A Valuable but Complex Business Arrangement for Physicians

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

Split dollar arrangements can be a complicated and confusing concept for even the most experienced insurance professionals or financial advisors. 

Moreover, for most physicians and healthcare executives they seem to be fraught with even more confusion. 

The Basic Concept

This concept is, in its simplest terms, a way for a medical practice to share the cost and benefit of a life insurance policy with a valued physician employee. 

In a normal split dollar arrangement, the employee doctor will receive valuable life insurance coverage at little cost to them.  The medical practice business entity pays the majority of the premium, but is usually able to recover the entire cost of providing this benefit. 

Approaches and Structures [IRS Notice 2002-8 and 2002-59]

Following the publication of IRS Notices 2002-8 and 2002-59, there are currently two general approaches to the ownership of business split-dollar life insurance: Employer-owned or Employee-owned. (In addition, Proposed Regulation 164754-01, substantially changed split-dollar arrangements even further.  

Both the medical practitioner and his/her financial advisor should research this area thoroughly before proceeding or making any recommendations. Regardless of the method used, a written agreement must be prepared to spell out the rights and obligations of the parties.

[1] Employer-owned method [IRS Tables and PS38 Rates] 

In the employer-owned method the employer is the sole owner of the policy. A written split-dollar agreement usually permits the employee to name the beneficiary for most of the death proceeds. The employer owns all the cash value and has the unfettered right to borrow or withdraw it as necessary. 

At the end of the formal agreement, the healthcare business entity can generally (1) continue the policy as key person insurance, (2) transfer ownership to the insured and report the cash values as additional income to the insured, (3) sell the policy to the insured, or (4) use a combination of these methods. This is commonly referred to as “rollout.”

Medical practitioners, and their advisors, should be careful not to include rollout language in the split-dollar agreement. Many plans are set up with the intent—although not in writing—to transfer the policy to the insured after a certain number of years.

The reason the rollout should not be included is that if the parties formally agree that after a specified number of years—or following a specific event—related only to the circumstances surrounding the policy, that the policy will be turned over to the insured, the IRS could declare that the entire transaction was a sham and that its sole purpose was to avoid taxation of the premiums to the employee.  

If that happens, the IRS may deem that the premiums paid should be considered income to the employee when they were paid. If this comes up in an audit years after the inception of the agreement, it may generate substantial interest and penalties in addition to the additional taxes due. The death proceeds available to the insured employee’s beneficiary are considered a current economic benefit. Also called reportable economic benefit (REB), it is an annually taxable event to the employee.  

If an individual policy is involved, the REB is calculated by multiplying the face amount times government’s rate tables, or the insurance company’s alternative term rates, using the insured’s age.  

If a second-to-die policy is involved, the government’s PS38 rates or the company’s alternative PS38 rates will be used.

Any part of the premium actually paid by the employee is used to offset any REB dollar-for-dollar. 

The employer-owned method is primarily used when the employer wishes to maintain as much control as possible over the life insurance policy or for officers and executives of publicly-held corporations. This employee perquisite can be used to reward key employees with current inexpensive death protection and simultaneously provide a potential handcuff for them by informally funding a deferred compensation agreement. 

[2] Employee-owned method [Code § 7872] 

With the employee-owned method, the insured-employee doctor is generally the applicant and owner of the policy.  Any premiums paid by the practice are deemed to be loans to the employee and the employee reports as income an imputed interest rate on the cumulative amount of loan based on Code § 7872.

A collateral assignment is made for the benefit of the business to cover the cumulative loan amount.  In some cases, the assignment may allow the assignee to have access to the cash values of the policy by way of a policy loan. This method is unavailable for officers and executives of publicly- held corporations because of the current restrictions on corporate loans (the Sarbanes-Oxley Act). 

The employee-owned method is somewhat similar to the older collateral assignment form of split-dollar. The benefits for the employee are both the ability to control large amounts of death proceeds as well as developing equity in the policy.

Whether or not this new method catches on will depend greatly on the imputed interest rate published by the IRS every July. If set low enough, this may be an excellent opportunity for the employee to use inexpensive business dollars to pay for life insurance.  

Illustrative Example: 

Dr. Charles Tryon is a valuable member of a team of surgeons at St. Mary’s Hospital.  He has recently developed a new technique for treating brain aneurysms.  The hospital would like to keep him on staff for years to come. 

