Insurance

  • Financial Planning, Insurance

    WHAT PHYSICIANS SHOULD KNOW ABOUT DISABILITY INSURANCE

    Why Disability Insurance is Important: Protecting Your Greatest Asset

    As a physician one of your greatest assets is your ability to earn a substantial income once you have completed your training and residency, and you should protect it with disability insurance. Most physicians will graduate with a healthy amount of student loan debt from years of schooling, likely totaling in the hundreds of thousands of dollars. And while this might be a daunting amount to have to pay back, the opportunity to earn a great income throughout your working career makes the investment worthwhile.

    If your ability to practice medicine in your chosen field and use the skills that you have gained during your years of school and training were to disappear, the ability to pay off your student loans, not to mention being able to achieve your goals and live a life that you enjoy would be drastically reduced. Insurance companies estimate that as many as one in seven doctors will be disabled at some point during their career. The importance of your future income and the high likelihood of needing to rely on disability insurance are the reasons why it is such an important topic for all physicians to understand.

    Short-Term vs Long-Term Disability Insurance

    There are different variations of disability insurance: short-term and long-term disability insurance policies. The benefit period – or how long you receive payments if you become disabled – can last up to two years for short-term policies. Long-term policies are designed to cover your working career, with most policies ending at the age of 65. For this article we will be focusing on the more important of the two, long-term disability insurance (LTD).

    The Benefits and Drawbacks of Employer-Provided/Sponsored Group Long-Term Disability Insurance

    Many employers offer a group long-term disability insurance to employees. This is a great first step in protecting your long-term earning potential, but relying solely on employer-provided coverage can come with some drawbacks.

    Some of the benefits of employer sponsored long-term disability insurance are:

    • Lower cost
    • Easier to qualify for (usually does not require medical screening)

    The list of potential drawbacks for employer-provided coverage is longer, but that doesn’t mean that employer-provided disability insurance is a bad thing it just means you have some extra homework to do when choosing an individual long-term disability insurance policy to make sure you are getting the correct coverage.

    Potential drawbacks are:

    • Any occupation definition of total disability
    • No portability if you leave your employer
    • Benefits are taxable (when employer paid)
    • Offsets with other benefits such as social security
    • Capped benefit amount

    An employer-provided group long-term disability policy is a great place to start when it comes to coverage, but you are almost certainly going to want to supplement that coverage with an individual policy that provides a full level of income replacement as well as the ability to maintain coverage if you switch employers in the future. Let’s look at an example of the benefits from a group policy and why you would want to supplement with an individual policy as well.

    Employer provided long-term disability coverage typically has a maximum monthly benefit cap along with only replacing a percentage of an employee’s. Also since this is usually a benefit provided by your employer on a pretax basis, the employee ends up paying income tax on the benefit they receive, so for example:

    Let’s say Doctor Doom earns $400,000 per year and is covered by a LTD plan that covers 60% of income up to a maximum of $15,000 per month. Under the plan they are insured as if they are making $300,000 (60% of $300,000 provides for $180,000 or $15,000 per month, the plans monthly benefit). Dr. Doom would also still owe income tax on the $180,000, lowering their benefit further.

    Important Contract Provisions and Riders

    There are different provisions and riders that are included in a disability insurance policy that may affect the cost and benefits that you are entitled to receive should you need to make a claim. The list below contains a few of the most important provisions and riders to understand when choosing a policy.

    Definition of Total Disability: Own-Occupation vs Any Occupation

    The definition of disability is an important distinction within the policy. Under an own-occupation definition, someone would be considered disabled if they could not perform the functions of their occupation, whereas with an any occupation definition as long as they could perform the functions of any occupation, they would not be considered disabled.

    A basic example would be if a surgeon who through illness or injury lost their fine motor control and could no longer perform surgery (their occupation), but could still work an office job, they would be considered disabled under an own-occupation definition but not an any occupation definition.

    Residual Disability

    This is a provision that allows a partial benefit to be paid if someone is not totally disabled but are in a situation where they cannot perform all the duties of their occupation or cannot work as many hours and suffer a reduction in income.

    Elimination Period

    This is the period of time before you are able to start taking benefits. You can think of this as being similar to the deductible in a health insurance plan. 90 days is a typical length for most long-term policies, but elimination periods of 0 days, 180 days, or longer can also be selected.

