By J. Haden Werhan, CPA/PFS, Capital Performance Advisors
In recent Wealth Extractions, I offered tips to assist you with wealth accumulation as you save some of your early income, invest your savings, and ultimately manage your accumulating investment portfolio. Now I will focus on some guidelines for protecting your wealth throughout the stages of your career.
Early risk management
Even when you’re young and your net worth lacks all the commas you hope for, there is a lot of important wealth planning you can achieve in advance of more formal advanced planning. Wealth protection (also known in industry-speak as “risk management,”) is definitely one of those things.
When you graduate from dental school, you may notice an almost predatory level of attention from risk management (a.k.a., insurance) specialists, wanting to sell you products from a dizzying selection of programs and options. What’s often missing from the menu are solid reference points to help you meaningfully assess what represents too much, too little, or just the right amount of coverage.
No wonder. Risk management is largely a commission-based industry, in which brokers are paid by policy providers, not by you, to sell their products. There is a time and place for appropriate application of wealth protection throughout your life. We all know there is strength in numbers. The ADA offers reduced fee memberships for new dentists to give them access to numerous benefits. This link to the ADA Guide for New Dentists contains tremendous resources, including insurance.
Now I’ll describe the insurance landscape for the young dental professional.
Health – I’m surprised and concerned by how often I encounter young dentists who don’t have basic health care coverage. After you reach age 26 and are no longer in school, you cannot be covered under your parents’ medical plans. Of course I don’t need to tell you what health care costs are these days for even relatively minor treatments. Enough said.
Malpractice – Malpractice insurance is another essential. If you are associating or partnering with another dentist, I recommend you obtain your malpractice insurance from the same carrier to minimize squabbling among competing policy providers if a claim is brought against multiple parties in your practice.
Personal liability – Depending on your financial situation, you may or may not need a personal liability umbrella policy to protect your personal assets against calamity or legal action. If you are just beginning to gather assets such as autos and a home, the basic liability protection that comes with these may suffice. If you have a bigger collection of possessions, you may want to add an umbrella policy to step up your level of liability coverage at a cost effective rate. Again, it is preferable to work with one company to reduce the chance of ending up with dueling policy providers in the event of a claim against you.
Disability – As a new dentist, you are typically entitled to a basic disability policy with a $3,000 per month benefit, and you don’t need to meet the normal income qualifications, as described in more detail below. This is coverage worth considering. It should offer significant peace of mind for a relatively low cost and help you and your young family cover basic living expenses should you become disabled.
It is critical to note that not all policies contain "own occupation" protection, and I highly recommend that yours do contain this protection. Should you not be able to practice dentistry if you become disabled, you don't want the insurance company to tell you that you must resort to a job as a night watchman to pay your bills before they’ll pay you as much disability coverage as promised.
Mid-career risk management
After you acquire your own practice and have begun to grow, so too will the number of visits from your friendly neighborhood insurance brokers. Again, this is not entirely unwarranted, as you may be exposed to new, different, and elevated risks that call for revised coverage. Here’s an overview to help you put all those new “opportunities” into perspective.
Life (and disability) – Even if you have decided you will never die or become disabled, the bank that gave you a loan to purchase or start your practice is less confident about your future. The bank will likely dictate minimum levels of insurance for protecting its loan if you die or are disabled to the point that you can no longer practice dentistry. Because disability coverage typically has a 60 to 90 day waiting period before benefits kick in, you may want to also obtain short-term disability insurance to cover this gap. This will enable you to maintain your cash flow right from the point you become disabled and save you burning through your accounts receivable, which you will need for the rest of your bills. One should note that because disability insurance premiums are not deductible (except in very limited circumstances) disability benefits are not taxable. Thus, you do not need to have disability insurance equal to your pre-tax income, only your income after taxes. So if your income is $10,000 per month, you may only be able to qualify for (or need) disability benefits equal to $6,000 or $7,000 per month.
