How Much Disability Coverage Do You Need? – Episode 122

What would happen if health issues prevented you from practicing dentistry? Would your current disability policy keep you afloat? In this episode of Dentist Money™, Reese & Ryan discuss a financial indicator from the Elements® table called Insurance Rate, and the performance benchmarks calculated during a recent analysis for Dentist Advisors clients. They touch on a few considerations for life insurance coverage, and dive deep into the features and definitions within disability policies that can have a major impact on a dentist’s financial security.

 

Related Resources:

How Much Insurance Does a Dentist Need? – Episode 100

 

Podcast Transcript:

Reese Harper: Welcome to the Dentist Money™ Show, where we help dentists make smart financial decisions. I’m your host Reese Harper, here with my trusty ol’ co-host, Sir Ryan Isaac.

Ryan Isaac: Good morning, good morning. Happy to be here.

Reese Harper: Thanks for joining us this morning, sir!

Ryan Isaac: I am cheery today. I am in a good mood.

Reese Harper: We did get another three inches of snow at the end of March.

Ryan Isaac: It’s spring! (laughs)

Reese Harper: Now we can go skiing after we have delayed it all year.

Ryan Isaac: It would be a could day for it; that is true.

Reese Harper: I am excited about today’s episode because if you go through Dentaltown forums, and you go through a variety of online Facebook forums, you will find this topic to be one of the most discussed, and I could tell it is also one of the topics that people may understand the least about as it relates to their personal finance. For some of you, it might be a topic where you will feel like it is not very exciting but it is also something that if you don’t look at it at least once a year, it is one of the biggest risk items in your personal finances that you will have, and that topic is…

Ryan Isaac: *drumroll*

Reese Harper: Disability.

Ryan Isaac: Ooooh. That’s not boring, that’s amazing!!

Reese Harper: Well, I think it is pretty exciting for you.

Ryan Isaac: That is almost as exciting as the Final Four this year.

Reese Harper: An actuary like Ryan Isaac getting his numbers together… you found a lot of interesting stats.

Ryan Isaac: Yeah. So, do you want to give an intro on kind of what we do this month?

Reese Harper: Yeah, I mean, how about you do that. I want to hear you.

Ryan Isaac: I’ll do that! I was talking to myself anyway. (laughs) it was a reflective question. I would like to, Ryan, thanks for asking. This month is what we call insurance rate month. So, we take data and statistics from our dashboard and we measure everyone’s insurance coverage in three main areas. In life insurance, disability insurance, and liability insurance. We are trying to determine how much coverage they have compared to the other statistics in their life. So, what do you spend? How much debt do you carry? What is your net worth? What part of your net worth would be usable if something happened to you? If there was a death, or a disability, which things could you liquidate? Not liquidate? What are they worth? So, we wanted to measure that. One of the things that we have said before on the podcast that is interesting about the way people buy insurance is that you kind of just buy up to a monthly dollar threshold that you don’t want to spend anymore, and that is how much insurance you get, right? That is usually how people do it. They will pick life insurance, and they will just go, “well, what is $2,000,000? That seems like a lot of money. What does $2,000,000 cost me? Eh, I’ve got a little more, let’s go 2.5,” you know? Whether or not that is too much or too little, that is kind of how insurance is bought and sold to people, is just pushing someone’s threshold for wanting to spend on it. So, we want to measure how accurate it even was and what kind of coverage it is, so, we have some statistics from this month on kind of some averages on our clients that will be interesting to look at.

Reese Harper: Yeah, let’s go through a couple of the key statistics. Now again, these are across our clientele, so, this may vary a little bit, but I think we have a pretty broad sample of clients across most every state, and a lot of different income ranges. So let’s start with the average life insurance death benefit. Ryan, what is the average life insurance death benefit?

Ryan Isaac: Our client average is $3,000,000. That is what the average dentist is carrying in life insurance.

Reese Harper: And I think the interesting thing to kind of compare here is, the average life insurance balance probably correlates more to your income and your age than it does to just a random amount. The average dentist— if you take all specialists, and you take all GPs together— the average income range of our clientele is going to be somewhere between 300,000 and 400,000 a year of income, and that puts their life insurance death benefit at somewhere between, you know, nine and eleven times their annual income, and that is probably an easy way to think about whether you are close to maybe where the average person is. Now, there is an exact calculation for how we going about doing that, which we will cover, but if you are at five times your income, or you are at six times your income, you are probably a little bit lower than the average. And then, we have found that it is not uncommon to see dentists with eight or nine million of coverage, some dentists with ten million of coverage, but that is going to be someone who is a really high income earning, probably multi-location GP or specialist.

Ryan Isaac: With a lot of spending, too.

Reese Harper: Yeah, with a pretty high amount of spending.

Ryan Isaac: Yeah, so another way to look at this, too, was because in our reports this month, we are calculating what percentage of their insurance need… so, you know, if something happened to you, which debts get paid off? What multiple of your spending are you left with? How long could your family survive and keep spending the way that they are used to and not have to sell the house? That kind of stuff. What percentage of that need is actually covered? So, we measure that for each individual; we give them a report that shows, you know, “you’re 50% covered,” or “you’re 100% covered. Our average was 70%. So, across all of our clients, the average is, they have 70% of the calculated need covered in life insurance, which is probably— I mean, if something happened at 70% coverage, you will still make it. That is still enough money to— it is probably not enough to have the most conservative scenario where you wipe out all debts and have like, a 30 multiple of your spending forever, you know? You might have a 15 or a 20 multiple, and money might run out eventually, but that is still pretty good.