    Benefit Period

    The benefit period is the period of time that the policy will pay out disability benefits. This can range in time from two years all the way up to the insured’s lifetime. The most common benefit period is up to age 65

    Recovery and Transition Benefits

    Policies can offer a recovery or transition benefits to continue paying benefits to someone after the insured has fully recovered. For example, in the case of a solo-practitioner who has been disabled for a significant period of time and eventually recovers. They will likely have seen a number of their patients leave and find other physicians. Transition benefits could be used to supplement their income as they build back their patient base and income.

    Non-Cancellable and Guaranteed Renewable

    When a policy is both non-cancelable and guaranteed renewable it means that the insurer cannot change the policy terms or increase the premiums as long as the insured pays the scheduled premium. This offers the insured the greatest amount of protection. There are policies that are only guaranteed renewal (not non-cancellable) which allow the insurer to change premium rates in the future. This may provide the insured with savings on the initial premiums but leaves them open to rate increases in the future.

    Future Increase Option, Benefit Increase Rider, Benefit Purchase Rider, Benefit Update

    These options allow the insured to increase benefits or purchase more coverage in the future. Importantly the insured is able purchase additional benefits without undergoing additional medical underwriting. These are beneficial options for physicians early in their career as they can purchase increased benefits to keep up with their increases in salary without having to go through the medical underwriting process again.

    Catastrophic Coverage

    A catastrophic disability benefit rider allows you to receive an additional monthly benefit if you are unable to perform 2 or more functions of daily living (dressing, bathing yourself, etc), total and permanent loss of sight or hearing, or cognitive impairment. The reasoning behind this rider is that the additional benefits could be used to pay for someone to provide in-home care or medical expenses not covered under your traditional health insurance.

    Cost of Living Adjustments

    COLA is a rider that provides increased cost of living adjustments for claim payments to keep up with inflation. This is especially important the younger you are when purchasing your policy as inflation can take a toll on benefit payments over time.

    Long-Term Disability Insurance Cost

    Long-term disability insurance for physicians can be expensive. Premium costs tend to be in the range of 2-6% of income, and traditionally policies are much more expensive for women than men. This is primarily due to the higher risk of disability for women due to pregnancy and pregnancy related illnesses. According to the Journal of the American Society of Certified Life Underwriters a 35-year old woman is three times as likely as a man of the same age to become disabled for 90 days or more.

    Graded vs Level Premiums

    Graded premiums start out lower than level premiums and increase over time, whereas level premiums will remain the same for the life of the policy. If you are hell-bent on paying off your student loans, saving a ton and becoming financially independent early in your career then the graded premiums might make sense. But for most physicians, getting coverage early in their careers and choosing level premiums is the better bet.

    Premium Frequency

    Insurers offer a few different payment frequency options: annual, quarterly, monthly. With more frequent payments costing more than making one annual payment. This can usually be changed without affecting the policy so starting out with monthly payments early in your career and then switching to an annual payment once you can afford it is a good option.

    This article provides an overview on the basics of disability insurance and is by no means an exhaustive guide. When selecting a disability policy make sure to get multiple quotes and understand the specifics of your policy and what it covers. Your skills and your income, especially at the start of your career, are your most important asset. Make sure to protect it by including disability insurance in your financial plan.

  • Insurance

    ALL ABOUT DISABILITY INSURANCE

    It’s hard to work when you’re this banged up.

    It’s time once again for a very important exciting insurance post! Yay, I’m glad you are as excited about this as I am, because today I am writing (and you will be reading) all about:

    Disability Insurance

    Woot woot!

    Yeah, I know, totally what you wanted to hear about today, more insurance talk. But trust me, you’ll want to read all the way through on this one.

    I think most people have a decent idea of how the main types of insurance work. Health insurance helps you pay for doctor’s visits, medicine, and care for when you are ill or injured. Life insurance is meant to protect your loved ones and pays your beneficiaries when you pass away. Auto and Home insurance help pay for repairs to your home or vehicle when they are damaged or destroyed. The uses for these types of insurance seem reasonable and you probably have some of these types of insurance, especially where mandated, in the case of auto insurance, or home insurance if you have a mortgage.

    I’d argue that disability insurance is just as important as these other types of insurance, but if you’re like most of the population you don’t have it and you haven’t really thought about buying any, unless you’ve already experienced a situation where you could have really used it.

    Disability Insurance – The basics

    At the most basic level a disability insurance policy will pay you if you become injured or too ill (disabled) to work.

    How much money you receive, when, and for how long are all defined in the specific policy you purchase. As well as the types of illnesses and injuries that are covered.

