Disability Insurance, Another Look… by Ivan M. Kirshner, DDS

In the December, 2012 issue of Dentaltown Magazine, I wrote an article about personal disability insurance for dentists. I spoke about personal disability coverage to protect your most valuable asset: your ability to work through the years, earning income working as a dentist. I also discussed my personal journey of practicing for 23 years and the experiences I had with my coverage, and how it led to my second career helping other dentists for 23 years afterward.

In my years as a general dentist, it bordered on malpractice to recommend veneers and major restorative procedures if the underlying gums and bone were in need of treatment. It would be building on a bad foundation, not in the patient’s interest, and self-serving. I would hope that such practices are still looked upon as a serious breach of patient confidence.

In my years in the financial world, I have found many clients feel they have good financial representatives. What I often see, however, is that some representatives are only helping clients pick their investments while ignoring all the protection components of financial planning. This is doing things in the wrong order, but it is usually the case. Building on a bad foundation, not in the client’s best interest, and self-serving— do you see the analogy?

Forget statistics. None of them matter when it happens to you. Not to mention that as a dentist, there are so many things that can affect your ability to work beyond those that affect the general population, so the general population statistics are even less meaningful. I probably have well in excess of 100 dentists under claim. They are all glad they didn’t try to play the percentages and “yeah–but” game. If you want to gamble, do it in Vegas.

At least you may get a free room.

Now, I would like to share with you some information about other types of coverage you need to be aware of.

Overhead Expense Disability Insurance

This is an essential type of coverage for any dentist with his or her own practice and fixed monthly obligations. Remember, this is in addition to your personal coverage that protects you and your income long-term. With Overhead Expense Disability Income Insurance, you are the insured and would be reimbursed for 100 percent of your actual covered business expenses each month, up to the maximum monthly benefit. This would typically pay the rent, utilities, taxes, employee salaries and benefits (not yours), interest and installment payments on loans, depreciation, etc.

Why do you need this? Just look at your average monthly business expenses. I see what they are for most offices, and they never seem to go down. It is not unusual to have 40 to 50 thousand dollars a month of hard expenses. Imagine if you get partially or totally disabled and think you can rely only on your personal coverage. Most personal coverage has a 90-day elimination period and is for a much lower monthly benefit. If you still think you can rely on that, remember that you would now be giving up you and your family’s benefits to pay your business’ bills, and this benefit wouldn’t start until the fourth month! How long will your accounts receivable carry you? Another “yeah–but” is a mutual support agreement with other dentists. It may seem like a good idea, but these agreements are not legally binding. How long will the volunteer continue without compensation, and why wouldn’t you want both? Not smart.

By having Overhead Expense Disability Income Insurance in place, you are doing several things at the same time. You are preserving your personal benefits. You are protecting your personal and practice’s balance sheet by not personally paying these business expenses. You can return to your practice without having to layoff and rehire employees at the worst time. Your creditors are not upset with you. Think about this—even if you don’t recover and return, you have preserved the value of your practice for a potential sale. Practices have serious equity these days, but not much if it comes with key employees gone and liens against the assets!

As with your personal coverage, this should be with a strong company, and the policy should have own-occupation definitions, be non-cancelable by the company and guaranteed renewable. It should also include a residual or partial benefit so that you don’t have to be totally disabled in order to collect benefits.

Premiums payments for this type of coverage are considered a deductible expense by the IRS! Also, Overhead expense benefits received during your disability are taxable upon receipt. However, they are used to pay business-related expenses that are tax-deductible. That is why I recommend the shortest elimination period available (30 days). You are still greatly at risk even with this elimination period, which is like a deductible. There is no benefit for the first 30 days, the second month is the first claim month, and the first check to you won’t be received until the third month! Just imagine how much worse things will get if those insurance checks don’t start arriving. You need this because the debt hole gets dug fast and deep. The counterbalance for this is that most dental practices don’t require more than a 12-month benefit period. The reason is that by that time, you should have returned to your practice or be putting it on the market.

Disability Buy-Out Insurance

This type of policy is only needed if you have a business arrangement with at least one other partner. If so, what would happen if you or your partner(s) became disabled and could no longer practice?