Business overhead – Because disability insurance is usually based on income (except as described above for young dentists), it can be difficult to obtain. The insurance company will want to see your tax returns and assess your need for coverage before giving it to you. If you’re in private practice you may opt to add business overhead insurance. Business overhead is disability insurance that pays many, but not all, of your practice bills, while personal disability pays personal bills and/or loan payments. So if you become disabled, you’ll have protection for your practice bills, such as rent, utilities, staff salaries, and an associate to cover the practice until you recover.
Personal/professional liability and incorporation – As you gain more wealth, you naturally have more to lose, both personally and professionally. It behooves you to step up malpractice liability coverage and reexamine your personal liability umbrella policy. Also important — separate your business and personal liability as much as possible. The first step toward creating separation between your business and personal affairs is to create a professional corporation for your practice. But proceed with caution:
• A professional corporation (an LLC in some states) will help protect your personal assets against some practice liabilities, but not against malpractice. In other words, if you’ve done someone wrong as either a dentist or a human being, being incorporated won’t protect you from having to take personal responsibility for it.
• Also, take care to maintain the ongoing integrity of your corporation as a separate and distinct entity. For example, keep corporate minutes and strictly avoid any personal spending by the corporation. (For example, don’t pay your student loans or personal estimated tax payments with corporate checks.) If you’ve not meticulously maintained your corporate “Chinese wall,” a decent attorney can cut right through the corporation and attach your personal assets if a business-related liability arises.
Business protection – Once you own your practice, you’ll also need business protection insurance, with your bank named as the loss payee. If your hard earned infrastructure is robbed, vandalized, or destroyed, you don’t want to have to double your debt load to regain your footing.
If you retain one thing from this article, realize how hugely important it is NOT to purchase business protection based solely on price, but also on the provider’s service record.
As unfortunate timing would have it, I’m sorry to say that I know three dentists who suffered significant damages to their offices last year. Two have been paid and moved on. One is still arguing with the insurance company about the amount of reimbursement. Guess which one bought business protection insurance on the cheap? From what I’ve seen, nowhere else does the adage “you get what you pay for” seem more applicable.
Employment protection – Your business protection policy includes some nominal coverage, but it is usually very limited. As your practice matures, it’s a good idea to explore adding other insurance to cover what I believe are significant protection gaps. One of the most important these days is employment practices liability insurance (EPLI). If an employee embezzles from you, or you’re sued, fairly or not, for wrongful firing, harassment, improper overtime policies, and similar complaints, EPLI coverage will fill this important gap. (For the record, I see a fair amount of activity regarding overtime policies, a particular concern for dentists who typically pay their hygienists by the day.)
Retirement plan protection – Another milestone in a thriving practice is the day you initiate a retirement plan for yourself and your valued employees. Be aware that as a retirement plan sponsor, you become a trustee and fiduciary on behalf of the participants in the plan (the subject of another article soon). You can work with a pension plan administrator to ensure you are in complete compliance with all applicable laws and regulations, such as establishing a surety bond equal to 10% of the assets in your plan.
Mature risk management
This is beyond the scope of this article, but as you grow older and more affluent and navigate past your career-time risks, and you plan for or enter retirement, your risk management strategies can shift. You can consider higher-end applications of insurance that not only protect you against loss or liability, but also serve as estate planning tools to help you cost effectively and tax efficiently transition your wealth to your heirs or charitable intents. Keep checking Wealth Extractions for insights on that front.
Editor's Note: To read more from the "Wealth Extractions" series, please click here.
J. Haden Werhan, CPA/PFS, is a partner at Capital Performance Advisors and Thomas, Wirig, Doll & Co., CPAs. He regularly lectures and provides seminars to the dental community that he has been serving his entire career. By supporting dentists in their tax and accounting strategies, practice transitions and, ultimately, their lifelong wealth planning, Mr. Werhan and his partners assist dentists in achieving financial freedom. More information about his firms’ services can be found at www.cpas4docs.com. Mr.Werhan can be reached at email@example.com.
Wealth Extractions: Basic and advanced risk management
By J. Haden Werhan, CPA/PFS, Capital Performance Advisors