The problem with A/R financing life insurance plansArticle added by Roccy DeFrancesco on March 23, 2010
Roccy Defrancesco

Roccy DeFrancesco


Joined: May 24, 2006

I've heard that marketing entities are again making a big push with A/R financing life insurance plans, and I want to warn advisors to stay away from what is one of my least favorite concepts in the industry today.

What is an A/R financing plan?

It is a concept where a medical practice or company simply borrows money against their accounts receivable (A/R) and invests the borrowed money, for retirement purposes, into cash value life insurance.

The "sales" pitch is twofold:
    1. The doctor needs to protect the medical practice's A/R from creditors (patients); and,

    2. The doctor can create a large retirement nest egg using a cash value life insurance policy funded with the borrowed money.
My opinion of this concept is that it is marginal and somewhat risky from a financial standpoint; and, again, the sales pitch is typically delivered (intentionally or not) in a non-full disclosure manner which puts advisors selling the plan at risk to lawsuits.

The sales pitch

The sales pitch illustrates why I do not like this concept:
    Life agent: Doctor, did you ever think about the fact that your A/R is the largest asset of your medical practice, and that it is an asset that is subject to the claims of creditors?

    Doctor: No, I've never thought about that before.

    Life agent: Also, did you ever think about the fact that your practice's A/R is its largest asset that is just sitting around as a "stagnant asset," meaning it is an asset that is not building your wealth.

    Doctor: No, I've never thought about that before.

    Life agent: Doctor, would you like me to show you how to protect your A/R from creditors, and show you how to create significant wealth for retirement at the same time?

    Doctor: Absolutely.
Unfortunately, most of the time, the consumer has no idea what they are getting into, and many times, the plans are sold in a non-full disclosure manner.

The sales approach above is total garbage (to use a crude term) in my very informed opinion. Understand that I used to sue doctors for a living when I practiced law, I ran a medical practice for three years, and I'm licensed to sell malpractice insurance to doctors.

To be brief, here are just a few of the problems with this sales approach:

No. 1: The A/R is hardly at risk in a medical malpractice lawsuit. Ask around. Have you ever heard of anyone actually losing his or her A/R in a medical malpractice lawsuit? The answer will be no. There are multiple reasons why, but I won't go into detail in this article.

Think of this, though. A doctor has personal medical malpractice liability coverage and the medical practice has its own separate coverage with a separate policy and limits. The medical practice policy costs only 10 percent to 20 percent of what it costs the doctor for his/her policy. Why? Is it because insurance companies want to lose money? No, it's because the practice has very little liability in your typical medical malpractice case; therefore, the practice's assets are not typically at risk in a medical malpractice lawsuit.

To bring this into perspective, the A/R in a medical practice is more at risk to a sexual harassment lawsuit of an employee or a slip and fall of a patient than a medical malpractice lawsuit.

No. 2: The doctor, many times, is told to write off the interest. This is footnoted in most sales presentations. It's footnoted because most vendors who offer this concept will not officially tell a client the interest can be written off. Typically, this issue is left to the local CPA, who has no idea that you really can't write it off (see Title 26, 264(a) of the code). If you can't write off the interest with this concept, few will implement it because it is hard to make the numbers work financially.

No. 3: Much of the time, the projections are not real world. This concept is pitched to doctors of many ages, but it is most commonly sold to those between the ages of 35 and 55. The illustrations typically show a static loan interest rate based on "current rates." As you know, interest rates currently are very low. Only 20 years ago, commercial interest rates were north of 15 percent. Nevertheless, many illustrations given to clients show today's interest rates projected out 20+ years, which is not realistic.


While I'm not going to go into specifics in this article, I want to let you know that there have been lawsuits over this sales technique and a few high profile near misses. The Texas Medical Association looked at educating their doctor members on this topic until a huge lawsuit was threatened by one of its members who was sold an A/R financing plan.

If you really want to sell this concept (which I do not recommend), I suggest that you ask the vendors you are working with if they have had any lawsuits filed against them or the agents they work with. My guess is that the answer will surprise you, and then you'll be dissuaded from using the concept.


Do not believe all the hype with this topic. Yes, you can sell a lot of life insurance pitching this plan to a doctor who has no idea what he/she is buying, but is that the right thing to do? Do not tell your clients to write off the interest unless you are complying with the four-out-of-seven rule. Do not sell this topic because it is an asset-protection tool. Doing so makes it a disingenuous sale because the A/R is not really at risk).

If a client really understands the pros and cons of this plan and the risks involved, I can state with confidence that, based on past experiences, the doctor you are pitching it to will not purchase it.

If you want to bring a concept to your doctor clients to help them build wealth in a tax- favorable manner, consider learning about captive insurance companies, the Super 401(k) plan, or simply educate them on the math of buying a "good" cash value life insurance policy (revolutionary life) using after-tax dollars.

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