The Buy-Sell That Isn't Fine

Adequate: each $600,000 policy funds 50% of the $1.2M valuation, matching the ownership split. On a death today, the mechanics work.

Not adequate - four defects:

1. The valuation is static; the policies are not indexed. A dental practice valued at $1.2M today may be $1.8M in ten years. The survivor would owe more than the policy pays, at the worst possible moment.
2. Term coverage expires. 20-year level term on Dr. Patel ends at age 78 - after a normal retirement, so that is tolerable. On Dr. Chen it ends at 64, and most buy-sell funding assumes coverage lasts until the agreement's termination date. Confirm the agreement says coverage may be maintained to retirement age, not just for 20 years.
3. Term is rented coverage. The policy pays only if death occurs during the term. Nothing builds cash value, so there is no asset to fall back on if the agreement is renegotiated or the funding is unwound.
4. No disability trigger. The agreement pays on death only. A six-month absence doesn't trigger it - but a permanent disability would leave Dr. Patel with an untriggered obligation and no funding at all.

Also confirm structure: cross-purchase versus entity-owned. Cross-purchase gives the survivor basis; entity-owned is administratively simpler. The structure affects after-tax proceeds, and the policies must match the agreement.

Convert the term policy now. The conversion privilege lets him exchange to permanent coverage without evidence of insurability, but only if exercised within the window. After a cancer diagnosis, a new underwritten policy will be declined, rated, or postponed - the conversion privilege is the last remaining door, and it is closing in 14 months regardless of how treatment goes.

Practical steps:

• Confirm the conversion deadline and the conversion product options in writing with the carrier - some allow conversion only to specific permanent products, and the price rises with attained age.
• Convert the full $600,000 if affordable. Partial conversion leaves a shrinking term policy exposed to the same expiration problem.
• Do not lapse or borrow against the term. A lapse is unrecoverable.

The second clock: the practice's group life and group disability plans typically have guarantee-issue limits and actively-at-work requirements. If Dr. Chen reduces his hours or goes on leave before a supplemental application is submitted, he may not be eligible. Submit any individual or supplemental applications now, with full disclosure.

Fiduciary/partnership angle: Dr. Patel must be told what is happening to the funding arrangement, and the buy-sell should be reviewed by counsel for a provision addressing what happens if a funding policy becomes unavailable or is converted at higher cost.

Two distinct risks - don't solve one and call it the other:

1. Short-term overhead (weeks to a year): a business overhead expense policy pays the practice's fixed costs - rent, staff, utilities, malpractice - while the owner is disabled. It is written on a short benefit period (12–24 months) and is the right tool for a four-to-six-week absence.
2. Owner income: individual disability income replaces personal income. Apply immediately; underwriting is now impaired, and a policy issued with a cancer exclusion is still far better than none. Group LTD may exist but commonly caps at 60% of base pay, is taxable if employer-paid, and excludes bonuses and the owner's K-1 distributions.
3. Long-term/permanent disability: the buy-sell needs a disability buy-out provision with a defined waiting period and a funded mechanism. Without it, a disabled partner keeps drawing income and blocking decisions indefinitely, and the healthy partner has no exit.

How they interact: the buy-out funds the purchase; the overhead policy keeps the practice alive long enough for the buy-out to be affordable; disability income protects the family. Three different policies, three different jobs.

Also raise: key person coverage on each owner to protect the practice against the revenue loss and recruiting cost of an unexpected death - group medical does nothing here, and Dr. Chen's medical history does not affect the group plan's eligibility but does affect any individually underwritten coverage.