Dr. Tryon is married and has one small child and his wife is pregnant.  He has requested that the hospital provide him with more life insurance.  The hospital’s board of directors meets with a number of financial advisors to review their options and they settle on an employer-owned method split dollar arrangement. 

As a result, they will purchase and pay for a life insurance policy on Dr. Tryon, providing him the bulk of the death benefit for his family, as long as he is a member of their hospital staff.  They have also agreed to bonus Dr. Tryon the amount equal to the Reportable Economic Benefit, in order to keep his insurance cost at a minimum.

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Assessment

The above is not intended to be a complete treatise on the split dollar concept. There are many different variations that continue to change and develop daily.  Due to the complexity of split dollar and potential tax implications it is recommended that when considering a split dollar arrangement, an experienced team of advisors be consulted.

Conclusion

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Home Title and Boat Insurance for Physicians

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

The physician homeowner is well advised to consider a multitude of endorsements and/or potential increases in their insurance policy limits. 

Examples include:

· Scheduling personal property, such as jewelry, furs, golf equipment and computers, which have been exempted from coverage, or coverage has a severe dollar limitation. 

· Increasing liability coverage to take advantage of the minimums needed for “Umbrella Liability” to be covered shortly.

· Theft extension endorsement to remove the exclusion for loss of unattended property from a motor vehicle, trailer or watercraft.

· Earthquake and/or sinkhole collapse coverage.

· Increasing the deductible from the standard $250 to a convenient self-insurance amount. 

Two other important riders include home-title and boat insurance. 

Home Title Insurance

As a routine part of any home purchase, a history of the title to the property, as well as any liens or conveyances, is completed.  This is referred to as title insurance, and typically protects the mortgage lender from any title defects.

If a title defect causes loss, the title insurance company will indemnify the lender, not the homebuyer, to the extent of the loan.  These are single premium policies of indefinite duration, but can terminate when the loan is retired.

Title insurance is usually required by the lender at the time of settlement.  If the state does not required this coverage to be paid by the seller, its payment can certainly be negotiated by the parties involved. The medical professional should also inquire as to the cost of their own title insurance policy.  This second policy would protect them rather than the mortgage lender. 

Although it would undoubtedly add to the expense of closing, there is no harm in requesting that the seller be responsible for providing this protection to the purchaser as well.

Boat Insurance Overview

Watercraft and small pleasure boats are usually covered within a homeowner policy, but generally only for $1,000.  More expensive boats are often insured either under a separate Inland Marine policy or as a Personal Articles Floater (attachment) to the homeowner’s policy.

The decision between these two alternatives usually involves the liability risk element. There is no provision in the Personal Article Floater for liability, and although it could be increased on the homeowners, it is usually preferable to use a separate policy.

Other items to consider are the size of the craft, maximum speed, engine horsepower, waters navigated and special uses, such as water skiing or racing. Yacht insurance is usually written in the traditional terms of Ocean Marine insurance, with both “Hull” coverage and “Protection and Indemnity” liability coverage. 

It is quite different from an Inland Marine policy and is beyond the scope of this discussion. 

Conclusion 

And so, what is your experience with any – or all – of the above insurance policy riders; worthwhile or worthless? 

More Information: http://www.jbpub.com/catalog/9780763733421

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Beware the Hype of Superfluous Products

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

The following insurance policies should be carefully considered by physicians before purchase, since they may be unnecessary, too expensive, provide only minimal benefits or be duplicated in other insurance policies.

Avoid or Purchase?

These suspect insurance policy types include credit life or home mortgage insurance (decreasing term), life insurance for children, accident policies for students and pets, hospital indemnity policies, dread disease insurance, credit card insurance, pet health insurance, life insurance for the elderly, funeral insurance, flight insurance, pre-paid legal insurance and most extended warranties on automobiles, televisions, stereos, home computers and the like.   

On the other hand, the following types of coverage may be important in selected cases: trip cancellation insurance, termite insurance and flood and earthquake insurance. Regardless, the purchase choice for all of the above is your own – so think carefully. 

The “Perfect” Retirement Insurance Vehicle – Does Not Exist! 

