Estimate the Coverage Your Business Needs Before You Decide

A key person insurance calculator really asks three questions. What would the practice lose? What would replacing the clinician cost? How much does the practice need to keep running? Three common methods answer those questions with dollar figures you can compare.

This page walks through those methods for a medical or dental practice in Florida. NR CPAs & Business Advisors is a Miami CPA firm that helps families, professionals and business owners choose and buy life insurance.

What Key Person Insurance Is for a Medical or Dental Practice

Key person insurance is a life insurance policy the practice owns and pays for. The practice receives the death benefit. The insured is a clinician whose loss would hurt the business. The Insurance Information Institute describes this coverage as compensation to a business for financial losses caused by a key employee’s death or disability.

It often fits these practices:

• Solo owner-dentists whose patient base depends on them.
• Dental groups with several partners.
• Physician practices with associates or senior clinicians.
• Practices with a bank loan or a buy-in obligation.

A personal policy protects your family. Key person coverage protects the practice. Term life covers for a set period. Whole life covers for life and includes a cash-value feature, according to FINRA’s insurance overview.

Three Methods to Estimate How Much Coverage the Practice Needs

The three common methods are the salary multiplier, the replacement cost method and the revenue contribution method. Each gives a starting figure. None gives a fixed answer.

• Salary multiplier. Take the clinician’s annual pay and multiply it by a number of years. The multiplier reflects how long recruiting and building a replacement could take. The number of years is a judgment call, not a rule.
• Replacement cost. Add the one-time costs of filling the role. These include recruiting fees, sign-on pay, training and temporary coverage while a hire is made.
• Revenue contribution. Find the collections the clinician personally generates each year. Then estimate how much of that revenue the practice would lose during the transition.

Build each method from the practice’s own payroll and collection records. Rough guesses lead to rough answers.

Worked Example: Comparing the Three Methods

The three methods can produce very different totals for the same clinician. The example below is hypothetical. It uses invented round numbers for a two-dentist general practice. It is not a benchmark or a prediction.

The salary method gives the largest figure because it counts years of income. The replacement method counts one-time costs only. The revenue method counts lost collections during the transition. A practice might set its target near one method. It might also weigh all three against its loan terms and buy-sell agreement.

Your practice’s figures will differ. A coverage review is where those numbers get worked through with the responsible agent.

What the Coverage Is Meant to Pay For, and What It Does Not Cover

Key person coverage pays the practice a death benefit. The practice decides how to use that money, within its own obligations. Common uses include:

• Lost revenue while a replacement is recruited and patient flow settles.
• Recruiting, onboarding and training a replacement clinician.
• Loan payments, since some lenders ask for key person coverage as a condition of credit.
• Buy-sell funding. Coverage tied to a buy-sell agreement can help fund a buyout if an owner dies, depending on how the agreement is written.

The limits matter. The policy pays a death benefit under its terms. It does not guarantee patient retention or the value of the practice. A fully underwritten policy asks health questions, and issue may depend on insurability.

Florida law requires life policies to include an incontestability provision. After the policy has been in force during the insured’s lifetime for two years from issue, it becomes incontestable, except for nonpayment of premiums and, at the insurer’s option, certain provisions on disability benefits and additional insurance against accidental death, under Fla. Stat. § 627.455.

Cost Factors and Tax Treatment, Viewed by a CPA

Premiums depend on the insured’s age, health history, tobacco use, the coverage amount, the policy design and the insurer’s rates. The policy sets out its renewal terms and any age-based change.

Tax treatment starts with who owns, pays for and receives the policy. Three points to know:

• Death benefits are generally not taxable as income. Interest paid on death proceeds that the insurer holds under an agreement to pay interest is taxable, per the IRS guidance on life insurance proceeds.
• For employer-owned contracts, the general rule under IRC § 101, subsection (j)(1), caps the amount excluded from income at the premiums and other amounts the policyholder paid; subsection (j)(2) sets exceptions to that cap.
• Section 264 lists amounts that cannot be deducted in connection with life insurance contracts, under IRC § 264.

The firm’s tax and cash flow view sits beside the coverage. Insurance is offered by the licensed agent, separately from the accounting practice. Under Fla. Stat. § 473.3205, a CPA firm may not accept or pay a commission or referral fee in connection with the sale or referral of public accounting services. A CPA firm engaged in the practice of public accounting that accepts a commission for the sale of a product or service to a client must disclose that fact to the client in writing, following the rules the Florida Board of Accountancy has adopted.

How the Process Works, Step by Step

The process runs from a coverage review, to an application, to periodic review.

1. Coverage review. Gather payroll, collection reports, loan balances, buy-sell terms and a description of the clinician’s role.
2. Run the three methods. Agree on a target amount and a policy design that fits the practice’s cash flow.
3. Written consent. Florida law allows a business to insure an owner, partner or key person only if that person consents in writing before the policy is bought. The business may not retaliate against someone who declines, under Fla. Stat. § 627.404. For employer-owned life insurance contracts issued after the 2006 enactment of IRC § 6039I, the applicable policyholder must file a yearly return, in the form the Treasury Secretary prescribes, showing whether it has valid consent for each insured employee, and must keep records needed to show compliance, under IRC § 6039I.
4. Application and underwriting. Health questions are asked. The insurer decides issue based on insurability.
5. Periodic review. Revisit the amount when revenue, staffing or debt changes. Timelines vary by insurer and are not promised.

Why NR CPAs, and Common Questions

NR CPAs & Business Advisors pairs a CPA’s view of tax and cash flow with a licensed insurance agent’s coverage review. The firm is a Miami CPA firm. It helps families, professionals and business owners across the United States, including Indian-American households and business owners, choose and buy life insurance.

Nischay Rawal is the responsible licensed insurance agent on this page. Under Florida law, agents must say they are acting as insurance agents and identify the insurers, per Fla. Stat. § 626.9531.

Can a dental group insure every partner?

To talk through your practice’s numbers, reach out through the contact page and ask for a coverage review.