Practice transition in the face of tragedy-are you prepared? (Proceedings)

There are some things you can control in life but many that you cannot. The real issue is not what you can or cannot control but how you react to disasters and how well your practice can carry out a contingency plan.

No one expects death or disability but they can happen to anyone at any time. Every veterinary owner needs to consider the consequences of a disruption of service and the impact to employees and clients of the practice. If the veterinary owner is a sole proprietor, that person provides the management, leadership and day to day veterinary services for their clients. If they are not there, who will service and guide the practice? In a larger single owner practice, an owner with multiple veterinarians may have the client service covered with existing doctors or the use of relief doctors, but what if that owner provided all of the leadership to the practice? If there are multiple owners, is there a partner who can step up and take leadership responsibilities?

Like having a will, a good contingency plan for your practice includes how your family will deal with issues that will create a smooth transition. Addressing issues and building a plan will provide your family peace of mind. Identify issues that would need to be addressed under a contingency plan and commit them to writing. Make an impact assessment of these issues and the best way to deal with them. Mitigate any last minute issues by putting plans into effect today that takes care of these issues and develop a recovery strategy that addresses the issues in the long run. Your plan should identify teams and individuals that are responsible in an emergency situation. The people involved must understand their roles and the expectations that these roles place upon them and they must be fully prepared to implement their responsibilities at short notice when required.

Developing the plan

A common failing point when developing a contingency plan is to look for a one size fits all solution. Starting with a clear examination of the specific requirements of your hospital helps make sure that the plan you develop is the one you actually need.

Let's talk about practice continuation agreements. While these agreements are typically put in place for single doctor sole proprietorships, they also can be appropriate in a multi-doctor practice where leadership transition cannot be accomplished. This is a contract that provides for the assumption of practice by another veterinarian (under a predetermined plan for payment based upon value) in the event of the death or disability of an owner. So in a crisis, a hospital is taken over by another under a predetermined plan that is designed to quickly ensure the same service is provided to the client base. If you are sole proprietor this is a must. Transition to consolidators and corporations is usually not possible due to size. If the hospital goes unmanned for any length of time, the client base will quickly begin to disintegrate and once clients leave, it is difficult to get them back. Consequently, the hospital value will decrease. While we believe these agreements to be extremely important, they are not common leaving significant gaps and burdens to families and the hospital employees. These agreements should be done with hospitals that have a management structure in place and capacity to handle the additional client burdens. It may also be wise to cross train employees to assume responsibilities of any key person.

Owners and partners should also draft all letters, etc, to clients, referral sources, and staff that could be used in a tragic situation. These should be placed in a plan file.

For owners who have a single owner but multiple doctors, determine if there are potential takeover individuals in the group. Sometimes a hospital has a significant producer associate who has indicated they do not want to own but who do want to protect themselves in the event of a tragic event. Or, maybe part of the plan should be to consider offering an associate a minority interest in the practice to solidify their stay with the practice and provide the mechanism to deal with a tragic event. This can be accomplished with maybe the sale of a 10% interest in the practice.

If you are in a multi owner practice one cannot understate the value of a buy sell agreement. Having one is absolutely necessary. If you already have one, when was the last time it was reviewed? The major provisions you want to make sure are covered are when does a buy- out occur? Has a permanent disability been defined in the agreement? What are the mechanics of determining practice value? When is the practice value determined? Always best to use a certificate of value with the buy sell agreement and keep it updated so the hospital value is always known. A practice value determination left to the time of an event makes it that much more difficult to complete the transition, especially when emotions are running high because of an event. Make sure your buy sell agreement addresses ownership of the real estate as well as practice ownership. Too many agreements are drawn arranging for the buy-out of the practice and nothing is addressed to deal with the real estate. What then happens to that ownership interest? Does the agreement call for life and disability insurance? A full discussion of these items is below.

Disability, life insurance and retirement planning

Have you addressed these requirements as part of your overall plan?

Disability insurance

Disability income insurance is designed to transfer the financial risk of lost wages due to an accident or illness to an insurance company. The actual benefits may be received for as short a period as 6 months in some short-term group policies, to age 65 in both group long-term and many individual policies. The length of the benefit period is one of the main factors in determining the premium to be charged by the insurance company.

Disability defined

Arguably, the most important issue when purchasing disability insurance is the definition of disability found within the policy. Disability insurance pays a monthly benefit to the insured if he/she satisfies this definition of disability. Unlike a life insurance policy death claim, a disability income claim can be a far more difficult issue. Different policies from the same insurance company can define disability differently, and a veterinarian must be sure they are comfortable with the definition found in their policy.

The more liberal the definition of disability, the easier it will be to meet that definition, and the more likely the insurance company will pay benefits. Consequently, these are also the most expensive policies. Many agents and financial planners recommend paying the extra premium so that you have a higher chance of receiving benefits. The last thing an insured wants to do after becoming seriously injured is having to fight an insurance carrier over benefits.

There are two common definitions of disability:

          1. The ability to perform the substantial and material duties of your occupation, and

          2. The ability to perform any gainful occupation for which you are reasonably trained.

Partial disability

Some policies also allow fractional benefits for a partial, or residual, disability. Partial benefits can be available under two circumstances:

          1. During a disability where the insured cannot perform some of the duties of his/her occupation, or

          2. When the insured can still perform all the duties of his/her occupation, but for a limited period of time during recuperation.

Elimination period

Another aspect used in the development of a disability income insurance premium is the waiting period, (i.e., that period of time that elapses prior to the payment of any benefits during which the insured must generally be continuously disabled.) This is also referred to as the elimination period and in individual contracts is usually specified as 30, 60, 90, 180, or 365 days.