Reese Harper: Yeah, I mean, I think most people— if you said, “well, this would basically give you two-thirds of your previous lifestyle,” if you think about it that way, “if you spend 15,000 a month in spending, you have life insurance basically to cover you for 10,000 a month.” And that is what we have typically found. This statistic has actually been pretty consistent over the years that we have measured it. People are usually about two-thirds of the amount of coverage that they should have in life insurance. And the crazy thing to me is that it is kind of one of those things where it is a really unlikely thing to have happen, to have a premature death; it is statistically quite unlikely. But if it did happen, and you spent all of these years planning for your family, and you paid for life insurance year after year, I mean, think about the time that you invest in this life insurance thing every year. I mean, it is a pretty ongoing conversation you are either having with a broker or someone. You are doing multiple medicals… I mean, it is a time-consuming process, and at the end of the day, if something actually did happen to you, and you had two-thirds the amount of coverage that you would have needed in order to really replace your lifestyle, I think in most cases, the family left behind is going to be like, “you know what? Why didn’t you just get the full amount of coverage that we needed? Because it wouldn’t have been that much harder—”

Ryan Isaac: You are saying the difference wouldn’t have been that big of a deal, had you known.

Reese Harper: Yeah, had you known. Like, I just don’t think most people know, so spending just a teeny bit more to actually have the right amount of coverage— and we will talk about how to calculate that in a little bit— to me, that is like, why not do it? Because the cost is going to increase your premium by probably 10%, and then you have the right coverage, so that if you did pass away, your family is left with not quite enough money, so you are kind of like, “oh geez. We can’t really pay for kids’ college the way we had hoped to. We are having to do a major cutback—” I mean, a 30% reduction… think about your income! What if your income cut today by 30%? That is a big deal! So for me, just having the right amount of coverage… it is more of a question of just doing the right math than I think it is people trying to be cheap—

Ryan Isaac: Yeah, so the question is, then, what— you know, I think there is a tendency to look at stuff like this and go, “well what changes? I buy some insurance, and then, I mean, why would I really need to pay attention to this every year? What changes?” So, maybe we could touch on that for a minute. Like, what are some of the situations that would change someone going from 100% coverage down to 60%?

Reese Harper: Well, I have had several clients this reporting period where they are slightly under-insured right now, but their net worth is growing so fast that within twelve months, they won’t be underinsured, and so they will just say, “you know what? I am gonna be underinsured, but I am only underinsured for twelve months, and I am going to roll that dice, because I don’t really want to have to do another medical exam.” And I get that. I mean, you are 70% covered now—

Ryan Isaac: I get that; I’m not giving anyone blood. That makes me pass out.

Reese Harper: (laughs) yeah. I mean, it is inconvenient for a lot of people. It is kind of sad that that is the reason that a lot of people don’t have insurance! I don’t know how many clients I have right now sitting on a life insurance application because they just don’t want to get the medical done, because they don’t feel like they are healthy enough, or they feel like they need to lose some weight…

Ryan Isaac: It is actually really common! Yeah.

Reese Harper: They feel like they have to go exercise a little bit…

Ryan Isaac: Do you hear that a lot? I hear that all the time. Like, “I’m not ready. Give me twelve months; I’m gonna lose some weight.” And then twelve months later, it’s like, “did it go well?” And they are like, “naw, I’m heavier.” (laughs)

Reese Harper: I had to address that myself just recently! I had to reapply for coverage, and I had to just kind of be like, “you know what? I know I’m ten pounds heavier than I probably should be. I am probably not— I don’t know what my blood work is like, but it hasn’t been the healthiest in the last twelve months, because I have been a little more stressed than normal…” I am just throwing these out there; I am assuming these are what people are actually thinking, right? I don’t ever get stressed.

Ryan Isaac: No no no.

Reese Harper: But I just kind of told myself, “you know what? If I’m rated a little bit, or I’m in the second best tier, so be it. At least it’ll give me peace of mind for the next twelve months, you know?”

Ryan Isaac: Yeah, it is adequate.

Reese Harper: And then I will go exercise, and if I get in better shape, I will go reapply, you know? It’s not like— but, I really don’t think that the cost difference is worth waiting. We don’t get paid to sell life insurance, so…

Ryan Isaac: Oh yeah, let’s make that really clear: we dedicated an entire month to analyzing and giving opinions on life insurance, and telling—

Reese Harper: And disability and liability, but we don’t get paid to sell this stuff.

Ryan Isaac: At all. Directly or indirectly. People who we refer our clients to to get this stuff implemented or done, nobody pays us for life insurance; that is a good disclaimer I think.

Reese Harper: And so, we like to say we feel like we have an objective view on this, and I think from a life insurance perspective, people are two-thirds the amount of coverage they should have, on average. The good new is, in our entire sample, there was no dentist without life insurance.

Ryan Isaac: Now, there are a few skewed under that average, though. We were like, “whoa! Come on now, let’s fix that.”

Reese Harper: Well even people who are financial independent, which I thought was interesting, even people who are completely financially independent, some people still carry.

Ryan Isaac: Did you have those conversations too? I think it is interesting, and when you put it to them, they kind of look at it and go, “I’m paying fifty bucks a month for this thing, I pay like a $400 check every year, and if something happens, it is an instantaneous few million dollars in—”

Reese Harper: Well in some cases— I have clients who are financially independent, and they are paying 16,000 a year still. They are just saying, “you know what, I want to have this as a legacy for my family,” or “I’m in my 50s, and I just don’t wanna drop coverage, even though I don’t need it… I would rather just have a little bit of extra money for my family, rather than just replacing my basic needs.”

