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By Ralph Bovitz, CPA, PFS
Is your family’s financial security at
risk?
Did you know that the chance of
becoming disabled during your working years is 63% higher than the
likelihood of your death! You probably have life insurance, but do you have
disability insurance?
If you cannot practice law, due to
sickness or injury, for a prolonged period of time or, worse yet,
permanently, you need disability insurance to cover the daily costs of
living, until you can return to practice. Some law firms and bar
associations offer group disability coverage. If your firm does not offer
disability coverage, if you don’t belong to a bar association group plan, or
if you don’t have an individual disability policy, your financial plan and
family is at considerable risk. Yet many professionals, including
attorneys, don’t have disability insurance --- or perhaps have inadequate
coverage.
How much disability insurance should an
attorney have? Determine how much your family needs to meet the cost of
living: food, clothing, shelter, recreation, and any other important
expenditure. That number tells you how much disability insurance you need.
How much you need and how much you can afford are two different issues,
however. Insurance companies rarely issue a policy to replace 100% of your
earned income. At 100%, there would be too much incentive not to return to
work. Instead, disability policies are often pegged at 60% to 70% of earned
income. That might be all you need if you have investment income or your
spouse is also working or could work, if necessary, to supplement the
disability benefit.
Attorneys have a unique problem when it
comes to disability insurance – defining disability. Attorneys should want
the policy to kick-in when they cannot perform the duties of an attorney, a
so-called “own-occupation” policy. What you don’t want is a policy that
grants benefits only if you are unable to engage in any gainful occupation
for which you are reasonably suited by education, training or experience.
Such a policy would be cheaper than an own-occupation policy but means you
might have to be unable to take a job outside the practice of law, that is
most likely to pay a lot less than law, before you qualify for benefits.
What you want is a stream of income to tide you over until you can return to
practice.
Turning to the cost of disability
insurance, let’s review some of the ways to reduce premiums, if you have to
pay for your own policy. The longer you can wait before drawing benefits,
called the elimination or waiting period, the lower your premium. That
means you need an alternative source of income until benefits are paid, such
as your investment income or a spouse’s earned income. Another possible
source of income during the waiting period is your firm’s disability plan,
if there is one. Then, perhaps the firm’s policy might pay for four to six
months of disability benefits and that could be the period you would wait
before needing to tap your individual policy. Finally, you could
accumulate a four to six month reserve of living expenses, deposited in a
savings account, to tide you over until the disability benefits were
tapped. A four to six month waiting period would make a dramatic reduction
in premiums. The most common waiting period is 90 days.
How long should disability benefits
last is another important question to ask. It’s best to have a policy that
extends to age 65 for both sickness and injury. There are policies offering
benefit periods of two, three or five years, with premiums much less than a
policy going to age 65. The disadvantage of these specific-term policies is
a loss of benefits during a long-term disability. However, your health at
the time of application and the premium cost will influence your decision in
policy selection.
Here are some other
options to look for in a good disability policy:
-
Recognition
of a recurrent disability. With this feature, you don't have to
satisfy a waiting period again when the same disability reappears.
-
Partial
disability. Here the policy recognizes recoveries are often slow and
insureds are not able to perform some important duties of their
occupation. In that situation, reduced benefits are available until
you are up to speed.
-
Cost-of-living
adjustment. With inflation, living costs increase and the option to
receive increased benefits can be valuable, during periods of disability.
-
Right
to increase future benefits. This option gives you the right to
purchase increased benefits in the future, regardless of health.
Of course, all these additional options
will add to your premium, but it’s worth knowing they are out there.
Probably the most important features of
a good disability policy are that it’s guaranteed renewable and is
noncancelable. That means the insurance company cannot change the contract
terms, including premiums or benefits. Only you can cancel the contract;
the insurance company cannot cancel, even if its claims experience, that is,
how much they are paying out under the contract, is bad.
There is usually little flexibility in
disability plans offered by law firms or bar associations. The chief
advantage of such plans is that they are relatively inexpensive. Here are
some of the likely disadvantages of group or employer-provided plans.
Maximum benefits are restricted, the definition of disability is weak, and
it’s unlikely a quality conversion privilege to an individual policy is
available, if employment or association membership is terminated. Thus,
when an attorney may most need disability coverage, such as becoming
self-employed, it is not available because of health reasons. Therefore,
attorneys should design their disability planning around the
employer-provided plan, if offered, but consider the purchase of an
individual disability policy for more certainty, even if more expensive than
a group policy.
Finally, there are tax implications in
a disability insurance policy. In general, benefits are tax-free if you pay
the premiums. If your employer pays the premium, including the firm you
work for or your own corporation, the benefits are taxable. Thus, premiums
should be paid with your personal check, to make them tax-free.
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