Let’s go back to the day you collected your first paycheck as a working dentist. You spent 4-5 years getting your undergraduate degree, you spent another 4 years in dental school, and you may have even added 1-2 years for a residency, speciality, and/or military service along the way. It’s been almost a decade since your childhood crush wrote “HAGS” in your high school yearbook. You started your first job, and your first month’s paycheck is five figures. You’re used to living an entire semester off this type of cheddar. Oh the possibilities. You’ve watched friends go off and buy houses, cars, boats, vacation properties, the list goes on. So what are you going to buy? Drum roll please…. life and disability insurance.
Most people hate insurance. It’s a simple fact of life. As we learned in last month’s article, most people love to spend money. Insurance feels like a waste because we have to spend money on something we will probably never use instead of something enjoyable. If we ever do use our insurance benefit, then something bad has happened. Our car is busted, our house burned down, we are sick, we got injured, or something far worse has happened. There aren’t many positive things that can happen to us that will allow us to use our insurance benefit.
Here are some numbers that prove this point:
- “67% of American workers have no long-term disability insurance.”1 Link
- “Fewer than one in five adults […] are covered by both employer-based life insurance and a personal life insurance policy.”2 Link
- “106 million American adults do not believe they have adequate life insurance coverage.”3 Link
- “44% of American households would encounter significant financial difficulties within half a year if they lost the primary wage earner in the family, and 28% would reach this point in only a month.”4 Link
Let’s think about how crazy this is from another angle. What is the first thing you do after you buy a $40k car, a $100k boat, or a $500k house? Get insurance. It’s easy to do this because those assets are tangible. However for most dentists, the largest asset on their balance sheet by far is something intangible. It’s a little thing called earning potential. Ignoring inflation, if a dentist were to make $200k each year for 30 years, their lifetime earnings would be $6M. That number just gets bigger and bigger if you include inflation, increase your income, buy a practice, and/or work more than 30 years (the average dentist retires at age 69). No one in their right mind would intentionally leave a $6M+ asset uninsured or even underinsured.
So how much coverage do you need?
The amount of disability insurance a person needs can be very nuanced, but as a general rule of thumb, at the very least, you will want to cover monthly personal spending. Not just fixed expenses—all expenses. For what it is worth, our average client at Dentist Advisors spends about $15k/month.
Your monthly spending amount is just as important when it comes to life insurance. In order to guarantee your lifestyle for your loved ones you need to know your annual spend. Using a safe rate of withdrawal of 4%, you will need 25 times your annual spend. At $15k/month, that is about $4.5M of life insurance coverage.
Disability and life insurance are unique in that you need the most coverage early in your life, and it will decrease over time as your net worth increases. However, just remember that $1M in life insurance coverage replaces just over $3,300/month in spending. $1M won’t go as far as you think. The other thing to keep in mind is that if you were to have a life insurance policy pay out, it will most likely be the result of a premature and sudden death. Your practice and other assets may not be worth what they’re worth when you are a healthy practicing dentist. We have had clients suddenly pass away and seen their practice values disappear almost over night.
Sure, sure, but this doesn’t really apply to me
You might be thinking I’m only an associate who is young, healthy, and single so this doesn’t apply to me. My question to you would be, are you always going to be an associate who is young, healthy, and single? There are many benefits when you buy insurance while you are young and healthy.
Number one, the cost of these insurances are mainly determined by two factors: age and health. In many cases you will actually save more money over the course of your career by buying policies when you are young and locking up that price for the next 30+ years.
Number two, by securing your insurability you won’t have to worry if you do get diagnosed with a sickness or suffer an injury. “1 out of 4 dentists will be disabled long enough to collect benefits at some point before retirement.”5 These statistics come from actual disability claims submitted by insured members of the ADA. If you are sick and injured you try to get coverage… good luck. Most companies won’t insure you at all, or the premiums will be outrageous. This not only prevents you and your future loved ones from gaining protection, but it can also prevent you from buying the practice of your dreams. Most banks won’t lend you money if you don’t have an insurance policy you can assign to the lender.
Don’t sell yourself short
Regardless of your career stage, you are worth protecting. Those assets may be more intangible than tangible at the beginning, but they are every bit as real. We have seen far too many dentists put off getting insurance (or not get enough insurance), only to be diagnosed with something that prevented them from ever getting more. This has caused them anxiety, stress, and prevented them from getting the practice of their dreams. Don’t put a decade of schooling, hundreds of thousands of dollars of debt, and a lifetime of career earnings at risk to save a few bucks. It’s not worth it.
Taylor Sutterfield, MAcc is a Financial Advisor and CFP®. He earned a Masters of Accountancy from BYU’s nationally ranked program and has a background in in accounting, tax, and private equity. Learn more about Taylor.