Ryan Isaac: Well even being financially independent, that would be the difference between having to try to sell the building or the practice and not at all. So, really quickly, you were just— we were talking about some of the things that change over the course of a year that could change the coverage for this kind of stuff. Spending will be a huge factor; up or down, that will make a big difference in the amount of coverage you need.

Reese Harper: Yeah, if you spend more, you are going to need more coverage in order to replace that standard of living. I mean, a lot of people apply for their first life insurance policy really early on in their career when they are spending five grand a month, and then spending is double or triple what it was, and then they don’t realize that that is not even close anymore.

Ryan Isaac: So, spending is a big one… your primary residence… part of the calculation that we are trying to give people is, if something happened to you, let’s pay off the house that your family is in and not make them sell it, you know? We don’t need out of it. So if you move, and you go from the cheap house to the expensive one, that will change the calculation quite a bit too.

Reese Harper: Because you have to pay of a bigger mortgage now in order to— because that is the thing about life insurance calculation: you can be aggressive and say, “hey, my family’s gonna use my home equity, and then they’re gonna spend that all down, and then they’re gonna be having to rent (laughs) after that.”
Ryan Isaac: Yeah, you tell them that; we are not telling them that.

Reese Harper: But we are saying that we think that whatever house you are living in, you should pay off right now, and then have the income you need independent of that, so at least they are not worried about their house. I think that is the right approach.

Ryan Isaac: And a few other things, like your investments, how they have grown, how much you have saved—

Reese Harper: Whether your practice has appreciated in value—

Ryan Isaac: Yeah, the value of your practice— now, one thing to note is when we calculate these things for life insurance specifically, we gathered a lot of data from brokers to say, “what is the typical situation when a dentist passes away? What does that do to the valuation of the practice? Are we talking 70% of the normal value? Is it half? Is it 10%?” And there was a big range. So, the broker feedback that we got was like, “man, we have seen this from 10% of the original value, to 50%, or sometimes it can be sold for what it is worth if someone was in there picking up the pace…” So we do this a little conservatively; we just assume that we are going to sell the practice for half of what it is really actually worth when we do these calculations. So, something to consider.

Reese Harper: Just to clarify that, what Ryan is saying is that if a dentist passes away, we are assuming that they are going to get 50% of their current appraised value as an asset that can help offset their family’s spending.

Ryan Isaac: Right. Yep.

Reese Harper: Okay, let’s go to our last life insurance statistic, which was the average spouse life insurance across our clientele. Justin, I think you calculated that today. What was that number?

Justin Copier: Yeah, we came in at 630,000 for spouse coverage.

Reese Harper: So the average spouse life insurance policy is 630,000. Now, there are a lot of clients, though— this is taking into account a lot of people who have zero spouse coverage. So if you have a non-working spouse, the question is, should you or should you not have life insurance on a non-working spouse? At the current juncture we are at, we are at 630,000 of coverage across all clients, but I know that is because some people carry two million, some people carre a million, and then many people choose to go without coverage. What do you think the variable is as to why people choose to not cover or not?

Ryan Isaac: I just don’t think people think about it. Usually, it is pretty inexpensive, because it is less coverage, and especially if the spouse is a woman, then women are cheaper; their underwriting is cheaper; their life insurance costs less money for females than it does for males, so if the spouse is—

Reese Harper: I thought you were going to say it is because they are smarter.

Ryan Isaac: They are smarter. Their life expectancy is longer; they make fewer stupid decision than men do (laughs).

Reese Harper: That is true. From an investment perspective, there are tons of statistics on that.

Ryan Isaac: Yeah, that’s another podcast.

Reese Harper: This is tricky, because depending on whether both spouses are full-time employed, or one is a primary breadwinner and another one is a full-time homemaker, you never really know exactly how the family dynamics are set up, and in many cases, you are going to have equal amounts of life insurance on both spouses. We have a lot of clients who are both dentists, and in that case, you are going to have the same amount of coverage most likely. But then in other cases, a family’s net worth is already high enough with one wage-earner, and they don’t really feel like a non-working spouse passing away would have a negative financial impact. And I guess that is where I would say, push pause before you assume that a non-working spouse has no financial impact—

Ryan Isaac: Because they are working.

Reese Harper: Because they are working, and there is a big financial cost that is involved in caretaking, and running the home, and spending the time required to make sure that you are able to actually stay full-time employed, and run the practice. There is a huge cost.

Ryan Isaac: The downtime, and the mental/emotional adjustment.

Reese Harper: I have seen that happen personally, and I have seen the cost of that transition, and there is a big financial cost there. And I think, while there may not be quite as high of a death benefit on the non-working spouse, I would definitely say that not having spouse coverage is negligent. I am comfortable saying that. Like, that is just not— it doesn’t have to be a lot, and it doesn’t have to be expensive, I just don’t feel like it has been thought through when people don’t have coverage on a non-working spouse.

Ryan Isaac: Yeah, that’s fair. So this time next year, let’s have that average be a million dollars. That would be good. Let’s get to some disability statistics then. That is kind of the bulk of what we are going to talk about for the rest of the show. So, the average personal disability monthly benefit is $10,500.

Reese Harper: And that represents 67% of the coverage that the dentists need. So again, close to two-thirds the amount of coverage. Similar to life insurance, our client has about two-thirds what they should have, and as you can imagine, our clientele is consistently receiving information from us on their underinsured nature. Like, we are giving them a report, and we are actually recording a video, and we are talking to them, and pointing out that they are underinsured, and I am just saying that I have a feeling that our clients are probably more insured than most people, and that this reflects the result of someone constantly looking at it. Across the country in the average, I’m assuming it might be a little bit lower.

