Key Man vs. Buy/Sell Insurance Print
Written by Wes Caldwell | Danna-Gracey   
Thursday, 06 September 2018 09:21

Absent proper planning, the premature death or permanent disability of a partner or key employee can create devastating financial pressures on a practice. I am often asked for key-man insurance or buy/sell insurance, when neither actually exists. The insurance is simply a funding mechanism. Key man differs from buy/sell in the type of financial obligation the practice faces. The funding can come from one of several sources, such as cash flow, a sinking fund, or an investment account. However, due to the significant leverage provided, various types of life and disability insurance are usually employed.

What is Key Man?
Key man coverage (also known as key person or key employee insurance) indemnifies the practice for the premature death or disability of a key employee or partner. The insurance provides cash flow for the practice to replace the resulting loss of revenue. It also provides the time and resources to find a replacement. If the loss of an individual, for any period of time, would significantly impact your practice revenue, then a key-man arrangement should be considered.

What is Buy/Sell?
Buy/Sell coverage funds the execution of a purchase agreement in the event of the death or permanent disability of a partner. The purpose of the agreement is to facilitate a smooth ownership transition and exclude any outside interests from future business decisions. The agreement may stand alone or be included as part of the partnership agreement. The insurance creates the cash flow to satisfy the provisions of the agreement. Keep in mind that the agreement is the driver, so without it, the insurance makes no sense. Many agreements I see are funded with life insurance but rarely with disability insurance, even though most agreements contain a disability provision. An unfunded agreement, while better than none, could create a significant cash strain to the practice.

It is prudent to consider the financial impact that the loss of a partner or key employee would have on the bottom line. Proper planning and funding will ensure the smooth continuation of the practice during an otherwise-challenging time.
Wes has spent the last twenty-seven years in the financial services industry. He has specialized in the areas of tax advantaged asset protection strategies along with disability and advanced wealth transfer concepts. He is an expert in coordinating benefits for physicians and their staff.

Contact Wes: 

Last Updated on Thursday, 06 September 2018 09:27