Determine exactly how much you need
Nearly everyone understands the importance of expecting the unexpected. It is one of the reasons the process of financial planning exists–to provide security no matter what storm you may weather. Insurance plays an important role because it protects the hard work you’ve put into your dental practice, and peace of mind in the process.
“Should you unexpectedly pass away, you want to make sure you don’t leave loved ones in a financially stressed situation,” explains David Forbess, a CPA and financial planner at CWA. “They’ve already been stressed enough after something traumatic or disabling. Life and disability insurance help to not leave anyone in a lurch.”
Together, the right life insurance and disability plan can ease the impact of a traumatic life event that could endanger your financial plan. But, how much insurance do you need? What does it cost and how do you know if you’ve purchased the right kind?
Typically, life insurance is purchased as either term or whole/universal. Term covers only a span of time, often within 10-30 years. It is a good fit for covering the cost of a mortgage, school tuition or paying off debt. On the other hand, whole life insurance covers your entire lifetime, and it has an investment component that builds cash value. Term is usually less expensive: 5-10% compared to whole. The monthly premium for both is determined by age, gender, along with your and your family’s health history.
“Our firm often focuses on term life insurance because we can capture benefits for clients by putting money in retirement plans, 401(k) plans and IRAs while maximizing tax deductions. Whole life insurance may be valuable to those who are maxing out their contributions to these types of plans. It’s another bucket we can use.”
David Forbess, CPA and Financial Planner
How much do I need?
Everyone’s needs are different when considering the total amount of coverage needed. To begin, David recommends considering if something were to happen, how much would it take for your family to extinguish all debts and continue to live comfortably. Sometimes, David will work with clients on an estimated monthly budget and use it to determine the total coverage needed for a policy. He also takes into consideration retirement savings and investment gains of 4-5% per year.
“Every three to four years, you should revisit the total amount of life insurance. Slowly, as you begin the process of accumulating wealth, you become self-insured to a degree,” notes David. He likes to stagger policies for clients in 10-, 20- and 30-year policies so that as they grow older and wealth accumulation grows, they can peel back insurance policies.
What else should I know?
David suggests keeping a few things in mind while shopping for life insurance:
- Name a beneficiary that aligns with your estate documents.
- Work with an insurance professional with a good, reputable company.
- Apply for policies before age 40, if possible, to get the best deal on premiums.
- Keep track of your policies and inform your loved ones. Payouts from policies usually happen within 30-90 days and take longer when policy paperwork can’t be found.
Any worker’s financial plan should include protection in case you aren’t able to work for an extended period of time. The Council for Disability Awareness reports that more than 25% of today’s 20-year-olds will be disabled for at least one year before retirement. Every year, 5.6% of Americans experience a short-term disability and that’s why disability insurance is crucial. And, it’s not only about lost income, particularly for dental professionals.
“For younger dentists, it is a larger concern because disability goes away at age 65,” notes David. “If you become disabled early in life, you need to make sure you can cover the next 30 or so years of savings you’ll miss out on.”
Dentists should be aware of three different kinds of disability insurance policies:
- Personal disability policies can cover your expenses at home and replace your income. Short-term is typically up to three months with long-term plans covering periods beyond three months.
- Business loan protection policies (also known as business reducing term policies), which are policies pledged to a bank. If you become disabled, your loan is paid for by the policy.
- Business overhead policies can cover the costs of running the business itself, like rent, utilities, wages or taxes.
David notes that a good rule of thumb for premium pricing is that disability insurance premiums are typically 40-50 cents on the dollar, for every dollar of benefit you receive. Premiums are also usually more expensive for women due to maternity needs. For dental professionals with high earning potential, policies may seem costly; so, you should determine exactly how much coverage is right for you.
How much do I need?
Much like life insurance, it is important to know how much money you and your family require in your monthly budget. A good rule of thumb is to target at least 70% of your current salary and to consider whether you have enough emergency savings to last up to six months for any short-term disability. Because short-term policies can be pricey, it is usually better to build up a cash reserve and shop for long-term policies.
Also, consider policies within the context of your personal financial liquidity and your business’ available working capital. Can you and your business withstand your long-term absence without a policy?
What else should I know?
Keep in mind a few notes from David on disability policies:
- Be aware that policies typically have a 60-180 day wait period before policies can begin paying out.
- Get the right kind of policy with the right kind of riders (policy provision or amendment), such as an own occupation rider. This covers you when you lose the ability to perform a profession you have been trained in, like dentistry. With a true occupation rider, you would be allowed to have a different job, while still receiving full benefit payments from your policy.
- Exercise any future increase options, which allow you to increase benefits without undergoing the underwriting process again.
- Consider Cost of Living Adjustments (COLA) over time. Many policies offer riders that keep up with costs over time.
If you have unanswered questions about life or disability insurance, not only can an insurance professional help you but also consider consulting a financial planner.
“This is a very emotional topic. However, I like to look at it from a math standpoint and understand what my client’s wishes are for taking care of their family. Often, it becomes a math equation at that point, to see how the numbers play out in different scenarios,” explains David. “We’re here to help.”
Contact our team for a complimentary consultation to learn more about how insurance plays an important role in your full financial plan.
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