    One side note: disability insurance is different from worker’s compensation insurance. Worker’s comp will pay if you get hurt or injured in a work-related accident or injury. Disability provides insurance for when you are injured or ill and can’t work due to a personal accident like and auto accident, or long-term illness such as cancer.

    Why Disability Insurance?

    So, why should you consider disability insurance? With all types of insurance, it makes sense to understand the W questions first. What exactly does this insurance cover? Who is protected and who receives a benefit by having the insurance? Why should you specifically purchase it?

    What: As we’ve discussed above, disability insurance pays you in the case you can’t work for an extended period of time due to an accident or illness.

    Who: Typically, the person who owns the plan is the person covered and the one who receives the benefit from the insurance company if they can no longer work. This is different from life insurance where the insurance company pays your beneficiary when you die.

    Why: This is the W question for which everyone’s answer is different. You need to ask yourself another series of questions or discuss them with a financial planner to understand if having disability insurance coverage is right for you.

    What would happen to you or your family if you could no longer work for an extended period of time? Are you the sole income provider in your family, or would a spouse be able to provide if you could no longer work? Do you have enough money saved or are you close enough to retirement that you would be able to live comfortably if you had to quit working today?

    The statistics on disability are pretty sobering, some estimates state that the average employee with a long-term disability or illness will miss 2.5 years of work. Another study found that of patients diagnosed with cancer, 42% depleted their life savings within 2 years. According to the Social Security Administration, almost 1 in 4 of today’s 20-year-olds will become disabled for a period of time before they reach the age of 67.

    The Two Main Types of Disability Insurance: Long Term and Short Term

    When it comes to the types of Disability Insurance it’s kind of like an old school sundae bar with two flavors, chocolate or vanilla, and a bunch of toppings you can sprinkle on top. The two flavors are long term and short term, and the toppings are the different riders that allow you to adjust the policies to best fit your situation.

    The benefit period (how long you receive payments if you become disabled) for short term disability insurance can last anywhere from 90 days up to two years, while a long-term policy can last 5-10 years or longer. And most plans are designed to be in effect until you reach the age of 65.

    Am I good if I have employer provided disability insurance?

    Some of you out there may be wondering about disability insurance you receive as part of a group plan benefit from an employer. This is great because you at least have some coverage as a benefit of employment, but there are some questions to ask and things to look out for. The first is that since it is an employer benefit which your employer pays for and provides to you, any benefits you receive will be taxed. This differs from a policy that you pay for yourself where you would receive the benefits tax free.

    If your company disability policy covers employees on their full monthly salary up to $5,000 per month, rather than receiving $5,000 dollars, you might receive around $4,000 depending on your tax rate. And that $4,000 might be enough to cover your expenses, but it pays to know that beforehand, so you aren’t relying on receiving the full $5,000 and coming up short.

    Another wrinkle to investigate with employer provided plans is what occupations they cover. Most employer plans have “any occupation” coverage rather than “own occupation” coverage. This means that as soon as you are able to work in “any occupation” you may stop receiving your disability benefits, even if you are not well enough to go back to doing the work you were doing before.

    As an example, if you were a surgeon that contracted a disease that caused hand tremors, you may be declared disabled to continue your current occupation, but the insurance company may decide that you are still able to work at another occupation where your disease would not affect your ability to do the job. If your disability coverage was “any occupation” then you could possibly be denied benefits since you could work in a job, even if it wasn’t the occupation you had before.

    The key is to understand the benefits and limitations of your employer provided policy so you can back it up with a policy of your own if needed.

    Key terms within Disability Insurance Policies

    The type of disability coverage you receive can vary quite a lot based on your preferences and how it is designed. These terms are defined in all policies while the riders below are options you can include if they make sense.

    Occupation Class: Insurance companies group professions into buckets based on incomes and how likely they are to make claims, similar to how they group individuals into segments based on your current health and habits for life insurance policies. The higher the occupation class, the more cost effective your disability coverage.

    Elimination Period: This is the period of time before you are able to start taking benefits. It is usually 90 days for most long-term policies.

    Benefit Period: How long you can retain coverage (typically till age 65) and how long you can receive benefits once you start (usually 5-10 years depending on the long-term policy).

    Disability Plan Riders

    There are many different riders that you can add to disability policies to adjust the terms and benefits you may receive. This is just a partial list, so make sure to do your homework on the riders available to you before purchasing a plan.

    Future Increase Option (FIO): This can give you the ability to increase the benefit based on increased earnings, without undergoing another medical exam.