Ryan Isaac: Yeah, I think that is true, and then I was going to say, some people— I mean, there are a fair amount of people who, because of medical reasons, since they have implemented their coverage in the past, they can’t get more. So there are a fair amount of people who have five grand of disability coverage, but because of medical reasons, they can’t get more, and even though they spend 15, that is just the way it is; they can’t get more coverage.

Reese Harper: Yep. The number of dentists that don’t have any disability insurance as a percentage of our total sample is 6.2. So, there are 6.2% of the sample that doesn’t carry any personal disability coverage.

Ryan Isaac: And these would be people who we haven’t gone through this with yet.

Reese Harper: Or people who are— this is one where I do have some clients who are independently— they are financially independent, and they don’t need disability coverage anymore. And then, I do have some who can’t get coverage, and then there are clients who just choose not to. There are some people who have a strong opinion about insurance spending, and it is a big enough pain point for them. Like, when you look at a disability premium, and if you are looking at a standard personal policy through a big national carrier, sometimes the financial cost of that is so much that people just walk away from it and say, “I don’t want to do it.”

Ryan Isaac: Here is the thing, though. We were going to touch on this a little bit later, but this is from Principal Life Insurance, their disability claims data: 48% of all home foreclosures are the result of a disability, where 3% result from death. So, it is easier and it is easier to insure our lives, for sure, but you know, such a small percentage of home foreclosures are due to someone passing away versus almost half are due to disability.

Reese Harper: That is interesting. The average business overhead expense policy: business overhead expense pays your overhead if you are disabled; it is a common coverage that a lot of dentists carry. Across our clientele, the average is $23,000 a month.

Ryan Isaac: Yeah, assuming that was full coverage, I mean, what does that put overhead annually for somebody? What is it, 23? So you are talking about a practice with like 300,000+, 350 or so, of overhead per year? So I’ll bet that is low. I mean, from my own experience going through people’s BOE coverage, I think it’s low.
Reese Harper: Well, if you take the average collections across our clientele, and you say that their overhead expense— if you take out their own salary and replace that salary with someone else who can kind of come in and do the work to replace them— Which a lot of people don’t choose to insure that much on business overhead expense; they will only insure their basic staff costs, and their rent, and their building, and some of their loan payments—

Ryan Isaac: And even then, it is usually under— yeah, we will get to some of the mistakes later, but I think that is an interesting statistic to come back to when we talk about common mistakes with business overhead, because I think that is low.

Reese Harper: Well the challenge with that in a lot of cases is right now, the ADA business overhead coverage only goes up to $25,000, and so a lot of people, when they see that, and they say, “well, if 25,000 is the maximum I can get from the ADA—” it is not the maximum amount you can get from other carriers, but from the ADA it is— then I think your first reaction is, “well it must be enough, then, if that’s the max.” I mean, wouldn’t you be that way?

Ryan Isaac: Yeah.

Reese Harper: It’s like, “well if they say that’s enough, no one else is doing more than that, so I’m gonna go up to that.”

Ryan Isaac: But I mean, for some practices, that is barely half of what it costs to run their business every month, not including them. So… interesting. Well, let’s talk about some national statistics. These were our client statistics that we just went through; let’s talk about some national ones. According to the Council for Disability Awareness— these were kind of interesting, these were causes of disability claims— musculoskeletal, connective tissue disorder… what does that mean? Is that like, wrist problems? That would be like wrist, and elbow, and joints. That accounted for 28.5% of new claims. So, pretty common. From my own experience in talking to people, I mean, there are a fair amount of dentists with like hand and wrist and elbow problems. Back.

Reese Harper: Yep, and that is a third of all the claims; that is the biggest issue. Cancer was the second leading cause of new disability at 14.6%, and that is disproportionately, obviously, occuring at the latter stages of people’s careers, but it is still a big cause. Injuries caused 10.6% of new claims. So, snowmobile accidents, mountain biking fall-downs… we have quite a few clients who get hurt doing random stuff that you wouldn’t think, like, even at their practice, they will be fixing something on their building, or they will be trying to repair a piece of equipment and fall… ladder falls, actually, have accounted for—

Ryan Isaac: It’s common?

Reese Harper: Yeah, whether it is for hanging up the Christmas lights, or fixing something in your office in the ceiling— we have had a lot of situations like that.

Ryan Isaac: That is scary, man!

Reese Harper: Yeah, injuries are almost 11% of new claims.

Ryan Isaac: And then mental disorders cause about 8.9 percent of new claims. Which is interesting— and we will talk about this in a minute— how many policies don’t cover mental claims, or they do on a very limited basis.

Reese Harper: Yeah, and you have to decide if you want to pay for that. I mean, because it is 10% of new claims, right, but that is not 10% of all dentists who are going to go through a mental health disorder.

Ryan Isaac: Yeah, well, I mean, here’s the thing, too. These statistics are hard to come by. This is for the Council of Disability Awareness; this isn’t dental specific. So, I think that is actually higher in the dental industry, the mental disorders; I think that is actually higher.

Reese Harper: Yeah, and here is the thing: there is a lot of conflicting data on this, because since we don’t sell these policies, as we go around and look at research, we find that there is not a lot of independent research on this topic. A lot of the research comes from the actual insurance companies (laughs), and I am not saying that they are reporting bad data, but I mean… we don’t know, so it’s hard. If I was going to go find out whether Ford was the best truck and compare it to Chevy, I wouldn’t go and ask Ford for its own independent research on whether it was a better truck than Chevy.

Ryan Isaac: Their statistics? Yeah, that is fair.

Reese Harper: Anyway… you talked about the ADA data a little bit that 25% of dentists will have a disability at some time during their career long enough to collect benefits. That was interesting to me to see the ADA publish that.

