With so many types of insurance available and so many agents eager to make a sale, it’s easy to feel bombarded with options. In general, it’s best to keep the following rule of thumb in mind:
Buy insurance to cover a risk you cannot afford to cover yourself.
That’s it. Insurance as a long-term “investment” or tax shelter device is rarely worth what you’ll pay in premiums, although insurance salespeople will try to convince you otherwise.
Here are a few dos and don’ts to consider when deciding what kind of insurance to buy.
We buy life insurance to cover the risk of dying prematurely and leaving behind a family with insufficient assets and income. Beware of policies that try to make life insurance less straightforward than that, including variable annuities, which tack on high fees, penalties, and tax disadvantages. Universal life policies should also be avoided, for when rates fall, premiums go up. Owners then find themselves with a scaled back, or even canceled, policy. Buying life insurance or second to die life insurance for the purpose of funding estate taxes is also not recommended.
Captive insurance is the practice of a parent company creating a subsidiary as a way to insure itself. A captive can provide tax savings for the parent, but be aware that the concept has been abused by shady promoters, and the IRS knows this. Also, keep in mind that because of the start-up and maintenance costs, captives are most appropriate for high-earning doctors. In September 2017, the Avrahami court decision ruled how it will likely end the sale of micro-captive insurance tax shelters to doctors and other small business owners. The micro-captive tax shelter is a good example of the old adage, "No tax deduction is worth it, if the costs of obtaining it are too great."
Because of instability in the health market, many employers are considering dropping their group health insurance program. If you decide to drop this major benefit, you will need to figure out how to make it up to your staff in some other way. Determine how much you paid for your employees' health benefits (employer-paid premiums, HSA contributions, and so forth) in the last year you offered group health insurance, then use that figure as your baseline for your future health benefits.
Even after retirement, it’s not “game over” when it comes to insurance. After selling your business, you will still live with risks that necessitate liability insurance, especially if you’re a high-profile member of your community who may be a target for prosecutors. Retired doctors also still need malpractice insurance to protect against claims for work done prior to retirement. Contact your carrier to see if your policy is “occurrence” or “claims made”; this will determine how your malpractice protection will work during retirement.
Understanding what kind of insurance you need (and do not need) is essential to your financial security. As trusted advisors for the dental profession, Collier & Associates prides itself on delivering expert advice on these topics and more in our twice monthly newsletter. Learn more about the newsletter and receive a sample of the Collier & Associates Newsletter with our 2018 C&A Tax Guide for Dentists.« Back to Blog