The shorter the elimination period, the higher the potential premium. In short-term group policies, the standard elimination period is the first day for accidents and the seventh day for sickness. Long-term group policies traditionally begin after six months. Persons with ample savings should consider a longer elimination period in order to save premium dollars, but those with less savings should obviously choose a shorter elimination period.

Monthly Benefit Amount

Another aspect to be taken into consideration for developing the premium to be charged is the monthly benefit amount. The amount of coverage which can be initially purchased is dependent on the current level of pre-disability earnings. Insurance companies have usually been willing to insure 50 percent of current income (for the highest wage earners), to up to 70 percent of current income (for moderate to lower-income workers).

Inflation protection

When purchasing a disability income policy, it is strongly recommended that it include an inflation rider. In the event of disability, this rider will increase the benefit each year in an attempt to keep pace with inflation. Without this rider, if a young insured becomes totally disabled, their monthly benefit will certainly lose its purchasing power over the years. If the insured is young enough, a level benefit may become almost meaningless 20 to 30 years in the future. An inflation rider will cost extra, but is money well spent.

Renewability

The last major issue to be considered when purchasing a disability policy is the renewal feature of the policy. The typical renewal features are:

     • Conditionally Renewable

     • Guaranteed Renewable

     • Non-cancelable

Conditionally renewable policies allow the insurance company a limited ability to refuse to renew the policy at the end of a premium payment period. The insurance company may also increase the premium. Most policies sold to veterinarians will not contain this limitation.

Guaranteed renewable means the insurance company cannot cancel the policy, except for non-payment of premium, but it can change the premium rates for an entire class of policies. As long as the owner pays the premium in a timely manner, the policy will remain in force. Simply, you are guaranteed the right to renew the policy, but it may be at a higher premium rate.

Non-cancelable means the insurer cannot cancel the policy nor can it change the rates. This added level of security means non-cancelable policies are more expensive than guaranteed renewable policies.

Although redundant, many disability income policies specify that they are both "Non-cancelable and Guaranteed Renewable."

Disability insurance is most important to have. Almost everyone understands the importance of adequate life insurance, especially when they have children and a mortgage. But many overlook disability insurance.

Many fail to recognize that the chance of becoming disabled at least once during their lifetime and not being able to work for months, or even years, is greater than the chance of dying. For those working for someone else, ask this question: "Will my employer pay me if I am in a car accident and can't work for 6 months?" What if the disability is so severe that you can never work again and you're only 35 years old? Will your employer still pay you for the next 30 years?

Statistics

     • At age 30, long-term disability is 4.1 times more likely than death.

     • At age 40, long-term disability is 2.9 times more likely than death.

     • At age 50, long-term disability is 2.2 times more likely than death.

Life insurance

Life insurance transfers the financial loss resulting from death. A myriad of different families of life insurance policies exists, but they basically have two main types: term insurance and permanent insurance.

Term insurance

Term insurance is the simplest form of life insurance. Term insurance is exactly what the name implies: it provides life insurance coverage for a specified period of time, i.e., the term. At the end of the term, the policy is either canceled or continues, typically by paying higher premiums.

Renewable term

These policies have premiums which typically begin very low, but increase steadily each year. At the end of each year, the policy owner has the option to renew coverage at the higher premium, or cancel the coverage. By the time an insured reaches age 60, and the probability of dying becomes more pronounced, the premiums start to rise drastically. The increased premium is simply a reflection of the increased chance of dying combined with the obvious fact that there are fewer lives at that age to spread the risk over.

Renewable term insurance has lost much of its popularity recently since level-premium term products have captured more market share.

Level premium term insurance

Level premium term policies offer a cost that remains level for a specified period of time, usually 5, 10, 15, 20, 25, or 30 years. The most popular products have premiums that are guaranteed to remain level for the prescribed period.

At the end of the selected level-premium period, the term policy is typically canceled, although the owner may keep the policy in force by paying higher premiums. The premiums, however, may increase drastically.

The affordability (during the selected term period) and simplicity of these products have made them very popular.

Permanent insurance

Permanent insurance differs from term insurance in two major ways. First, it is usually designed to last to age 95 or 100 (commonly referred to as the maturity date) without any future requirement to re-qualify for the coverage by providing proof of good health. Second, permanent policies have some form of cash value accumulation.

One permanent insurance policy can cover a single life, two lives, or an entire family. Policies covering two lives can provide a death benefit either on the first death or the last death.

Generally permanent insurance has a predefined level-premium payable until a stated maturity.

How much insurance should I have?

Determining the appropriate amount of life insurance that you should carry is often a trade-off between the calculated need and the amount of premium you can afford. Recommendations must consider your goals and priorities, the calculated needs for life insurance, the types of policies available, and your current financial situation.

Some rules of thumb for determining life insurance needs are the following:

          a. four to six times annual earning, or

          b. Insurance, when combing with your current asset base, sufficient to replace 50% -75% of income.

While rules of thumb are nice check points, they are no substitute for a thoughtfully completed life insurance needs analysis. Nevertheless, when a quick answer is required, a method that will yield a useful result follows:

          a. What was your after-tax income from compensation and investments last year?

          b. How much money did you save last year?

          c. Your after-tax cost of living last year is item 1 minus item 2.

Retirement planning

This is the time to begin planning in earnest. Do an in-depth retirement cash flow plan now, so you can make informed choices about your finances. For a "snapshot" view of your retirement progress, consider doing a simple exercise. You might multiply all non-business expenses per year times twenty, which gives you an idea of the total investment assets you should have accumulated. Having money in retirement plans can be a tremendous help to your family in the face of a tragedy when this money sources becomes extremely important.

Look at your saving and investments more critically, since the development of an investment strategy becomes more important as you accumulate wealth. In particular, you need to have effective planning strategies for maximizing the after-tax returns on the investments outside of a retirement plan.