    Catastrophic coverage (CAT): Long-term disability insurance will typically cover 60% of your salary, however with a catastrophic disability benefit rider you could receive up to 100% of your salary if you are unable to perform 2 or more functions of daily living (dressing, bathing yourself, etc), total and permanent loss of sight or hearing, or cognitive impairment.

    Residual/Partial: Allows a partial benefit to be paid if you are not totally disabled but are in a situation where you lose 15%+ of prior year earnings.

    Cost of Living Adjustments (COLA): Provides cost of living adjustments for claim payments to keep up with inflation.

    Own Occupation: Can be considered totally disabled if you are unable to perform the duties of your occupation, even if you are employed in another occupation.

    Retirement Protection Plans (RPP): You could receive contributions to your retirement plans in addition to the disability income benefit.

    Student Loan Protection: Benefit would pay student loan payments as well as the disability income benefit.

    Well, those are the basics on disability insurance, a less understood topic that I think more people should learn about so they can adequately protect themselves.If you would like some more guidance in this area I recommend seeking out a fee-only financial planner to help figure out if protecting yourself with long term disability insurance is the right decision for you. If you would like to talk to us at Steady Climb Financial Planning, give us a call. We are happy to help.

  • Insurance

    WHICH TYPE OF LIFE INSURANCE IS RIGHT FOR ME?

    Concept of insurance with hands over a house, a car and a family

    Insurance can be a very complicated topic, and life insurance especially so. One of the reasons is that people don’t like to think about dying and especially not dying younger than they’d like. But another reason has to do with the complicated nature of life insurance and all of the various types available.  

    There are many different types of life insurance policies and two similar policies can offer wildly different benefits based on the addition or subtraction of just a few words. I can think of almost nothing worse than being caught in a situation where I don’t receive the benefits that I desperately need, all because I misunderstood the type or terms of the insurance that I paid for.

    The response by most people when confronted with a complicated situation like this is to ignore the issue and hope for the best. But most of us do need some type of life insurance, so it’s best to understand the differences between the main types of policies.

    This post contains a very brief overview of the main types of life insurance available today. Having a basic understanding of the different types of insurance available can help you narrow down the multitude of options available. That way you can start to find the policy type that will serve best to protect yourself, your family and your assets.

    Two categories of life insurance: Term & Permanent

    There are two main categories of life insurance: Term and Permanent. A term policy lasts for a specified period of time (5, 10, 20 years, etc.), and a permanent policy lasts until the policy holder’s death as long as someone continues to pay the premiums.

    Term policies tend to be less expensive, because they have an end date and may not have to pay out a death benefit. Permanent policies tend to be more expensive because as long as someone continues to pay the premiums they will have to pay out a death benefit someday. Permanent policies also tend to be more expensive because the policies can include complicated provisions and options that you can adjust later on.

     A Term policy is almost always the best option

    Before going any further, I want to say that there are probably some people for whom each of these types of policies is a fit, but many people are sold permanent life insurance policies (whole, universal, variable) when a term policy would be much better – and less expensive – for them.

    The insurers tend to make more money from permanent policies, so the commissions (what the insurance salesperson earns when selling a policy) tend to be much, much larger for permanent policies than term policies. Since the salesperson is incentivized to sell permanent policies, more permanent policies are sold. This is another place where working with a fiduciary advisor, who is legally bound to look out for your best interest, can help you analyze your insurance needs and options and make sure you don’t end up paying more for insurance coverage you don’t need.

    For most people in their prime working years, life insurance is there to provide financial support for their spouse and/or children if they were to suddenly pass away. A term life insurance policy does this quite well. A 45-year-old can buy a 20-year term policy that expires at 65, by which time the need for the policy should be past if they have saved for their retirement and their children are grown and supporting themselves.

    A permanent policy will be more expensive and by the time you reach 65 or 70 you may not need coverage any more. At that point you might face the difficult decision of either continuing to pay the premiums or stopping and losing any future benefit.

    A term policy is as simple as it gets in the life insurance space. Proponents of permanent policies will argue that you can use their policies to build cash value and invest as well, but these options are more complex and expensive. You are almost always better off buying a term policy and investing in a separate IRA or brokerage account.

    Types of Life Insurance

    1. Whole Life Insurance: policy is permanent, premium is set, death benefit is set

    Whole life insurance, sometimes called “ordinary life” insurance is a type of life insurance which is guaranteed to remain in force for as long as the premium payments are made until death or until maturity if a maturity date is part of the contract (typically maturity dates can be 10, 20 years or to age 65). The premium for a whole life insurance policy is typically fixed (meaning the premiums will always be the same, also called a “level premium”) at the time the contract is purchased. Because the premium is fixed and there is no end date to the policy, a whole life policy is typically more expensive than a term life policy, which I will cover later. 

