The primary purpose of life insurance is to pay a death benefit – almost always tax free – when the insured dies. We’re all familiar with the need to insure the life of a breadwinner to protect a spouse and children from financial catastrophe. As a dental practice owner, we have some special needs to address, too, over and above their role as breadwinners for their families. Let’s take a closer look at the use of life insurance in a business context.
Life Insurance as an Employee Benefit
You can buy life insurance for your employees as an employee benefit, similar to any other benefit, under Section 7702 of the Internal Revenue Code. Generally, the law lets business owners, deduct the premiums for up to $50,000 of term life insurance for their employees. This is important in a society where employees are more and more used to getting insurance coverage from work. In some cases, this coverage may be the only life insurance a dental worker has.
Funding Buy Sell Agreements
If you have a dental practice with one or more partners or other shareholders who are active in managing or running your dental practice, you should have a buy-sell agreement in place. In a nutshell, this is a written agreement that the survivor will purchase the deceased partner’s interest in the practice for cash from the deceased’s estate – and that the deceased’s estate will sell.
If you fail to create a buy-sell agreement, you may find yourself in practice with your partner’s spouse. Or worse, your partners’ spouse’s lawyers. Your partner’s heirs may have no expertise in or interest in running your business, which could create big problems down the road. They will still be entitled to your ex-partner’s share of any dividends or distributions from the practice and will demand their fair share of cash even though they may contribute little or nothing to the business’s operation. A buy-sell agreement protects both sides by ensuring the heirs get the cash they need, while you get to continue running the business.
And where does the cash to fund the agreement come from? Life insurance. Each partner can own a policy on each of the other partners, or the dental business itself can own the policy.
Key Person Insurance
Does your dental practice have a key salesperson, manager or technician who is so productive, or so crucial to your operation, that it would severely damage your practice if this person were to unexpectedly pass away? If so, you have an insurable interest in that individual, and you may want to consider owning a policy on him or her. If the worst happens, the policy will provide your business with enough cash to keep functioning while you search for, hire and train a replacement. This could cost tens or even hundreds of thousands of dollars.
Bonus Plans
Some life insurance policies – specifically “permanent” insurance policies such as whole life or universal life policies, build cash value. The policy owner can use this cash value for any purpose. In some cases, you can structure a plan to award the cash value to a key employee as a bonus after a certain number of years of service. This so-called “golden handcuffs” plan gives your top dental employees a powerful incentive to stay with your practice, and as time goes by, it gets very difficult for competitors to “poach” your key people.
Supplemental Retirement Planning
Cash value plans can also be a great way for you to supplement your retirement income, without all the many restrictions that come with standard retirement plans such as 401(k)s and IRAs. You can restrict life insurance-based retirement plans to owners and executives, for example, to supplement your other retirement savings. By purchasing a modest-sized death benefit, and funding the policy with substantial premiums, you can build significant cash value over time.
You can use this for retirement or even as a source of reserve capital for your dental practice. You don’t have to wait until you are age 59 1/2 to use the money. Or you can simply keep the policy in force and use it for the purpose for which it was designed: Life insurance.
There are nearly as many ways to use a life insurance policy to benefit a dental practice or owner as there are dental practices. Every practice is different.