Ryan Isaac: Yeah, long enough meaning that most people are carrying the waiting period of 90 days, so we are talking about more than three months of a disability claim.

Reese Harper: But by far, the highest proportion of claims, they are not lifetime claims, but there is this— like we said, we went through those statistics earlier— there is enough of a risk, whether it is a musculoskeletal disorder, or a connective tissue problem, or you do have a mental health disorder, or another or another disease– which we haven’t really talk about disease statistics— but things like John Hopkins, or Parkinson’s… there are a lot of diseases that can be catastrophic. Multiple sclerosis… I have seen people from their 30s have MS for decades, you know, in a pretty debilitating way; it can affect people in different ways. So, disease is a really big factor in disability. And the catastrophic side of disability is the one you kind of worry about, which is a lifetime disease, or a paralyzing event— you know, someone who becomes a paraplegic— those kind of events are those ones that really make you look at disability. And most all policies have strong protections against those types of catastrophic problems. It’s when you get into these little bit more nuanced definitions of disability, which we will cover next, that you start noticing a lot more differences in policies.

Ryan Isaac: So, here is what makes buying a disability policy hard and confusing: there are all these different definitions that make one policy different from another, and riders that you can add to the policies. So, we are going to go through a few of these, and try to explain when they are really important to get right, and maybe when they are a little bit more nuanced, and not quite as important. So, the first distinction, especially for dentists, is that you can buy an individual policy by yourself— you know, you can go to any number of companies directly— or you can buy it through a group. So, members of the ADA, or the AAO, or any other association will often times have a group contract with an insurance company to buy it a little less expensive than you could buy it directly from someone else. But they will have differences in the policies that you end up getting.

Reese Harper: Yeah, and the individual policies will always argue that because it is an individual policy, it is much better, because it isn’t a contract with a group, but it is a contract with you as an individual, and I think there is some truth to that for people who— if you have an excess of a budget to spend on this, and you feel like—

Ryan Isaac: Who feels that way? (laughs) like, technically you might, but you never feel that way.

Reese Harper: Well, I think there is just a different type of client out there who prefers it, you know? Like, for me, I don’t want the cheapest disability policy, because I don’t have a good group policy, number one… I think dentists have a much better group option that a lot of other occupations have, and I think the ADA makes a strong case for the quality of their group policy.

Ryan Isaac: And the main definitions of the ADA policy are pretty solid. Now they do start to differ in some of the more nuanced pieces of the policy. They will differ quite a bit from a private company, but…

Reese Harper: Yeah. Just hit these briefly. You have these different types of policies, the group or the individual, then you have a monthly benefit amount, which is just the amount you are going to get paid if you are disabled, and then the premiums are based on your age, and they are either going to go up in premium every year, because you pick one that just rises, or they are a level premium, right, that is fixed based on your age, and it will last— until you are 65, it will be that same premium.

Ryan Isaac: Now, we talked about insurance in a previous episode, episode number 100, and we talked about this a little bit, how to choose that premium, and you said it is better to have that premium that is going to grow, and then get the amount of coverage that you need today rather than take a lesser amount of coverage that is not even going to help pay your bills, and then have it be on a fixed payment schedule. I would rather see a client be fully insured, and then have it on a graded schedule, because if we are saving money, if the savings rate is high and net worth is growing, at some point, we might be able to pair some of that back anyway. So…

Reese Harper: I think it is just important to get the right amount of coverage, and unfortunately, that usually means buying one that goes up every year. And as you get wealthier, you can cut your coverage down so even though it is getting more expensive, you are paying for less disability insurance, and you can slowly decrease it over time.

Ryan Isaac: And then the benefit period just means, how long is this policy going to last? For dentists, you can get it into your 60s, and sometimes until you are 70.

Reese Harper: There is a waiting period, and generally, we recommend trying to push the waiting period as long as possible, because again, we are trying to save money on this as much as possible so that we can redirect funds to retirement savings, and all these other more likely outcomes, and just because you have 180 waiting period doesn’t mean that you have a bad policy, you know? You can have a 30-day wait, or you can have up to a 180-day wait, and we generally say on individual policies, push the waiting period out as long as you can, especially if you have other assets—

Ryan Isaac: Yeah, and emergency fund, or other things too—

Reese Harper: To hold you off during that first six months. You are going to pay a fair amount more over a 20-year career by having a shorter waiting period.

Ryan Isaac: You will. Now on your business overhead policy, the amounts of money are so high, and the stakes are so high, and your business doesn’t have a provider they are working, so having a shorter waiting period on the business overhead policy is better than having a shorter waiting period on the personal policy.

Reese Harper: Yeah. I would generally say the benefit period on business overhead, you could probably go to a twelve month—

Ryan Isaac: Most people recommend twelve. Most insurance providers will say 24 is a little bit of overkill. Alright, another piece of these policies is the guarantees. So there are two types of guarantees. This has to do with your rates and if they can ever cancel the contract on you. So, the most common one that every policy will be is called guaranteed renewable. It just means that they can’t ever cancel the policy on you; they just can’t get rid of it. But they can change the rates if they change the rates for everybody. And you should know that, too: an insurance company can’t single you out and just increase your rates. But if they said, “we are going to increase rates for everyone between 35 and 40 years old,” they can do that. Sometimes, they won’t notify you (laughs); I have seen that on message boards. But there is another type of policy called non-cancelable. These terms, they are not very intuitive, but that just means they cannot change the rates. So, if it is guaranteed renewable, which all policies are, they can’t just cancel your policy; they can’t get rid of it. But if it is non-cancelable, then they can’t change the rate on you, or for anybody. So, for example, the ADA policy is a guaranteed renewable policy, which means they can’t just get rid of it, but the non-cancelable part, they can raise the rates in the ADA if they raise it for the whole group. And they have done it.