    Upon the insured’s death and payout of the policy, the payout is typically paid tax free. When discussing insurance, you will often hear the term “cash value”. This when talking about the whole, universal and variable life insurance variants. As the premiums are paid in a whole insurance policy, part of the premium pays for the death benefit and a portion goes into the cash value of the policy and builds over the whole life of the policy. In some cases a policy can be cashed out prior to the insured’s death (policies differ, but usually the premiums paid must be more than the value of the life insurance), in this case the dollar amount paid over the value of the insurance will be taxed as ordinary income.

    2. Universal Life Insurance: policy is permanent, builds cash value you can use to offset premiums, option to adjust death benefit

    Universal life is similar to whole life in that it provides a death benefit and remains in force as long as the premium payments are made. A main difference is that later on in the policy you can use a portion of the cash value of the policy to pay your premiums, lowering your out of pocket costs for the policy.  The interest rate is typically tied to a market rate, so as rates change your ability to tap into the cash value to adjust your premium fluctuates as well. Within most universal life policies there are also options to adjust the death benefit. Raising the death benefit amount will probably require additional underwriting, while lowering it will probably not. In either way you can expect to pay some additional fees to make the change to the policy. The ability to tap into the cash value and adjust the policy are benefits of a universal life policy, but the added complexity comes with an added cost versus a whole life policy. 

    3.Variable Life Insurance; policy is permanent, option to invest cash value in mutual funds, option to adjust death benefit (VUL)

    A variable life insurance policy, is similar to a universal life policy, but whereas with a universal policy the cash value grows within a savings account in the policy, with a variable life policy you can invest your cash value in mutual funds. But, rather than in a brokerage account where you have access to all manner of investment options, with a VUL you only have access to the fund options available with that insurer. With a variable life policy the death benefit is typically fixed, as it is with a whole life policy. You can also find a sub version, a variable universal life (or VUL) policy which possesses the investment options of a variable policy along with the policy flexibility traits of a universal policy. As I stated above, along with the additional options and flexibility involved in a variable or VUL policy comes additional expense and complexity. 

    These 3 types of insurance, Whole, Universal, Variable, can generally be categorized as Permanent Insurance since the policy and the death benefit remains in effect, with no termination date of the policy, as long as the premiums are paid.

    4. Term Life Insurance: expires at the end of the term, set premium, set death benefit, easy to compare between providers, less complex

    Term life insurance differs from the types of insurance discussed above in that it is not permanent, as the name implies it is only in effect for a set term. Typical term lengths are 10, 20, or 30 years. Term life policies are typically much cheaper than permanent life policies for this reason. With a permanent plan the insurer knows that they will have to make a death benefit payment as long as the insured continues to make their premium payments. However, with a term policy once the term is up the insurer is off the hook for the death benefit. A possible downside to term insurance is that you might outlive your policy. If your need for insurance still exists after the term has expired you will likely have to pay more in premiums for an additional term. Term insurance is by far the least complicated type of life insurance. There are only two components to decide on: the length of the term, and the value of the death benefit. Because of this it is much easier to compare between term plans from different insurers, and there are many places online where you can compare quotes for the same policies from different companies.

    5. Others

    The four types of insurance listed above are the main types of life insurance offered, but by no means are they the only kinds available. There is declining benefit insurance where the value of the death benefit declines over the term of the policy. These are usually designed to match the mortgage amortization schedule on a home, so that if the insured dies prematurely the death benefit from the insurance policy will pay off any remaining mortgage balance.

    There are also joint life insurance policies where two people are covered with the same insurance. These can be designed to pay out when the first person dies or after the second person dies, depending on the underlying reason for the insurance.

    Final Expense Insurance, often called burial insurance, is a policy designed for older individuals who want to make sure their final expenses are covered and their family do not have shoulder the costs after they pass. 

    Conclusion

    When evaluating insurance, you should ask yourself the question “what am I insuring against?” and keep this Einstein quote in mind.

    “Everything should be made as simple as possible and no simpler”

    For most people the simplest answer is a term policy that protects their family during their prime working years. If your situation requires something different or you were too intimidated to look into life insurance before, you now have a bit more information to help you with your search. 

    If you want to have a more detailed discussion about any of the above insurance types or want to know more about what strategies might be the right fit for your particular situation, feel free to email me at chris@steadyclimbfp.com or schedule a free introductory consultation.