In the years I have been doing this, I have read many agreements between dentists. I am not a lawyer (thank God), do not practice law and do not give legal advice. These agreements almost always talk about what would happen if one partner dies, and often discuss life insurance that can either be crossowned or payable to the practice, depending on the business structure. What is almost always missing in the agreement is any mention of what would happen if one of the partners could no longer practice due to an accident or illness.

What do you really want walking through the door after a partner can no longer practice, words or money?

The statistics of a disability occurring to one in two dentists during their career are, of course, much greater than the odds for just one dentist alone. The likelihood of a disability is far greater than the death of a partner.

Disability Buy-Out Insurance reimburses the policyholder for the purchase of the disabled partner’s interest. Disability buy-out can create a lump sum of money that is paid by the insurance company after one year, 18 months or 24 months of disability. Without it, there can (and will) be disagreements and lawsuits. Without it, a healthy partner has to do double duty. Do you really want to be partners with a disabled dentist, or possibly be dealing with his or her spouse? Who gets the income? Who pays the overhead? How long can the practice afford to pay the disabled dentist who is no longer contributing? It is amazing how money to fund the buy-out is in everybody’s interest. Oh, and if the practice has a loan, most of the time the bank will not renew under these circumstances or the loan may even be callable. This practice could be headed for serious trouble.

Business Reducing Term Insurance

Again, this is disability insurance on the insured (you). It is used specifically and exclusively to cover financial obligations. Because it is matched to an obligation for a practice loan, dental building loan, or even a school loan, it doesn’t interfere with how much coverage you qualify for or need for your personal benefits or your business overhead benefits. The benefit period is usually matched to the length of the loan. This policy has a loss payee that is the lender. Banks love it and it doesn’t interfere with you collecting the full personal benefits you qualify for. You don’t have to assign personal benefits to the lender, which I see done often and can be a catastrophe. Imagine you need to collect benefits for you and your family’s living costs, but the first dollars from the insurance company go to the bank for the obligated debt. Now I know you and your banker have a great relationship, but my guess is he or she won’t be sympathetic. Excuse my sarcasm, but you know that’s true. This is a relatively inexpensive type of coverage that satisfies the lender, and is easily cancelled once the obligation is fulfilled.

Disability Waiver of Premium on Life Insurance

Did I just switch subjects on you? Not really. Life insurance for a dentist should almost always include an extra rider that is called disability waiver of premium. What this means is that should you become injured or too ill to continue working, the premiums are waived. This means they are paid by the company, not you. The policy will not be lost because you cannot pay it.

Imagine the scenario: You are collecting your disability insurance. You also have permanent whole life insurance. The life insurance is continuing to be funded as if it were you writing the check, but the insurance company is paying it! Your death benefit and cash values remain and the policy becomes self-completing. You own the policy and have access to the cash value anytime you want through loans and withdrawals.*

This article is not about the many advantages of permanent life insurance, but I am continually amazed at how this terrific product is often overlooked as part of protection, retirement and estate planning due to misinformation by financial “entertainers.”

In my life, I have collected benefits from all of these, and so have many (too many) of my clients. I fully understand that retirement planning and investing have more sexappeal. I am glad to help with all of it. But I can tell you that often, life events get in the way. Life can call your bluff at any time. When it happens that day, you probably won’t be calling to ask about other account balances. I certainly don’t want to take the call knowing these issues weren’t properly and fully addressed.

*Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income.

  Author's Bio
Dr. Ivan Kirshner entered the financial services area in 1990 after leaving the private practice of dentistry. He attended the University of Arizona and graduated from the University of Tennessee College of Dentistry in 1968.

Ten years ago, he formed Kirshner and Klarfeld Financial Group, LLC, with his partners Michael Klarfeld, CLU, and his son, Jeffrey Kirshner, CPA, MBA, PFS. They practice together in Scottsdale, Arizona with clients around the country.

The views and opinions expressed herein are solely that of the author and do not represent the views or opinions of The Guardian Life Insurance Company of America, or its subsidiaries or affiliates thereof.


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