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Insuring Your Medical Practice With a Buy-Sell Agreement

Insuring Your Medical Practice With a Buy-Sell Agreement

September 20, 2021

Life insurance is designed to help protect a household from the financial hardships that may follow the untimely death of a primary wage earner. But how will a death affect a small business or medical practice?

One way of safeguarding a medical practice is to create a buy-sell agreement. A buy-sell agreement is a contract between different entities within a business to buy out the interests of a deceased or disabled member. A buy-sell agreement also can protect the practice from loss of revenue and cover the expense of finding and training a replacement.

Types of Buy-Sell Agreements

There are multiple types of buy-sell agreements, but there are two main types commonly used by medical practices:

Cross-Purchase Agreement. In a cross-purchase agreement, owners or partners have the opportunity to buy the ownership interest of a deceased or disabled owner. This is often done with life insurance policies, where each owner takes out a term life insurance policy on the other owners and lists themself as the beneficiary. If an owner dies or becomes disabled, the funds from the life insurance policy can be used to buy the other’s interest. This type of agreement gets complex the more owners or partners there are, so this agreement is generally used in smaller medical practices.

Entity-Redemption Agreement. Entity-redemption agreements are formal agreements between all the owners or partners– and the practice itself – under which the practice agrees to purchase the business ownership of deceased owners. Oftentimes in this type of agreement, the medical practice takes out a life insurance policy on each partner or owner in an equal amount to their stake in the business. In the event of an owner’s disability or death, the practice uses the sum from the insurance payout to purchase their stake in the business. 

Funding a Buy-Sell Agreement

Life Insurance. Purchasing a life insurance policy in order to fund a buy-sell agreement is an option when preparing for the future of your medical practice. Using life insurance enables a buy-sell agreement to be funded with premium payments and attempts to ensure that funds will be available when they are needed.

Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. 

Protecting Your Practice 

Life insurance for your medical practice often covers more than just death of an owner. It can additionally protect you from disability, a partner’s departure from the practice, or a number of other scenarios. 

Buy-sell agreements also aren’t the only type of life insurance policies that can safeguard your medical practice. Policies like key-person agreements compensate your practice for financial loss due to an employee's disability or death. Speaking with a licensed agent can help you determine the best type of policies to safeguard your medical practice and prepare for the future. 

Ready to learn more? Take some time this Life Insurance Awareness Month to learn about the types of life insurance available. Get an instant quote on our site or send us a message for a review of your existing policies and insurance needs.