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Another Business Use of Life Insurance

Gary A. Cook; MSFS, CLU, RHU, CFP® CMP™ 

If a key physician were to die prematurely, what would potentially happen to the affected medical practice?

In many cases, especially in smaller practices, it would have a devastating affect on the bottom line, or even precipitate a bankruptcy. 

In these circumstances, a form of business insurance, called “key person coverage”, may be recommended in order to alleviate the potential financial problems resulting from the death of that employee.

Variations on a Life Insurance Theme

In our scenario, the medical practice would purchase and own a life insurance policy on the key person or physician. Upon the death of the key doctor employee, the life insurance proceeds could be used to:

· Pay off bank loans for the practice;

· Replace lost profits of the practice;

· Establish a reserve for the search, hiring and training of a physician replacement. 

Example: 

Main Lion Hospital [MLH] gained national recognition as an innovator with a new procedure for laser eye surgery. Not only have they invested an enormous sum of money in the equipment used, but they are also very dependent on the talents and continued employment of Dr. David James Williamson IV, who helped design the equipment and procedure.

Assessment:

Fearing the economic consequences if Dr. Williamson were to die, MLH purchased an insurance policy on his life to help pay for the immediate replacement and the training of another specialist.

And so, do you have this type of insurance policy as either the key-physician, or an associate doctor in a medical practice that recognizes the need?

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