This is not an insurance sales pitch. In fact, we at OptometryCEO do not endorse any one particular insurance carrier. What we do endorse is successful owners of optometry practices making smart decisions and doing what is best for their families and patients. Making sure your family receives payment on the equity in the practice in the event of your untimely death is smart. It is also smart to make sure you will have the funds to buy out your partner immediately upon his or her death. Key person insurance is not optional if you own any portion of your optometry practice.
With key person insurance your family and patients are provided for immediately should you or your partner die. When purchasing key person insurance, keep these three thoughts in mind:
- Practice Value – This should be established yearly and be a part of your operating agreement. We recommend a general formula that is used to assess the value each year, so if a partner dies there is an agreed-upon value prior to death. We would recommend using the last three years’ average gross collected multiplied by 70 percent. This makes sure that the deceased’s family gets full benefits of the owner.
- Single ownership options – For sole proprietors, find another single-owner optometrist within your area and take out key person insurance on each other. Typically finding someone to partner with that has a practice of similar value would be advised.
- Corporate by-laws – If you as an owner do not already have a section in the by-laws about key person insurance we would advise adding it. This will ensure that all parties agree up front about the importance of covering each other. Discuss this further with your attorney as you may need an addendum to your corporate by-laws.
No one wants to buy more insurance than necessary, and–depending on your tolerance for risk–many insurances are optional. However, we feel key person insurance is non-negotiable. In fact, having each partner take key person insurance out on the other it is so important that it needs to be required in all corporate by-laws. For more information contact your office’s insurance provider and ask about key person insurance.
Can you please further explain the need for “single ownership options”. You mention what to do but not why.
In the “single ownership” option there is risk that an owner passes away and then the practice is sold for pennies on the dollar. Too many times we see the surviving spouse not receive a fair and equitable amount for the optometry practice, or worse, the practice closes with no buyer. By taking key person insurance on another practice and them returning the favor, a dollar value is set on an annual basis or an agreement is established setting a formula for practice valuation. If the practice is worst 250k and the insurance is 300k then for tax purposes the practice is immediately purchased for the 250k and the estate can have the rest. This insures both owners from losing significant value in their practice AND it gives the surviving owner the immediate funds to buy the practice. Patients are also best taken care of when there is someone who can run the practice upon death of the doctor/owner. Hopefully this helps establish why key person insurance is important for the single owner.