In the recent months, I have started to keep track of questions that our clients have asked us. Some questions are about their existing portfolio and others are so concerned that they put off buying insurance for fear that the answer was something they would not want to hear. So far, I have accumulated over one hundred questions, which I will be publishing over time through these Professional Advisory articles, blog posts, etc. What I’m observing is that we, the insurance industry, are highly focused on the technical, advanced planning questions but have forgotten about basic Insurance 101. The core, basic questions cannot be overlooked. The insurance insurer is the foundation of any sound financial plan. It represents the core replacement of the future bank account of earnings that you represent for your families. Understanding how it specifically affects you and your personal and business circumstances is of paramount importance. Without this, you are just buying a product off a shelf that will likely not address your unique requirements.
For the purposes of this article, I have picked out one common question that I get all the time. Is my disability coverage enough to cover personal and business expenses?
Disability coverage, whether personal Long Term Disability (LTD) or Business Overhead Expense (BOE), are both unique products in the insurance carrier’s offering. Unlike life insurance that allows you to choose the amount that best suits you, these coverages are capped based on eligibility. In essence, each insurance carrier has a chart. It lists taxable income on the left and the most coverage they will offer on the right. There is a small variance between one carrier and the next when it comes to dentists so generally speaking, they are all the same. For example, at lower incomes, the eligible disability coverage, based on taxable income, is about 66 2/3 per cent. In other words, if you were making $60,000 of taxable income per year, you would be eligible to purchase about $40,000 of after-tax benefit. What that dentist is taking home after tax while working is about the same as the tax-free benefits that would be provided if disabled.
As your career moves along and income significantly increases, the gap between your take home and eligible LTD widens. For example, if you are making an income of $250,000 per year (almost $21,000 per month), you would be taking home just shy of $13,000 per month after-tax in Ontario. By contrast, insurers will only offer about $9,500 per month, aftertax. They don’t necessarily want to keep you whole at the higher incomes. They want to ensure there is a motivation to get back to work and resume predisability earnings. So in addition to a likely increase in personal expenses while on disability such as health care, paying someone to run your business, etc., you have a 25 per cent reduction in take home pay.
Business Overhead Expense is another tricky product that becomes more restrictive as you become more successful. BOE is designed to reimburse fixed expenses such as rent, loan payments, non-revenue generating staff, etc., in the event of disability. Commonly these plans are limited to about $25-30,000 of monthly benefit. What if you have a large, long-standing practice? What if you have multiple locations? You very quickly have expenses over the maximum. So what do you do about this shortfall?
This article is not necessarily about giving you answers you want to hear but rather to give you clear, honest information so that you can make informed decision from a position of strength and knowledge. So what do you do about this? Far too often I see dentists with plenty of coverage but no strategic plan. Don’t assume that a disability will also provide sufficient cash flow.
There are a few ways we can supplement this shortfall. Some through implementing products like Critical Illness and Long Term Care. Other methods are through business planning by building your practice around associates and other annuitized revenue that will continue whether you are working or not. In essence, creating your own insurance policy.
Bottom line is that implementing LTD and BOE without discussing what life would look like if you were disabled will not serve you well. Talk to your advisor. Make sure they understand the logistics of your dental or specialty practice so they can insulate your lifestyle, family security and stability of your practice. PA
Simon Kay – www.protect-ins.comFounded by Dr. Ian Wexler in 1995, Protect Insurance Agencies Inc. has provided specialized expertise in life, disability, critical illness, group insurance and other services to over 900 dentists across Ontario for the past 18 years. Protect can be reached for questions or other enquiries at (416) 391-3764 or email@example.com.