Key-person insurance can be a small business' lifeline

2016 08 30 16 00 52 53 Mc Carthy John 400

This article from Heritage Financial Consultants draws on the same core materials that are included in the management consulting program for Levin Group clients. By gaining a deeper understanding of their financial situation and the options available to them, dentists can make informed decisions that will enable them to reach their retirement goals sooner.
— Roger P. Levin, DDS

Would you hesitate to buy fire insurance for your practice? Of course not. What about liability insurance in case one of your patients slips in a treatment room? Same answer. But have you insured what could be your most valuable asset -- your partner or associate? If not, you should consider "key-person" insurance.

Protecting your most valuable asset

John G. McCarthy III is a partner with Heritage Financial Consultants.John G. McCarthy III is a partner with Heritage Financial Consultants.

The know-how, judgment, and experience that build a business are found in people, not technologies or facilities. Everyone on your team contributes to the value of your practice, but none more so (aside from yourself) than a partner or associate.

What would happen if that person were to die? It would be a major disruption and could bring about a financial crisis for your dental business. However, by insuring your partner or associate with key-person insurance, your practice would be more likely to survive and recover from the loss.

Key-person insurance (previously known as "key-man") offers a financial safety net. It can provide the cash needed to hire a replacement and keep the business running smoothly. That's why practice owners can benefit from key-person policies.

How it works

Here are several factors you should consider before getting key-person insurance:

“Ask yourself how much it will cost to replace a partner or associate in the event of death, and where the cash will come from.”
  • Typically, the practice buys a life insurance policy on the life of the key person.
  • The practice is the owner, premium payor, and beneficiary of the policy.
  • The policy may be term insurance or cash-value life insurance.
  • The premiums paid by the practice aren't tax deductible.
  • While life insurance benefits aren't normally subject to income tax, the death benefit received by an incorporated practice from a key-person policy may be subject to the alternative minimum tax.
  • Key-person insurance can also be set up to fund buyout arrangements or deferred compensation plans for a retired top employee (that is, you, the practice owner).

Additional benefits

Besides helping to stabilize a practice's financial position after a partner's or associate's death, key-person insurance can do the following:

  • Serve as collateral for bank loans.
  • Pay off practice debt or hold off creditors seeking to collect following the key person's death.
  • Instill loyalty and enthusiasm in the insured person.
  • Provide funds needed to buy out a deceased owner's interest in the practice.

Ask yourself how much it will cost to replace a partner or associate in the event of death, and where the cash will come from. Check with a reputable insurance professional to find out how key-person insurance can help provide some answers.

John G. McCarthy III is a partner with Heritage Financial Consultants and a registered representative of Lincoln Financial Securities offered through Lincoln Financial Advisors, a broker-dealer (Member SIPC) and investment advisory. Heritage Financial Consultants is not an affiliate of Lincoln Financial Advisors. Lincoln Financial Advisors does not provide legal or tax advice. CRN-1559901-080116

Disclaimer: The comments in this article are not meant to be taken as financial advice. Levin Financial Group recommends that you always consult with your financial planner before making any significant changes in your financial situation.

The comments and observations expressed herein do not necessarily reflect the opinions of, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.

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