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January 17, 2013 at 08:38 AM
Very few financial professionals ever ask about disability buy-sell. It’s a very easy product to understand. Just think about it in terms of what might happen to your customers if they need it and don’t have it.
Here’s a hypothetical example: The story of Andy and Jeff.
Andy and Jeff had been best friends ever since they started dental school together.
When they finally graduated, they decided to team up to start a practice, and to “bite the bullet financially” so that they could enjoy their success not only as best friends, but as dental professionals.
Because disability insurance companies know that someone like a medical doctor or a dentist has a high earning ability, they are willing to offer these professional people higher benefits than they would normally offer to those who are entering the business marketplace.
Andy and Jeff each bought about $5,000 per month of disability insurance coverage. They also knew that the first few years they likely would be paying out more money than would be arriving in the form of receivables. So, they also bought business overhead expense coverage, to protect them in the unlikely event that one of them became disabled.
Fast forward 20 years.
Andy and Jeff are now taking out $250,000 per year of income each from the practice. This particular practice is now worth more than $1 million, including the value of a building and equipment that they both own jointly. Over the years, they’ve added to their disability coverage to protect their growing income.
Jeff is in Aspen skiing during a winter vacation. Coming down a hill, he loses his balance and falls head over heel several times. While no bones are broken, he suffers some amnesia and constant headaches.
Jeff’s neurologist tells him to take six months off. His disability insurance policy is now paying him $10,000 per month, and his business overhead expense policy is covering his share of the expenses. For the most part, there are no big problems so far.
One huge exception: The hygienists, techs, and Andy are all working harder to keep up the revenue stream.
At the end of the six month layoff, Jeff tries to come back to work and but that just does not work out.
His neurologist again tells him to stay off his feet until he is completely well.
Andy is trying to pick up as many patients of Jeff’s as he can—but he is also getting frustrated. When will this scenario end?
Finally, at the end of one year, Jeff is told he likely will never be completely well again—certainly not well enough to work as a dentist. Jeff goes to Andy and tells him, “I would like my equity out of the business. My neurologist tells me I likely will never work again.”