Reese Harper: Because it is not a non-cancelable policy. Which is so freaking confusing, because the name non-cancelable, to me, sounds like the first one.

Ryan Isaac: Exactly (laughs). And the first one sounds like the second one.

Reese Harper: Just keep in mind, the big picture is, there is a type of policy where they can change the rates for everyone, and you need to know, like, “can they change my rate?”

Ryan Isaac: That’s it. Don’t worry about the terms, just ask your agent, “can they change my rates?” That will work. Okay, so, one of the big ones here that distinguished between different policies and different companies are the definitions of disability, total and partial disability. So these are the ones, when you hear the phrase, “own-occupation,” or “own-occ,” or “any occ,” that is what these things are. So let’s talk about those for a minute.

Reese Harper: Let’s start with an own-occupation.

Ryan Isaac: Own-occupation just means you will get paid if you can’t do your current job now. If you go do any other job, you will still get paid if you are disabled.

Reese Harper: I could be a realtor after being a dentist, and I will still get paid for my dental income.

Ryan Isaac: Yeah. Go sling CEREC machines.

Reese Harper: What does any occupation mean?

Ryan Isaac: Any occupation means that if you are able to perform any other occupation, able, whether you are doing it or not, you are not going to get paid anything. So, anything. I mean, if you could go work anywhere besides being a dentist, even if you are not choosing to, then you are not going to get paid.

Reese Harper: Yeah, and I think there is some legal kind of precedent for this that is a little interesting. Like, if you have a policy that technically, you could go and do another job but you didn’t, I don’t think the insurance company actually— in some cases, there are any occupation policies where the agent will tell you that the insurance company’s perspective is, “we are not going to force you to get another job, even if you can.”

Ryan Isaac: Well there is something called a modified own-occ, or they call it sometimes a transitional occupation, where you can’t do your job, you can’t do the dentistry, but if you choose not to go do another job, you can still get paid. Even if you are able to. So you could say, “I can’t be a dentist. I could go sell for the supply company, but I choose not to. I am going to still get paid.” Where other definitions, like that any occ, they will say, “well if you are able to, we are not going to pay you.”

Reese Harper: Yep. I think the point here is that these words, any occupation, own-occupation, transitional occupation, or modified own-occupation, you just need to understand what your policy says specifically, because just because it is an own-occupation or any occupation or transitional, just because it is one of these words, it doesn’t necessarily mean all of the policies are the same that call themselves any occupation. If a policy says it is an any occupation policy, it doesn’t necessarily mean they treat claims exactly the same way. So you need to really understand the language in your policy as it relates to these definitions of disability, because this is probably one of the more important—

Ryan Isaac: This is one of the big ones.

Reese Harper: Yeah, and a lot of times, you will just get bullet point. You will get a high, single-bullet item that says, you know—

Ryan Isaac: Own-occ. With an asterisk by it.

Reese Harper: Yeah. You just have to understand the definition of each policy. There is another benefit called the recovery benefit, and some policies actually pay a partial disability or a recovery benefit when you are trying to get back to work, and some don’t.

Ryan Isaac: Well this is huge, because— you said this earlier— most disabilities are not career-ending forever; most disabilities people come back from, but in a diminished capacity. So you just can’t work the same amount of hours, you can’t do the same things, you are slower…

Reese Harper: You can’t operate at the same intensity that you were.

Ryan Isaac: You earn less money… yeah. That is the most common form of disability: something you come back from.

Reese Harper: Yeah, and some policies will define this as a loss of production rather than a drop in collections, which can be really significant.

Ryan Isaac: Yeah, well that is from, like, the ADA… I was reading that on their website. They will define it that way. So, yeah. I mean, again, don’t worry so much about the terms as really understanding from your agent what that actually means in your situation. In partial disability, some companies will say, “if you have a drop of 20% or more in your income, then we will keep paying you some benefits.” Others might be 15%, and that 5% difference in your income might be a fair amount of money. So, knowing how they are going to define your partial disability as you are trying to come back to work will be really important.

Reese Harper: A couple of other items that you have probably heard about: there is a future increase option… that is basically just a right that you get to add more coverage without going through underwriting at different intervals. Usually, it is like, once a year, we are going to send you a letter, and it is going to say, “do you want to buy more coverage? Because you have paid us a little bit of a premium to have this right to increase your policy.” It is not something that you lose out on forever if you don’t exercise it, in most cases, it is just that year’s option, and every year that passes, you can usually renew, but in some cases, if you don’t exercise it every year then you lose the option to continue to increase it at the same pace.

Ryan Isaac: Some policies are going to say— it is kind of built in that they just do it for you. 250 bucks every year that they will just go up, and you have to opt out of it. So it is important to know that.

Reese Harper: A cost of living rider is just a benefit that comes on the claim side if your policy. If you are disabled and you are on claim, the cost of living rider will just make your benefits go up with inflation—

Ryan Isaac: Or at a fixed percentage that you choose when you bought the policy.

