Disability Income Insurance (What New Dentists Need to Know) by Jeff Kirshner

Dentaltown Magazine

Learn the fundamentals, policy design options and how to spot the top mistakes young dentists make


by Jeffrey W. Kirshner, CPA/PFS


Your earnings potential as a dentist will never be greater than it is today, and you’ve spent countless hours and hundreds of thousands of dollars to get where you are. Because of this, you need to consider disability income insurance to protect your most valuable asset: your ability to earn income as a dentist.

The disability income insurance marketplace for dentists is changing at a rapid pace. Just 15 years ago, perhaps two carriers would provide dentists with good disability income insurance, and the maximum monthly benefit available was $10,000. Now, there are at least five companies that will provide dentists with good coverage, and the limits have increased to at least $17,000 for some carriers and, if your income is high enough, you could even get up to $25,000–$30,000 of benefit if you carry coverage with more than one carrier.

Competition in the marketplace has increased choices, provided new product innovations and created improvements in underwriting, which is certainly good news for dentists. However, there are clouds on the horizon: The claims for dentists have increased considerably over the past five years, and some carriers are scaling back their robust offerings for dentists in an effort to reduce exposure.

Ask yourself this question: If the paycheck you received today was your last one ever, would you be OK financially? If you answered “yes,” congratulations! You can stop reading. If you answered “no,” then you should continue reading the rest of this article.

Below, I highlight some fundamentals you should understand in a disability policy, some of the policy design options that are critical and, finally, some of the common mistakes that I see young dentists make.

Fundamentals

“Noncancelable” and “guaranteed renewable.” These two terms together mean that once a policy is issued, the company cannot cancel your policy, change the definitions or change the rates as long as you pay your premium on a timely basis. If a policy is only “noncancelable,” the premium rates can’t increase and the policy cannot be canceled, but the definitions of the policy can change. If a policy is only “guaranteed renewable,” then the premiums can increase over time. Having both of these features is a must, and is available only with individual policies.

True “own-occupation” definition of total disability. If you cannot practice the profession of dentistry because of illness or injury, you’re considered totally disabled even if you work in another occupation.

It’s difficult to think of any other professionals who can become disabled as easily as dentists. Dentistry is a great profession, but the investment in your education doesn’t really allow you to earn significant income doing something else. Many companies say they offer own-occupation, but if you read the language, you may see that they interpret that as meaning you must be totally disabled and not working anywhere else. This is a modified own-occupation definition of disability. Be wary; I’ve met dentists who thought they had own-occupation disability income insurance and found out that they didn’t only after it was too late.

Ask your agent to show you this own-occupation language in the illustration before you apply and make sure the own-occupation period is for the entire benefit period. I’ve met with one dentist filing a claim who thought he had own-occupation coverage, only to find out that his own-occupation was for the “initial period” only, which was two years. In other words, he could work in another occupation and collect his benefit for two years but after that, he would lose his benefit if he worked in another occupation. Likewise, I’ve met with a dentist filing a claim whose policy was sold as own-occupation but when reading the contract, it was clear that he could not collect if he earned income in another occupation.

Good financial ratings. The financial ratings of the insurance company are critical. All the guarantees of an insurance contract are backed up by the claims-paying ability of the company. Be mindful of the fact that if you have a long-term claim, you’d better hope the company will be there for you down the road.

In addition to very well-known A.M. Best and Moody’s rating agencies, check the insurance company’s Comdex ranking, a composite of all ratings that the company has received from major rating agencies such as A.M. Best, Standard & Poor’s, Moody’s and Fitch. The Comdex percentile ranks the companies on a scale of 1 to 100, with 100 being the best; I typically recommend only companies that have a Comdex ranking of 90 or higher.

Policy

Elimination periods. How long you must be disabled before you start collecting your benefits. The typical elimination period is 90 days—shorter elimination periods drive up premiums, while longer elimination periods may not save you enough. It may be better to allot premium dollars for purchasing a longer benefit period than an elimination period less than 90 days. Your life won’t be any different years from now if you had benefits that began after 60 days, but what if benefits stopped paying you at age 65 when you might have qualified for benefits payable to age 70 or beyond?

Benefit periods. How long a policy will pay benefits. For young dentists who likely haven’t saved much or anything for retirement, I recommend the longest benefit period that they can afford. While a lifetime benefit is still available from one carrier, it is very expensive. If you cannot afford this, then at least consider benefits payable to age 70, 67 or 65.

Partial disability coverage. This means you’ll be eligible for partial benefits if you suffer a loss of income due to sickness or injury but are still working in your occupation. Many claims are partial claims. Without this feature, you’d most likely receive benefits only if totally disabled. Compare the partial features closely between companies: If, when and how much benefit you would receive if your income would be reduced because of a disability is directly dependent on the contract language. Don’t assume that “partial” from one company equals the same “partial” from another company.

Future purchase options. This gives you the opportunity to purchase more coverage in the future without any medical underwriting. You should purchase the maximum benefit your income qualifies for in the beginning, and you should also maximize the amount of benefit you can acquire in the future as your income increases.

Cost of living adjustment (COLA) riders. If you have a claim that lasts a long time, your monthly benefit should increase every year to keep pace with inflation. Different companies have different riders and costs for this rider, and it’s not in the scope of this article to address the details.

