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Here are some of the vital basics doctors and their advisors need to know about captive and life insurance sales plans.
Among the high pressure sales strategies targeting doctors at year-end are plans featuring captive insurance companies and life insurance.
This is my third and hopefully final installment on the legal and tax planning strategies that are marketed to doctors by various promoters every September. Our first discussion covered estate planning, estate tax, and gifting based sales and was largely a summary of the facts on these issues that most consumers need to know. Our last discussion covered more overt threats including the frivolous and attractive arguments that outright conmen use to target doctors and which are capitalizing on American's fears and our current high level of political discord, with the worst of these cases making you a party to criminal tax fraud.
Today, we address two other issues that require careful due diligence and can present a significant value and investment if done right and a significant unnecessary expense and even legal jeopardy if not.
Captive Insurance For Doctors
As I've previously covered in significant detail in a four-part article series for Physicians Practice, captive insurance can provide significant benefit to medical practices and their owners if they are the right fit for your practice, offer real coverage, address real risk, and are not abusive in their construction, fees and funding. They can provide some very significant benefits in areas including, but not limited to:
- Increased coverage limits on existing coverage;
- First dollar coverage limits that protect you against high deductibles;
- Increased scope of coverage in covering areas you are currently not insured for
- Increased economic efficiency in buying insurance "wholesale" and retaining the profit in your own insurance company;
- And yes, even the "tax savings" benefits I've warned you against on multiple occasions
I'm obviously in support of you taking all legal and well-advised measures to retain profits and reduce taxes, but the captive industry is rife with unskilled promoters, many of whom are simply low info sales people for captive managers. It is the abuse of captives and the tax benefits they provide in particular that has drawn the ire of the IRS and continues to be one of the major problems. If you are being sold a captive primarily as a tax shelter over and above it's value as a risk management tool that's a huge red flag, here are some other common ones:
- You are being insured for unreasonable risks you don't really have, like hurricane insurance for a Midwest practice;
- The premium costs of the insurance coverage including any additional coverage are significantly higher, in some cases by 10X, than would be buying them on the open market;
- The captive makes significant purchases of life insurance with captive profits, as opposed to providing real liability coverage and this sale is part of the proposal from day one
Again, life insurance is an objectively good tool that is consistently misused and oversold to doctors by a minority advisors that are unscrupulous, unskilled or both. As an attorney, I suggest that my own clients buy appropriate amounts of life insurance on a regular basis to manage risk, protect their families and provide income, guarantee a legacy and fund an estate plan or estate tax exposures, fund buy sell agreements, protect those who may have guaranteed your medical school loans and a variety of other legitimate uses.
One thing I always want my clients to really understand is the wide range of options available in purchasing life insurance which range from simple term coverage to complex, mind-numbing premium finance strategies. It's vital that you really understand what you are buying and that you ask the right due diligence questions
about life insurance to help avoid making a costly mistake. It's also vital that you understand why life insurance is being used as a vehicle and if that use is appropriate in terms of the expense load you are committing to, what it provides, and the legality of the use of the tool from the perspective of the IRS. if the life insurance sale is tied to a tax plan. There are many instances where life insurance is part of such a plan and many more where it is not.