By: Taylor Richardson, CRPS®, AIF, Financial Advisor
Studies show that one in four dentists are likely to become disabled for up to a year before reaching the age of retirement, a statistic that’s not too surprising given the physical demands of the profession. With odds like that, it’s important to have a plan in place that will protect your income should you find yourself unable to work due to a disability, whether it’s temporary or permanent. As you look at options for long term insurance products, here are some things to keep in mind to be sure you make smart choices and get the best value.
Recent Graduates Can Save 10-30%
Signing up for disability insurance when you graduate will save you money in the long run. By getting a policy three to six months after graduation, dentists are eligible for a student discount of 10-30% over the life of the policy, depending on the carrier. By signing up while you’re young, your premiums will be lower, an advantage that will continue so long as you maintain the policy. Plus, having protection early in your career, when you have high debt but no safety net in terms of savings or investments, is a good idea.
Insure for 60% of your income
Dentists are high income earners, so insuring for 60% of your income should be enough to cover costs. If you sign up before establishing an earning history, you’ll default to a base pay that’s 60% of what’s considered typical. In today’s market, your disability payments would be about $5,000 per month.
90-Day Waiting Period
You want to balance the cost of the premium with the need to maintain cash on hand while waiting for the policy to kick in, and 90 days is a good compromise. If you choose 30 days, premiums will be a lot higher. Over 90 days requires keeping a burdensome amount of cash on hand.
Riders Can Add Value
Riders add benefits or amendments to the terms of a basic insurance policy to provide additional coverage and allow policy holders to tailor coverage to meet their individual needs. Most riders come with an extra cost on top of the premium, but some are available for free. Sign up for all the free riders you’re offered because they can be valuable. The following riders probably come with a fee, but they’re worth it:
- Regular Occupation – This rider ensures you receive your full disability payment even if you’re earning money in another capacity. If you become disabled in a way that prevents you from practicing dentistry, but you’re able to earn money by doing something such as consulting, you’ll still get the full disability payout. Without this rider, any money you earn would be deducted from your monthly payment.
- Cost of Living Adjustment (COLA) – This rider ties your payments to inflation, so you’ll get a cost-of-living increase of at least 3.5% every year.
- Benefits Updates – When you first sign up for a disability insurance policy there’s an extensive underwriting process, during which your health is evaluated and closely scrutinized. With this rider you won’t have to repeat that process when you make changes to the policy, such as increasing benefits. If down the road you want to have the policy reflect a $300,000 practice, you can increase the coverage without worrying about any recent health issues that might otherwise have created a problem.
Don’t Take Tax Deduction
Never take a tax deduction for your premiums. If you do, any disability payments you receive will be taxable.
Don’t Use Policy as Collateral
When applying for a mortgage loan, some banks might ask you to assign disability payments to them as collateral. Should you become disabled, the bank would then have the first right of refusal for the payment. They would probably deduct the amount of the mortgage payment and you would get whatever was left, which is not a situation you want to be in.
Tell People About Your Policy
Whether it’s a spouse, a business associate, or your financial planner, make sure you provide information about your policy to the relevant people. If you’re disabled to the point where you’re unable to communicate, you’ll need someone who can act on your behalf to invoke the policy.
Protect Your Practice
If you’re out six months with a broken arm, as a business owner you’re liable for your employees’ salaries plus overhead expenses, such as rent. And who is going to take care of your patients? Business overhead expense disability insurance, also known as business expense insurance, pays your overhead expenses if you become disabled, which may include paying a short-term dentist to treat your patients while you recover.
When to End the Policy
While disability insurance is important to have at the beginning of your career, you don’t want to pay the premiums forever. The ultimate goal is to self-insure. As your business grows and you build wealth, work with your financial planner to decide when you can discontinue the policy and stop paying the insurance company.
If you have questions about which insurance products are worth spending money on and which aren’t, schedule a call with our team at Engage Wealth Advisors. We’ll discuss ways you can protect your income and help you build the wealth you’ll need to have the kind of retirement you want.