medical expenditures, property damage or theft, and professional and personal litigation.

The purchase of insurance transfers the risk to the insurance company, providing money when none exists to replace the loss from these perils. Insurance trades a potentially unaffordable loss, the cost of the peril, for a known affordable cost, the premium. Typically, only unaffordable losses should be insured, even if the risk for occurrence is relatively low. The remainder of this article discusses personal and business insurance plans that are required by most dentists.

Personal insurance

Disability income insurance

A dentist’s ability to perform his or her occupation is, in effect, the “production line.” Inability to perform these functions because of a disability can cause great financial loss. Disability income insurance should be purchased by a new practitioner immediately on entering practice, if not while a dental student.

Disability income insurance is purchased in monthly increments. Companies limit the amount of available coverage to approximately 40% to 60% of income. The amount of coverage available, as a proportion of income, decreases as income increases. Income documentation must be provided to purchase benefits, although dental students and residents often may buy a stated amount of coverage without proof of income.

Several important provisions must be evaluated when purchasing disability income insurance:

  • Policy ownership: a “noncancelable and guaranteed renewable” policy prohibits the insurance company from increasing rates or changing policy provisions to the detriment of the policyholder. It is the recommended type of policy for dental professionals and is typically available through local agents. Many association group policies are “conditionally renewable,” which allows the insurance company to increase rates and alter policy definitions. Although conditionally renewable plans often have lower rates than noncancelable and guaranteed renewable policies, a rate or definition change could leave the dentist with inadequate coverage. Some professional associations endorse noncancelable and guaranteed renewable policies with a discounted premium. These plans often offer the best of both worlds—strong definitions at more affordable rates.

  • Definition of total disability: the best policies pay benefits when you are unable to perform the “material and substantial duties of your regular occupation.” A true own occupation definition pays full benefits if you cannot perform your occupation even if you go to work in another occupation. Rates for true own occupation policies are typically the most expensive. A modified version of own occupation is one in which benefits are paid if you cannot perform your regular occupation as long as you choose not to work at another occupation. Under these policies, income loss benefits may actually be paid under a partial disability rider while engaged in another occupation.

  • Partial or residual disability: in many cases, a dentist may have an illness or injury yet still work part-time at his or her occupation. Partial disability, often referred to as “residual disability,” pays partial benefits based on income loss when the dentist is disabled but still working at his or her regular occupation. Some companies include residual disability in the base contract, although others provide it as an optional rider.

  • Elimination period: benefits usually do not begin on the first day of disability. An elimination period, typically 90 days from the first day of disability, must be satisfied, after which benefits commence.

  • Benefit period: the length of time benefits are paid during a disability is referred to as the “benefit period.” Choose a benefit period that pays benefits to the age of 65 years, at a minimum. Benefit payments for life, depending on age at the onset of the disability, are available as an optional rider on some plans, although others might offer a rider that makes contributions to retirement plans during a disability.

  • Cost-of-living rider: even at a modest 3% inflation rate, income has to double over 24 years to keep pace with inflation. If a disability were to occur at a young age, benefits must increase to maintain purchasing power. An important optional rider, cost-of-living (COLA), increases benefits during a disability and is usually tied to changes in the consumer price index (or set as a fixed rate).

  • Additional purchase option or future increase option: to buy disability insurance, a prospective insured must prove good health. Under a noncancelable guaranteed renewable policy, the insurance company cannot later restrict or cancel the policy based on negative changes in the insured’s health. The insurance company can refuse to increase coverage, or increase at less than favorable terms, if the insured has subsequent health problems, however. Most companies offer optional riders that allow the dentist to purchase additional coverage later, as long as his or her income meets stated benefit issue limits, with the same terms and conditions of the existing policy, even if the insured were to experience a health problem that would otherwise render him or her uninsurable.

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Jun 15, 2016 | Posted by in General Dentistry | Comments Off on Insurance Planning for Dentists and Dental Practices
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