If you own a private medical practice, two different paychecks are at risk if a physician cannot work. One is that physician’s household income. The other is the money that keeps the practice running: rent or the office mortgage, staff pay, utilities, malpractice coverage, and the other bills that continue even when that physician’s schedule is empty.
Those are different problems, and they are usually handled by different policies.
Individual disability insurance replaces a portion of the physician’s own income (see our companion post on disability insurance for physicians). It does not automatically pay the practice’s bills. For that, practices look at coverage the business can buy, such as business overhead expense insurance and, when there are partners, disability buy-out insurance (AMA).
This post explains what those policies do, what they do not do, and how they differ from a physician’s own coverage. It is general information. Policy language varies, and the contract controls.
What is at risk if one physician is out
In many private practices, a large share of revenue is tied to the work of one or a few physicians. If that person becomes too sick or hurt to practice, two things can happen at once:
- The practice’s income drops because that physician is no longer seeing patients or performing procedures.
- Many of the practice’s expenses keep arriving anyway.
The American Medical Association puts it this way: if you are responsible for some or all of the monthly expenses required to keep a physician practice open, it is worth protecting the practice and your partners. The AMA points to three kinds of coverage commonly used together: business overhead expense insurance, the physician’s own disability insurance, and, for group practices, disability buy-out insurance.
Business overhead expense: who pays the bills that keep the doors open
Business overhead expense insurance, sometimes called an office overhead expense policy, reimburses eligible expenses of running the practice if one of the practice owners is disabled and cannot work (AMA).
Those expenses may include:
- Staff salaries
- Rent or mortgage payments on the office
- Utility bills
- Professional liability insurance premiums
- Other fixed costs that are normal to running a professional practice (AMA)
A Life Happens account of an owner who had a disability overhead policy describes the same idea in everyday terms: the overhead policy helped the business meet payroll and pay vendors, while the owner’s personal disability policy replaced a portion of his salary for household expenses such as the mortgage and groceries.
Two points are easy to miss:
It reimburses expenses. It does not replace the physician’s paycheck. The physician still needs individual disability insurance for living expenses (AMA; Life Happens).
It generally does not replace the professional fees or profits that physician would have generated. If the question is “Who pays the rent and the staff while Dr. Lee is out?” overhead coverage is the usual answer. If the question is “Who replaces the collections Dr. Lee would have brought in?” overhead coverage, by itself, is not designed to do that.
Some overhead policies can help with a related solution: hiring a temporary physician to fill in (AMA). That replacement, often called a locum tenens physician, can keep seeing patients so the practice continues to generate income while the owner recovers. Whether a substitute’s pay is covered, and under what rules, depends on the policy.
Overhead benefits are paid for a limited time set by the policy. The AMA describes the practice’s expenses as covered until the disabled physician returns or until that partner’s share in the practice can be sold. Benefit periods and waiting periods vary by policy. Some policies also have a partial-disability feature if the owner can work in a reduced way. Exact options vary.
The AMA notes that the practice expenses these benefits pay, such as malpractice premiums, rent or the office mortgage, staff salaries and utilities, are generally tax-deductible. Exact lists and tax results depend on the policy and on your CPA’s advice.
Business loan protection (often a rider)
Some overhead policies offer an optional rider that can help keep up with certain business debt during a total disability, for example startup loans, equipment leases or financing used to expand the practice. That is separate from reimbursing day-to-day overhead. The loan feature, when available, is meant so those payments do not have to pause just because the owner cannot work.
Not every policy includes it, and the debts that qualify are defined in the contract. Ask whether a loan-protection feature is available on any overhead policy you are considering, and match it to the loans your practice actually carries.
How this differs from “business income” on a property policy
If you already have commercial insurance for the practice, you may have business income coverage, also called business interruption coverage. That is a different product.
Business interruption insurance generally replaces income lost when operations are disrupted because of a covered physical loss, such as a fire (NAIC). The Insurance Information Institute notes that a claim usually must be caused by direct physical damage to the business’s property.
A physician who cannot work because of an illness or injury typically does not trigger that property coverage. Disability overhead coverage is the design aimed at that situation. The two can complement each other. They do not substitute for each other.
The physician’s own policy, including residual or partial disability
The physician’s individual disability policy is still essential. The AMA notes that if you become disabled, you will still need to cover your living expenses, and that a specialty-specific definition of disability can matter if you can no longer work in your medical specialty but could work in another role.
Some personal policies also pay a residual or partial benefit if you return to work but earn less because of the disability (NAIC; AMA). That benefit is paid to the physician, not to the practice. It can help the household while the physician works a reduced schedule. It does not pay the office lease or the staff.
A policy the physician owns does not replace coverage through an employer or hospital. It adds to it, and it is the physician’s to keep. For how own-occupation definitions, waiting periods, and taxes work on that personal policy, see our companion post.
If there are partners: disability buy-out
Partners in a group practice may also want disability buy-out insurance. It is designed to help fund the purchase of a disabled partner’s ownership interest if that person can no longer fully participate because of a lengthy disability (AMA).
Attorneys often recommend a buy-sell agreement that says what happens if a partner dies, becomes disabled, or retires. The agreement should set a purchase price or a formula for setting one, and it should have a way to fund the purchase (AMA). Florida law recognizes a business’s insurable interest in the life, body and health of its owners and partners, and an individual policy on a person generally requires that person’s application or written consent (Florida Statutes s. 627.404).
A disability buy-out policy is meant to provide those funds. It is often paid as a lump sum so the buy-out can close in one payment, though some policies can pay in installments. The structure should match the buy-sell agreement (AMA). Buy-out coverage is designed for a lengthy disability (AMA), so ask how its waiting period lines up with the buy-sell agreement.
