If you are a medical professional who owns all or part of a health care practice, you are also a business owner.
That means if you become unable to practice your speciality, either temporarily or permanently, due to disability, you won't just lose your income. You could also lose your entire business.
If you’re not treating patients due to disability, the business is losing revenue. According to the Medical Group Management Association (MGMA), primary care physicians pay nearly 60 percent of their revenue just in overhead expenses. Without that revenue, your business can’t pay for its office space, its employees, and other expenses.
That’s why if you’re partial or full owner of a medical practice, you need both a disability insurance policy and a business overhead expense (BOE) policy or rider.
The reason for a business having a business overhead expense disability plan is to cover its monthly business expenses if an injury or illness impacts your ability to work.
BOE policies vary but you can typically get one that pays a maximum monthly benefit between $15,000 and $25,000. If you obtain BOE that is bundled with your personal disability policy, the maximum benefit may be a factor of that benefit amount; for example, the BOE benefit maximum might be equal to 12 times the benefit on your personal policy.
Insurers writing business overhead coverage can’t keep a doctor's business afloat for too long. Business overhead insurance therefore has a limited benefit period. Typically the maximum is two years. At that point, if disability keeps you from getting back to running your practice, you will likely have to sell or liquidate your practice.
BOE benefits can help you cover:
- Rent or mortgage payments on your business facilities
- Employee salaries and wages
- Business loan repayments
- Business insurance premiums
- Equipment maintenance
- Building maintenance and janitorial services
- Office supplies
- Malpractice insurance premiums paid by the business
Policies typically stipulate that benefits will only cover business overhead. So if you have a maximum benefit of $20,000 but your overhead only amounts to $15,000, the policy will pay the latter.
If you’re part of a partnership or multi-owner corporation, the BOE policy will likely cover just your share of expenses. This is usually based on how much of the company you own at the time of disability.
A question that many medical professionals may have is whether they need this type of coverage if they are the only physician in the practice. The thinking goes that if the physician/owner can’t work at all because of an injury or illness, there may be little reason to keep the medical business operating.
In fact, there have been cases in which insurers balk at paying overhead claims when an sole owner becomes permanently disabled. Their rationale is that without the doctor being able to see patients, the practice itself is no longer a functioning business. Without a functioning business, there is no overhead to pay.
Yet even if you are the sole practicing physician and owner, it’s a good idea to invest in BOE coverage. The simple reason is that only a small fraction of disabling incidents are permanent. In most cases, you can recover from an injury or illness and return to your practice. But if you don’t have money to cover your overhead, you will fall behind on those expenses and may lose your office space and/or your employees before you can recover.
In addition, a business overhead policy can often be established to pay for a replacement doctor or nurse practitioner to keep the practice operating until the physician owner can return from disability
If you have a business or medical practice loan, your lender may require BOE insurance coverage. Lenders do not forgive business loans just because an owner is unable to work. But they also need to protect their capital investment and ensure they receive loan repayments if you can’t work.
An important thing to keep in mind is that your personal disability insurance policy will not pay enough in benefits to cover business loan payments AND meet your daily needs.
Just as with personal disability coverage, it’s better to buy BOE when you’re younger. The same underwriting principles apply to BOE as with disability coverage; your age and health will greatly determine how much you pay in premium.
Unlike your regular physicians disability insurance policy, premiums for BOE coverage are tax deductible. That’s because the IRS considers it a business expense.
A must-read for anyone going into private practice:
The Ultimate Guide to Medical Practice Loans in 2021
Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.