Self-employed eye care professionals should give serious consideration to a complete insurance protection plan that covers business continuity and practice succession, and which also protects the financial needs of your family.
There is a common misconception in self-employed circles regarding insurance. Personal insurance – such as income protection, TPD and life cover – may protect your family but it does not protect your business or practice.
Business interruption insurance covers your business for loss as a result of fire, theft and damage – but not for health-related events that can prevent you from working.
You need to ask yourself whether your practice could survive if you, your partners or other key employees were to get sick or injured. If the answer is ‘no’, then you need to consider business insurances such as key person cover, business expense cover and buy/sell insurance.
Ask yourself whether your practice could survive if you, your partners or other key employees were to get sick or injured
Key Person Insurance
Key person cover provides a lump sum payment to pay debts and replace lost revenue – as well as pay for hiring costs of a suitable replacement to keep a practice financially viable in the event of death, total and permanent disablement or diagnosis of a dreaded disease in a person vital to the practice’s profitability. Key person insurance premiums can be tax deductible depending on the purpose of the cover.
Business expenses insurance helps cover ongoing fixed practice expenses such as rent, interest and lease repayments. Further, non-income producing staff wages and utilities expenses can also be covered. Business expense premiums are generally tax deductible.
Generally, if a medical practitioner is unable to work in their practice due to a disability or sickness, business expenses are covered for one year. Let’s assume, for example, that Mr. Smith has a car accident and is unable to work for four months. During this time, a number of fixed practice expenses will continue to be billed despite his inability to generate an income. Such expenses will include rent, practice fit-out loan interest, equipment lease costs, electricity and utility costs – as well as the salaries of non-income producing staff. However, without working, he is unable to see patients and will not be able to generate the income required to pay these expenses. Without business expenses insurance, he will have to use his savings to make these payments, but these expenses will be covered with business expenses insurance for his period of absence, allowing Mr Smith to focus on getting better.
Business succession planning is also often overlooked as a key business insurance. At some stage, a buy-sell agreement should be considered to facilitate the transfer of practice ownership to the surviving partners in the event of death or total and permanent disablement.
Buy/sell insurance helps ensure a practice survives and ownership continues with the remaining partners in the event of death or disablement of an owner, while at the same time ensuring the family or estate receives fair compensation for their entitlement to the relevant share of the practice value.
Buy/sell arrangements typically have two components: a legal agreement and the funding mechanism of which an insurance policy is an option. Here’s how it works; two business partners own a practice worth AUD$1 million, where each owns 50 per cent, and they each are covered for AUD$500,000. If one of the partners dies or is disabled, this partner’s family or estate will receive AUD$500,000 – which is their value of the practice. The surviving partner will receive the remaining 50 per cent shareholding and in doing so, become the 100 per cent owner.
Mark Sacks is the award winning Principal Advisor for Experien Insurance Services. Experien Insurance Services offers a full range of insurance products available to healthcare professionals and can be contacted on (AUS) 1300 796 577.
Disclaimer: Experien Insurance Services is an affiliate of Investec Experien, Pty Ltd ABN 94 110 704 464 and an Authorised Representative of Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, a wholly owned but non-guaranteed subsidiary of Commonwealth Bank Australia ABN 48 123 123 124. This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain a copy of the product disclosure statement and also obtain independent professional advice before acting on the information contained in this publication.
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1. Key person insurance provides a lump sum payment to pay debts and replace lost revenue
2. Business expenses insurance helps cover ongoing fixed practice expenses
3. Buy/sell insurance helps ensure a practice survives and ownership continues with the remaining partners in the event of death or disablement of an owner
4. Business expense premiums are generally tax deductible.