To give you an idea of the impact of this rider, the potential benefit for a 25-year-old dentist with a $5,000 monthly benefit to age 67 is $2,505,000. This is simply $5,000 per month times the number of months of benefit. The same example, by just adding a 3% guaranteed compounded COLA rider, provides the dentist with a potential benefit of $4,906,392. This rider is costly, yet well worth it. Remember, you’re just staying even with purchasing power.

Student loan protection riders. As the cost of dental school continues to rise, so does the level of debt that young dentists have when they begin their careers. I rarely meet young dentists who have no debt, and, on average, I see most dentists graduating with around $350,000 in student loans. Unlike other kinds of debt, federal student loan debt cannot be discharged during bankruptcy under current law. It makes sense to safeguard your ability to continue loan payments during a period of disability. Depending on the company, you can add up to an additional $2,500 per month of disability benefit above and beyond what you might purchase to protect your income. This additional benefit can be for 10 or 15 years from the time you purchase your contract.

Mistakes

Inaction. During their final year of dental school, students are usually approached by multiple brokers on campus trying to get them to purchase disability income insurance. This often leads to confusion, frustration and sales resistance among the students, who end up doing nothing but kicking the can down the road. This can be a big mistake: You will never be younger than you are in dental school, and premiums increase with age. By waiting, you’ll most likely end up paying more down the road … but that’s not even the main risk. The biggest risk is that with every year you wait, you risk a health change that renders you uninsurable, or insurable but with exclusions. Moreover, there are often discounts available when you’re in school, and these discounts may go away shortly after graduation.

Relying on group disability insurance or coverage through an association. Group and association disability coverage is less expensive than individual coverage, and there’s a simple reason for this: It may not be as good. Group and association policies rarely provide true own-occupation protection, and even if they did, the coverage is not guaranteed renewable and noncancelable. You could have own-occupation today and, through no fault of your own, have an inferior definition tomorrow. Also, dentists can’t take group disability insurance with them if they leave their employers, so if you start a practice down the road or join a group without group insurance, you’d have to secure individual coverage and hope that you’re insurable. With association coverage, if you leave the association, you lose your coverage.

Underinsuring. If you had a machine in your basement that could print money, would you insure it for the maximum amount possible, or a lesser amount? As a young dentist, you are a machine, and you should protect your ability to generate income to its fullest. This is not an area to economize; get the most coverage you can qualify for at the youngest possible age. If you have to make changes somewhere else in your life, then do so. Increase deductibles on your car insurance, eat out one less time per month, make one fewer trip to Starbucks per week … do whatever it takes to free up the cash flow to protect your income. Once your disability income insurance is in place, it becomes a fixed monthly expense in your budget. As your income quickly increases, you will soon be able to enjoy the things that you may have gone without when you designed your disability income insurance policy.

Not taking a policy with exclusions. It’s common for young dentists to be offered a policy with some sort of exclusion. Sometimes, the reaction is to get upset and not take the policy at all, which is a mistake. Depending on the nature of the exclusion and the underlying health issue, the exclusion may be reviewable in the future. If there are no ongoing issues and this can be documented, then there’s a chance that the exclusion can be removed. If you have an exclusion, ask your agent if it’s permanent and, if it’s not, find out when it can be reviewed. You should stay on top of your agent over the years to make sure that exclusions are removed if possible.

Set it and forget it. New graduates often purchase their disability income insurance, then never review their coverage again. This is a mistake for several reasons:

If your income increases over time and you don’t increase your benefit through your future increase options, then you’ll be underinsured in the event of a claim.

Premiums can vary from state to state, so if you move to a new state after dental school, you may find that the state you moved to has lower premiums than the state where you purchased your policy. For example, if you purchase your policy in California and move to Texas after graduation, you’ll find out that your premium in Texas would be much lower.

If you’ve completed a specialty program after dental school, a review is critical because dental specialists pay less for disability income insurance than do general dentists.

In some cases, it may make sense to replace an older policy with a new policy if there have been no health changes and the new policy provides the same definitions, because this may reduce your premium. Even if you don’t replace your original policy, then your future increase options can be exercised at the more favorable rate class of a dental specialist. This could save you thousands of dollars in premiums paid over your career.

When purchasing disability income insurance, work with an agent who specializes in this area. Treat this as one of the most important financial decisions you ever make, pay for the very best policy you can afford, and then manage your policy over the years.

*Not practicing CPA for Guardian or its subsidiaries or affiliates. Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5080 North 40th St. Suite 400, Phoenix, AZ 85018, 602-957-7155. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. [DBA NAME] is not an affiliate or subsidiary of PAS or Guardian. CA Insurance Lic. #0D63609. 2019-82097 Exp. 7/21


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Author Bio
Jeffrey Kirshner graduated from Arizona State University with a degree in accounting and went to work for Coopers & Lybrand in San Francisco. After earning his CPA, Kirshner went on to receive an MBA in finance from the Marshall School of Business at the University of Southern California. While working for Oracle, he implemented large-scale financial and sales systems for medium to large companies. Kirshner, who entered the financial services industry in 2001, has been a regular qualifier for the Guardian’s Leader’s Club and is also a member of the Guardian’s Inner Circle for leading disability income agents. He has also earned the personal financial specialist designation, available only to CPAs in good standing with the American Institute of Certified Public Accountants. He works primarily with physicians, dentists and business owners in the area of personal financial planning.
 
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