Reese Harper: Yep. And that doesn’t necessarily mean that your policy’s benefit will increase during the time when you are not disabled. So if you have 5,000 a month for 20 years, and then you get disabled in year 20, it starts at 5,000. So, you know, you have to keep an eye on—

Ryan Isaac: That is what the future increase option is for is to have that go up over time. The other thing to thing about with cost of living riders is that some companies— let’s say you go on claim. You are at $5,000 of benefit, and you are on claim for a few years, and it works its way up to like, 7,000 bucks or something by the time you are off the claim. Some companies, if you come off the claim, and you go back to work just fine, and you go back on a claim at some point in the future, some will start you back at your original 5,000 and say, “you can pick back up at 7 where you ended off last time, but you have to repurchase that” like, you have to buy that extra amount that it increased, and some companies will just automatically start you where you left off if you go back on a claim. So, having to repurchase that cost of living increase that happened when you were on a claim the first time, that is something that changes from company to company. Kind of a nuanced thing, but that could make a big difference.

Reese Harper: Yep. And then the last thing, maybe there are three that are kind of more intuitive. Ryan talked a little bit about mental/nervous benefits… some policies don’t have any mental/nervous benefits. So, if you have any kind of mental health issue, it won’t be part of the benefits that you can apply for. Some policies have limitations where they say, “you’ll have a two-year limit on the claim that you can receive for a mental/nervous issue—”
Ryan Isaac: That is really common, too.

Reese Harper: And then some policies have a lifetime mental/nervous rider built into them, where you are able to a make mental/nervous claim and it is no different from any other type of disability. You can imagine how that would affect the cost of a policy when almost 10% of the claims nationally come from mental/nervous issues. So, if you are concerned about that, or want that feature, you are going to have to pay a fair amount for that benefit.

Ryan Isaac: And there are probably half a dozen small, more nuanced riders you can throw on there. If I am buying a policy or telling a client to buy a policy, the important ones would be, how it is defined, you know, own-occupation, how they define your disability, how they define partial disability— that’s a big one— future increase options, and cost of living, and mental/nervous. I would say those are probably like the top features of a policy you want to make sure that you understand clearly and that are probably part of the policy you get.

Reese Harper: Yeah. There are also the smaller ones, like some will have student loan protection riders, some will have retirement income riders—

Ryan Isaac: Where they pay these things for you if you are on a claim—

Reese Harper: Some will waive your premiums, where you don’t have to pay any premiums during the time you are disabled.

Ryan Isaac: Yeah, they will have a death benefit if you die while you are on a disability claim… they will have social security integrations, where if— receiving social security disability benefits are really difficult to obtain, and you can imagine, so sometimes policies will say like “if you are able to get social security, we are going to reduce your benefits.” So, that can be an important one, to understand how social security integrates with your policy. That is another one. So, there are a few there, but I think we hit the bigger—

Reese Harper: Yeah, keep in mind that every private disability carrier has one of— this will give you a good orientation around the types of things that you should be aware of in your policy, and not all policies are the same, and there is a reason that some policies cost more than others, and some are less expensive. Our philosophy is, at a bare minimum level, you have an ADA contract that is available to you through this group, and you have an AAO group for the American Association of Orthodontists that you can participate in that is at a pretty substantial discount to where these private policies are priced. So a private policy is always just going to cost more than an ADA group policy, because there are different features that are built into the— in most cases it will cost more. I mean, even if you strip down a private policy and try to make it be as lean as possible, it is still going to have a tough time competing with the ADA group policy. But that is not necessarily a reason for buying the ADA group policy, we are just saying, at a minimum level, at least have adequate coverage through a disability policy that protects you from a catastrophic perspective, and then if you have excess resources and an excess budget, I think there is nothing wrong with saying– the side of it I would like to see people make is I reduce my lifestyle and spending a little bit so that I can have the best types of coverage available to me, and protect my family, and live a prudent life around protecting myself from these issues, but the reality is people generally don’t have enough disability insurance, and so I would rather at least see them have a catastrophic policy that covers them up to the right amount of benefit level then shortchange their benefit level to get a better policy—

Ryan Isaac: Yeah, like with more flexible definitions and more riders. Yeah, I would agree. Let’s talk really fast then, about how much disability— earlier we were saying our average client carries about 67% of the disability coverage that he or she actually needs, and the average dollar amount was $10,500. How do we arrive at the amount of coverage someone should have?

Reese Harper: Well, it is pretty simple, you just have to take all of your living expenses right now, including your mortgage payment— for disability, you have to look at your mortgage payment, you have to look at your student loan payments, you have to look at all of the monthly living expenses you have… If you have after-tax investment accounts, a large after-tax investment account balance, you can withdraw a certain percentage of the account every year to offset your spending. We usually recommend 3%. And so, take your million dollars of after-tax investments and multiply that by 3% and say, “I can get 30,000 a year in personal spending out of this account no matter what—”

Ryan Isaac: Yeah, “and I need to spend 120, so—”

Reese Harper: “So, I have a disability amount that I need of 90.” So your after-tax investments can reduce the need you have for disability, and the bigger those get, the more you can actually reduce your disability benefit. Once you are into the latter stages of your career, and if you had a very large practice, or you had a bunch of rental property, if you had anything that you could confidently call passive income that was above and beyond that liquid investment withdrawal amount, then that could also reduce some of the disability need that you might have.

Ryan Isaac: Yep. So, that is what is interesting about disability: it is easier to calculate what you need— I mean, you just need kind of close to what you are spending— but it is really hard to buy the stuff, because it is so nuanced. What about— do you want to talk about business overhead?

Reese Harper: Yeah! I think if you are a single practice location, I think you want to look at all of the overhead that you would want to maintain so that your practice continues to function and stays competitive in the market, and then at least get 85%+ of that overhead—

Ryan Isaac: That is what brokers and specialists have told us. If you are the only doctor there, 85+; try to get close to what you are spending every month in the practice. It does change a little bit when there is multiple doctors in there, partners, or associates. I have heard people say, you know, between like 60%-75% of your overhead is probably adequate because there are other people in there. This is a different discussion too, when there are partners in a practice, and especially if it is a large business, where having buy-sell policies with life insurance and disability to cover the scenario where one of the partners can’t come and produce and contribute to the practice, that is where these policies have a little bit different approach, but you protect the different partners.