Additionally, according to fee-only life insurance expert Peter C. Katt of Kalamazoo, Michigan, doctors should be on guard against believing in the existence of perfect retirement vehicles funded through “springing” cash value life insurance plans.

These plans reportedly feature payments of very large premiums while the policy is subject to favorable tax treatment, and then transferring the policy to the insured doctor when it appears to have no taxable value, after which the cash value springs to life. 

Assessment – Beware the VEBA

Unfortunately, in the real world, tax deductible contributions and tax-free benefits do not exist without resorting to fraud or deception.

Particularly notorious are the so-called continuous group insurance and VEBA (Voluntary Employee Benefit Association) pre-paid retiree plans, despite the fact that the later have been mistakenly endorsed by state medical societies – in certain cases.  

Conclusion

Always remember that no matter how professional and sincere marketers appear, there are no life insurance that can legitimately provide tax-deductible insurance with tax-free retirement benefits.  

Therefore, you should always consult a qualified professional for further information regarding your specific needs. And so, have you ever been “burned” or benefited by any of the above insurance policy types? 

More information: ttp://www.jbpub.com/catalog/9780763733421   

About insurance agents: https://healthcarefinancials.wordpress.com/2007/12/18/insurance-agents-raising-the-bar

Fiduciary education: http://www.CertifiedMedicalPlanner.org

https://www.crcpress.com/Risk-Management-Liability-Insurance-and-Asset-Protection-Strategies-for/Marcinko-Hetico/p/book/9781498725989

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Negligence Based Coverage – Vital for Physicians

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

Negligence is generally the basis for liability “umbrella” insurance.   

Definition of Negligence

Negligence may be defined as the failure on the part of an individual to exercise the proper degree of care required by the circumstances.

It may consist of the failure to do something, or doing something that should not have been done.  It is the omission to do what a reasonable and prudent person would have done in the ordinary conduct of human affairs.

Umbrella Insurance Policy Structure

Umbrella insurance policies should be considered anytime the medical professional or healthcare practitioner has a substantial current income or has accumulated a sizable estate, and is concerned about asset protection from potential litigation.   

Umbrella policies vary greatly in structure so care should be taken to examine all of the various aspects of the policy carefully. Not only do umbrella policies vary in structure, but they can be arranged with many different endorsements to meet the specific needs of the medical professional. 

Examples:

A few illustrations for the practicing physician would be:

· The addition of personal injury coverage (to include libel, slander and defamation of character).

· Incidental medical business pursuits (to include coverage to personal automobiles where the healthcare or business activity was incidental and not the primary purpose of the use of the car).

· The broadening of personal automobile coverage (to the insured regardless of whose vehicle they were driving and the coverage afforded that vehicle).

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Assessment

And so, what has been your experience with this insurance policy type which is typically very inexpensive?

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Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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• FINANCE: Financial Planning for Physicians and Advisors
• INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
• Dictionary of Health Economics and Finance
• Dictionary of Health Information Technology and Security
• Dictionary of Health Insurance and Managed Care

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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?

Related information: www.jbpub.com/catalog/9780763733421

More info: www.HealthDictionarySeries.com

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A Necessity for Contemporary Medical Practices

[Staff Writers]

Workers’ Compensation Insurance [WCI] is reported to be the largest line of commercial insurance, possibly because it is also a statutory obligation for most physicians and all employers who have common law employees.

Purpose of WCI

Workers’ Compensation provides coverage for lost income due to on-the-job accidents or work-related disability or death, and benefits vary by state. Its purpose is not only to provide these benefits but also to reduce potential litigation.

Physician-Executive Benefits of WCI 

Medical office staff employees accepting the benefit payments from a Workers’ Compensation claim generally forego the right to sue their physician-employer. Workers’ Compensation rates are established by job descriptions and commercial rates for the medical professional’s office are some of the lowest available.

WCI Structures

Generally, the three methods of providing Workers’ Compensation coverage are: 1. Private commercial insurance; 2. Governmental insurance funds; and 3. Self-insurance.

There are however, seven “monopolistic” states – Nevada, North Dakota, Ohio, Washington, West Virginia, and Wyoming – which may not permit private commercial insurance.

