Many doctors are at risk for falling for a sales pitch that claims to protect the A/R (accounts receivables) in their medical practice. Many doctors are buying into certain life insurance plans that offer minimal benefits at all simply because they are trying to protect the assets of the accounts receivables in the medical practice. Doctors should be leery of using their A/R to finance life insurance plans.
Using Account Receivables Financing to Buy Life Insurance
Insurance sellers have been pushing plans that doctors should stay away from. These plans are called A/R Financing Plans for the purpose of buying life insurance policies.
Asset Protection or Retirement Planning?: A/R Financing Plans
This is an asset protection and retirement planning “concept” developed by insurance agents to sell more insurance. The medical practice or a company factors (borrows money against) their A/R and then invests the funds into a cash value life insurance policy for retirement purposes.
Using a good cash value policy to build tax-free wealth for retirement is a great idea, however, it is the way in which the policy is sold that is the problem. The angle that is used by life insurance agents to the doctor is particularly sly. The business owner or doctor is told that he:
- Needs to protect the business’s accounts receivables from creditors (i.e. client patients)
- Can build good retirement income with a cash value life insurance which is paid from the cash that’s been borrowed from the accounts receivables loan.
Many financial experts will state the retirement income is little and it also poses a danger. In most instances, the sales angle does not provide all the necessary details and information. Keep in mind that if an advisor comes to you with this angle without disclosing all of the accurate details, he is liable.
The sales pitch would be along these lines: Doctor, have you thought about your account receivable? It is one of your practiceï¿½s biggest assets and it can be claimed by creditors if you are sued? What is your account receivable doing right now to create more money for you? Would you be interested in learning how to protect your largest asset within your practice from creditors and learning how substantially increase your retirement income simultaneously?
It is difficult to not get persuaded to listen further.
This Asset Protection Planning tool is not really necessary because the risks are so minuscule.
Poor Asset Protection Planning Strategy
Most business owners will have no clue what they are really getting into and these plans are typically sold in a manner that does not consider all the necessary financial and legal details. The sales tactic by the life insurance agent in the above scenario is total hogwash. We have a close relationship with an attorney who instigated hundreds of lawsuits against doctors as his practice. For three years, he also managed a medical practice and he can also legally sell malpractice insurance to doctors. This attorney is the author of [“Asset Protection for Doctors”] book in which he discloses how doctors can really protect their assets from creditors usually involving an irrevocable trust.
The following is a short list of the errors of information when trying to sell life insurance using the accounts receivable to finance it:
- The A/R (accounts receivable) is really not in danger from any sort of medical malpractice lawsuit. I’ve never heard of a doctor losing their accounts receivable income from a medical malpractice suit. Doctors have their own personal medical malpractice liability coverage and the medical practice itself has its own liability insurance policy apart from the doctors’ personal insurance. The medical practice insurance costs 10% to 20% of what the doctors pay for their personal malpractice insurance. The medical practice itself has significantly less liability in a usual malpractice lawsuit. So the medical practiceï¿½s assets (including the A/R) are usually not in any danger from creditors in medical malpractice suits. The A/R (accounts receivables) are actually at a higher risk from a sexual harassment lawsuit or even from a lawsuit as a result of an employee or patient who has an accident at the medical office than medical malpractice one.
- The doctors are often informed that they may write off the interest of the loan as the money is borrowed from the A/R to buy the life insurance policy. Many life insurance agents will mention this as a side note because life insurance vendors who offer this retirement plan will not officially tell doctors that the interest can be written off. The idea that the interest can be tax deducted is a fallacy (Review it for yoursef: Title 26, 264(a) of the code). If doctors are unable to deduct the interest as an expense item, this retirement plan is not good.
- Many of the forecasted financial data presented in the sales presentation is not realistic. The idea of using A/R to finance a life insurance plan is usually sold to doctors of any age, but the typical doctor is from 35 and 55 years of age. The financial data used by the life insurance agents will typically use a non-variable loan interest rate that is based on lower than market rates that are not sustainable over the period of the model.
Lawsuits from Accounts Receivable Financing Bought into Life Insurance
There have been a number of lawsuits over these sales strategies and even a handful of high profile cases. In fact, the Texas Medical Association desired to inform their doctors on this issue until a massive lawsuit was threatened by one of the members who bought into the accounts receivable financing to purchase life insurance plan.
Do not believe everything life insurance agents tell you regarding this retirement plan. Agents will do everything they can to sell doctors on A/R financing to sell more life insurance. Using this type of plan for mere asset protection should be avoided since the accounts receivables are not at a huge risk of lawsuits.
If you are looking for a good retirement strategies to protect your assets and transfer them to your beneficiaries, you should learn more about Captive Insurance Companies, buying a good cash value life insurance policy, or the Super 401(k) Plan.
Please contact Estate Street Partners at (888) 938-5872 and see how we can protect your assets and maximize your returns in retirement. We offer advanced retirement planning and estate planning strategies, reduction of your taxes while enabling to transfer your assets to your beneficiaries and superior asset protection plans using our formidable Ultra Trust® irrevocable trust.