It is not uncommon for dentists to sell their practice when they experience some form of disability. It could be mild back or neck pain, or something more serious. But in any case, dentists often think of retiring when they begin to experience aches and pain in their practice. They tend not to think of long-term disability insurance in these situations.
More often than not, however, filing for long-term disability insurance turns out to be a prudent thing to do. If you qualify for disability coverage, then the way you structure the sale of your practice could have a substantial effect on the amount of disability benefits you receive.
The Fine Print
Insurance companies issue policies to business owners that often penalize them for continuing to generate income after they become disabled. Most people don’t even realize their disability insurance policy has an “offset” provision, but such provisions can reduce their disability benefits or eliminate them entirely.
The way this works is that your insurance policy typically pays a certain figure to you every month that you are disabled. This is called your “benefit.” The value of your monthly benefit might be $15,000, but it may be reduced, or “offset,” by other income, such as Social Security benefits, to take a classic example.
Typically, every dollar you receive from Social Security reduces the amount of money your insurance company is required to pay you. If you receive $2,000 per month from Social Security, your disability insurance benefit is reduced to $13,000 per month.
Usually, your policy provides a list of what constitutes an offset, but it can get complicated when you are a business owner. For example, your policy might say that “earnings” qualify as an offset. Here is language from a Guardian disability insurance policy:
“Earnings include the amounts as reported for Federal Income Tax purposes of:
“1. Your share (based on ownership or contractual agreement) of the gross revenue or income earned by all such business entities including income earned by You and others under Your supervision or direction; LESS
“2. Your share (based on ownership or contractual agreement) of the usual and customary unreimbursed business expenses of those entities which are incurred on a regular basis, are essential to the established business operation of the entity, are deductible for Federal Income Tax purposes, and do not exceed expenses before Disability began. Such expenses do not include salaries, benefits, and other forms of compensation which are payable to You, or to any person related by blood or marriage to You unless such person was a full-time employee of such business working at least 30 hours per week for at least 60 days prior to the start of Your period of Disability; PLUS
“3. Any contributions to a pension or profit sharing plan made on Your behalf by all such business entities and not waived by contract during Disability.”
Even the most erudite judges find these provisions perplexing. I can assure you that insurers are keenly aware of how to use offset provisions to minimize the amount of money they need to pay their claimants. Understanding that you are at an informational disadvantage against your insurer is a critical step towards maximizing your benefits.
Be aware that very little is confidential. Your correspondence with prospective buyers, your purchase agreement, and even your tax returns can be fair game. Do not expect to structure the sale of your practice surreptitiously and nudge your insurer out of the picture. This will come back to hurt you.
And certainly do not engage in any conduct that would create the appearance of manipulating your finances, such as putting your spouse and children on the payroll the moment before you file a claim. With that said, there is no reason to structure the sale of your practice in a way that decreases your net financial gain for the benefit of your insurer, when you are not legally obligated to do so.
Avoidable problems arise when people structure the sale of their practice in a manner where they retain long-term ownership of the business, such as shares, or a contractual right to future revenue. Likewise, if you were to retain a consulting role, or a position on the board of directors, that can be problematic.
The best approach is to scrutinize your policy well in advance of selling your practice. Anticipate how your insurer could use an offset to minimize your benefits and avoid obvious pitfalls before you sell your practice.
Mr. Bourhis is an attorney with the Bourhis Law Group. He represents claimaints in disability insurance, homeowners insurance, and business insurance disputes. He also frequently writes about insurance and has been published in the LA Times, among other news outlets. Prior to joining the Bourhis Law Group, he served the California Supreme Court and the Honorable Martin J. Jenkins. He earned his JD from King Hall, University of California, Davis School of Law. He can be reached at firstname.lastname@example.org.