Assessment 

The medical professional may be inclined to the third method of WCI coverage, especially in the larger offices.  Since the weekly benefits are typically below $750, this seems to make some sense. In larger medical groups, the physician-owners can elect not to be covered, as it is usually more convenient for the medical-executive to cover this risk with personal disability income insurance. 

Medical clinics or other healthcare entities, which wish to take more direct control of costs and benefit management, should consider self-insuring only after receiving expert advice.  This is one form of coverage that truly requires a trusted, knowledgeable insurance and risk-management advisor. 

Conclusion

What has been your experience with WCI in your geographic area? If your medical practice does not provide WC insurance; why not? 

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[Few] Insurance Agents Learn About Modern Health Economics  

Staff Writers  

As a registered health underwriter [RHU], insurance counselor, long-term care or life insurance agent, it seems that almost everyone today is also acquiring a general securities license, or becoming a “financial advisor.”

Introduction 

Currently, about 240,000 of the nation’s life insurance agents – down from more than one million in 1965 – are being pressured to move toward financial planning as distribution of insurance products over the Internet spreads like wildfire.

Meanwhile, the same insurance and investment companies that are knocking on your door are also courting the medical professionals with their practice enhancement and risk management programs. 

The Pondering 

So, even if you were not interested in doing financial planning for doctor’s, you have seen the status of the American College erode as your own business has declined because of the World Wide Web. 

And, in the eyes of your former golden goose doctor-clients, you may have become a charlatan as everyone is clamoring for a piece of your insurance business and cloaking it off in the guise of the contemporary topic of the day; medical practice management, healthcare business consulting and personal financial planning for physicians.  

Think this is an exaggerated statement? A prior – and oft repeated – survey first conducted by Deloitte & Touche Consulting Group of New York, found insurance agents ranked last in having the trust of a wide selection of the public!  

So you ponder and consider how to regain this lost trust and try to understand contemporary managed medical care and the current healthcare industrial complex?  

But, how do you learn about it at this stage in your career? 

• What ever happened to the traditional indemnity health insurance, with its deductibles and 80/20 patient responsibility?
• Where did the whole-life insurance policy buyer go, with its fat-profits for me and my sponsoring company?
• How did I become a dinosaur insurance sales-agent?  

The Realization 

It was so easy to sell insurance in the good old days – your product provided good coverage – and the agent made a nice sales profit. So what – if it was expensive for the client?  Now, you realize that making a living will be more difficult in the future.  Like all the struggling collateral advisors in healthcare, you find yourself asking; how do I talk the talk and walk the walk – in this new era of insurance change and health reform turmoil?  

The Epiphany 

Slowly, as you study and re-engineer, you become empowered with knowledge for new risk management derivatives that provide added-value to physician clients.

And, you learn to integrate physician-focused financial planning concepts with medical practice management principles.  You learn something about health-economics and you seek to become a “fiduciary” and actually work for the client; not the insurance company. 

You are no longer just an insurance salesman, but are becoming a trusted advisor for the medical community.  You are slowly recreating your career and may successfully avoid the managed care “ripple effect”, after all. 

Educational information: www.CertifiedMedicalPlanner.com

Related Info: http://www.jbpub.com/catalog/9780763733421

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Do You Know About the “New-Old” 2001-2009 CSO Life Insurance Table?

By Dr. David Edward Marcinko; MBA, CMP™

Publisher-in-Chief  

As physicians and medical professionals, we know that all life insurance and annuity product pricing is based on mortality – the expectation of when, not if, death will occur.  

But, did you know that at its December 2002 meeting, the National Association of Insurance Commissioners (NAIC, http://www.naic.org) approved a new mortality table for individual life insurance products sold in the United States.  

The 2001 Commissioners Standard Ordinary (CSO) Table is the new valuation mortality table – insurers will use it to determine mortality risk when they calculate their own company reserves.  So, all physicians should be aware that this may lead to structural changes to term policies including a reduction in term rates and higher issues ages for level term products.   

The good news is that several large insurers have already lowered term rates 20-30%. 

The trouble is that the “new CSO table” is not required to be used by all insurance companies until 2009! 

Your comments are appreciated? 

More on: “New Risks for Physicians to Manage”

www.physiciansmoneydigest.com/article.cfm?ID=3146

Related info: http://www.jbpub.com/catalog/978076373342

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