Overhead coverage, the physician’s own disability policy, and a disability buy-out policy are designed to work together: one helps keep the practice running, one helps the disabled physician’s household, and one helps the remaining owners buy out a partner who cannot return (AMA).
A word about covering a key physician’s own salary
Some practices want to continue a key physician’s salary during a disability. That is a salary-continuation or “sick pay” idea. It is different from overhead expense coverage, which reimburses practice bills, and different from a buy-out, which purchases an ownership interest.
Who owns the policy, who receives the benefit, and how the premium is paid all affect taxes. In general, if an employer pays the premiums and those premiums are not included in the person’s wages, disability benefits are taxable to the person who receives them. If the person is treated as paying the premiums with after-tax dollars, benefits generally are not taxed as income (IRS). Ask your CPA how this applies to your practice.
How benefits and premiums are often taxed
The AMA describes a common pattern for overhead expense coverage: premiums may be deductible as a reasonable and necessary business expense, and benefits received during a disability are taxable, but they are used to pay practice expenses, which may themselves be deductible, so the net tax result can be a wash.
For disability buy-out coverage, the AMA says premiums are generally not deductible, whether paid by a corporation, a partnership, or an individual, and the benefits therefore would not generally be subject to tax.
These are general descriptions, not tax advice. Entity type, who owns the policy, and who receives the money can change the result. Ask your CPA, and have your attorney review any buy-sell agreement, before you rely on a tax outcome.
What these policies do not do
To keep the pieces straight:
| If you need… | The usual coverage |
|---|---|
| Money for the physician’s household bills | Individual disability insurance the physician owns |
| Money for rent, staff, utilities, and similar practice bills while an owner is disabled | Business overhead expense insurance |
| Help paying a temporary physician so the practice can keep seeing patients | A feature on some overhead policies |
| Help keeping up with certain business loans or equipment leases while an owner is totally disabled | An optional loan-protection feature on some overhead policies |
| Money to buy out a partner who cannot return | Disability buy-out insurance, following a buy-sell agreement |
| Lost income after a fire or other covered property damage | Business income coverage on a commercial property policy |
| A partial benefit because the physician is back at work but earning less | Residual or partial disability on the physician’s own policy |
Typical overhead coverage does not replace lost professional fees or profits. It does not fund a partner buy-out by itself. And it does not replace the physician’s personal disability insurance.
What to bring if you’d like a review
If you would like us to walk through how these pieces fit your practice, it helps to have:
- A simple list of monthly practice expenses that would continue if one physician were out (rent or mortgage, staff pay, utilities, malpractice premiums, and similar bills)
- A list of business loans, equipment leases, or practice-acquisition debt that would still be due
- Who owns the practice, and whether there are partners
- Any buy-sell or operating agreement, especially language about disability
- Any group or individual disability coverage the physicians already have
- A benefits summary if a hospital or employer also provides disability coverage
We will help you compare options from several insurance companies. We will not treat overhead coverage, personal disability insurance, and a partner buy-out as if they were the same policy.
Questions? Call McGriff-Williams Insurance at (352) 371-7977. A member of our team will follow up.
McGriff-Williams Insurance. Where confidence grows.
This post is general information, not legal, tax, or financial advice. Policy terms, covered expenses, benefit periods, waiting periods, and availability vary. Your policy contract controls. Disability policies have exclusions and limitations. Ask your attorney about any buy-sell agreement and your CPA about taxes.
Sources
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American Medical Association, “Insuring your physician practice” (updated Feb. 28, 2023): three common policies for physician practices: business overhead expense (also called office overhead expense), physician disability insurance, and disability buy-out; BOE reimburses operating expenses (staff salaries, rent or mortgage, utilities, professional liability premiums, and other fixed costs); some BOE policies help hire a temporary replacement; BOE tax pattern (premiums potentially deductible, benefits taxable, expenses potentially deductible, “wash”); personal DI still needed for living expenses; DBO funds purchase of a disabled partner’s interest after a lengthy disability; buy-sell agreement should set price or formula and a funding mechanism; DBO often lump sum, sometimes installments; DBO premiums generally not deductible and benefits generally not taxable. https://www.ama-assn.org/practice-management/private-practices/insuring-your-physician-practice
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Life Happens, “Careful Planning Saved a Family and a Business”: a disability insurance overhead policy helped a business meet payroll and pay vendors; the owner’s personal disability policy replaced a portion of salary for household expenses. https://lifehappens.org/videos/careful-planning-saved-a-family-and-a-business/
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NAIC, “Simplifying the Complications of Disability Insurance”: residual/partial disability; individual vs. group tax generalities. https://content.naic.org/article/consumer_insight_simplifying_complications_disability_insurance.htm
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NAIC, “What business income loss coverages are out there?”: business interruption generally replaces income lost when operations are disrupted because of a covered physical loss, such as a fire. https://content.naic.org/article/small-business-insight-what-business-income-loss-coverages-are-out-there-learn-endorsements-can-help-lost-business-income
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Insurance Information Institute, “Business Income (Interruption) Insurance: Key Facts” (April 22, 2020): a business income claim usually must be caused by direct physical damage to the business’s property. https://www.iii.org/sites/default/files/docs/pdf/business_income_interruption_042220.pdf
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Internal Revenue Service, “Life insurance & disability insurance proceeds” FAQ: employer-paid vs. after-tax employee-paid tax treatment of disability benefits. https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds/life-insurance-disability-insurance-proceeds-1
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Florida Statutes s. 627.404: a business entity’s insurable interest in the life, body and health of its owners, partners and key persons; the insured’s application or written consent for individual policies. http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699/0627/Sections/0627.404.html