Reese Harper: Yeah. Let’s hit really quickly just some top mistakes for the last five minutes, here. I think one of the things I see is that people just don’t have enough coverage on the life insurance side or on the disability side, both for business overhead and traditional disability. They are just underinsured. I think that happens because they are either spending with a company that is too expensive for them, or they have a level premium that is too much money and they can’t— they get lower benefits, they don’t really understand their personal spending properly, or don’t calculate this correctly, so they end up having the unfortunate event of going on claim and then realizing it wasn’t really the right calculation.

Ryan Isaac: Yeah, and I mean, it is common to hear— I mean, people treat retirement this way too. We kind of assume, like, “oh if something happened… or when I retire, I will just reduce my spending,” you know? Like, “we’ll cut back.” But it is hard to imagine a scenario where there are extra medical bills, and time in hospitals, and care providers, and medicine, or whatever it might be, therapy, that you will be spending less money. So, don’t make that assumption.

Reese Harper: What is another mistake that you see?

Ryan Isaac: Well in terms of business overhead, we see this a lot where a small amount of business overhead was purchased a long time ago, usually at the start of a practice, because of a loan provision. You know, the lender said, “you need to carry some business overhead to protect this loan payment,” and so they will carry like ten grand of business overhead. And it is not crazy expensive, but they are spending thousands per year to keep this in place, and the loan has since disappeared, and it is clearly not enough to cover the business… So, we see this a lot, where it’s like, either don’t carry it— you know, don’t spend thousands a dollars a year carrying inadequate coverage— or bump it up and carry the right amount of coverage that you need for your business. So I see that a lot with business overhead.

Reese Harper: I also see people pass up on disability because— I mentioned this a little bit earlier, but they are structuring their policies either through the wrong carrier or with too rich of a benefit setup, and it just, I look at like— I saw this week a disability overhead case where someone was paying $4,000 for their disability overhead, and they were about to drop the whole thing, right? But then I pointed them to the ADA, and I just said, “look, before you drop it, go look at this policy. It doesn’t have all the bells and whistles, but at least you will be able to hold onto that.” It was like, “okay, I just cut my premium by 70%, and I am going to keep it now.” And I just think cost is a lot to do with it. You see this a lot in the long-term care industry, long-term care insurance and disability industries, where at some point, if you are making your customers pay for benefits that they don’t feel like they are going to use or statistically are not going to use at a probably rate, you know, and if the downside isn’t catastrophic enough, they will just drop the coverage. And I think that is where the disability industry is kind of trying to figure out, “which riders and features and benefits do we actually add to these policies? What do we push on people? Because if we push too hard, they are not going to pay for this stuff. They will stop paying premiums.” And that is not good for any insurance company. I mean, that is what happened in the long-term care industry. In 2002, they started coming out with these new policies, and like, “this is going to be the best thing ever, and everyone is going to want long-term care—”

Ryan Isaac: Yeah, now so many companies don’t even offer it.

Reese Harper: But you know, they didn’t collect enough premium for the benefits, people decided they didn’t need it, want it, or it was too expensive, the benefits were too rich, they had all kinds of riders that weren’t going to be used, and it was a short-term kind of capitalization on fear rather than a long-term insurable need. And so I think it is just important to get the right amount of coverage and do that as a dentist at a minimum level through a carrier that can provide you either a graded premium so it is cheap year by year– and there are plenty of carries that will do that. But the brokers won’t really, in most cases, want to sell you those graded premiums, because the premiums aren’t as good, meaning the commissions that brokers get paid to sell disability policies are based on how much you pay, and so when you pay for a level policy that costs more, their commission is a lot higher, and so a lot of times, they won’t recommend graded policies because the commission is just not as great.

Ryan Isaac: Okay, that is great. I think that is a good recap. As a reminder, if you go to our new website, dentistadvisors.com, we have a link at the top called the “Education Library”, and we have done— I mean, there are probably a half a dozen episodes just on insurance that we have done over the last couple of years; there are articles and short videos we have done. So if you go to dentistadvisors.com, click on the “Education Library”, and you can filter— there is a little dropdown menu— you can filter for insurance, and it will pull up everything that you are looking for. If you have questions about this— Justin, if they have specific questions on this episode, like they wanted to ask about their coverage, or how much they should have, is it best to comment on the episode on the website? Shoot us an email? Contact us through the website? What would you say?

Justin Copier: Yeah, you can do either way! You can comment on this particular episode— when you go to the page that has this episode, there is a discussion board where you can add your comments— or submit a question to the podcast, or send up an email.

Ryan Isaac: Yeah, ryan@dentistadvisors.com.

Justin Copier: Or send us a text! 833-DDSPLAN.

Ryan Isaac: Yeah, you can text the number too! So you can call 833-DDSPLAN, or you can text 833-DDSPLAN. We are texters. Reese texts all day long; he likes that. So if you go to dentistadvisors.com, you can see that through the “Education Library”, if you click on “Podcasts”, you could submit a question for an upcoming episode that we would love to answer. And then if you would like to have a chance to chat with us, you can find a time to book a free consultation. We can talk about your situation, questions about investments, insurance, planning… just go to dentistadvisors.com, click on the button that says “Book Free Consultation”, and we would love to talk to you. Or you can call us or text us any time. 833-DDSPLAN. Thanks for listening.

Reese Harper: Carry on!

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