Part 2 - Life, Health, and Disability Income

Author`s Note: In Part 2 of this series, I`m going to deal with the area of insurance known as life, health, and disability-income insurance. Typically, the agents you use for this insurance are not the same ones that you use for your home, auto, and office needs.

Important insurance- planning concepts for the dental office

Chris D. Callen

Author`s Note: In Part 2 of this series, I`m going to deal with the area of insurance known as life, health, and disability-income insurance. Typically, the agents you use for this insurance are not the same ones that you use for your home, auto, and office needs.

We do not recommend paying for your associate dentist`s personal-health insurance, even though this would allow him or her to obtain health insurance paid on a "pretax" basis. With the new, health-care reform rules that have been mandated at both the state and federal level, you could be subjecting yourself to severe penalties and claims if you do not do the same for all of your other full-time employees. (Refer to the June issue of Dental Economics for my article on this confusing area of health-insurance planning for your office.) In many states, if you take a business deduction for health-insurance payments for any of your employees and/or their dependents` coverage (including you and your family), you need to check with your CPA to be sure that this practice does not violate your state`s health-care reform rules.

Many states require you to follow strict health-care reform rules if you have an employer-sponsored plan. If your business pays for any portion of your or your family`s health insurance, you probably will need to make the same coverage available to all of your other full-time employees.

If your spouse works in the office, we do not recommend applying for your family`s insurance under that person`s name. Many tax advisers have been recommending this strategy to afford the dentist the opportunity to receive a 100 percent deduction for the family health-insurance premiums. Although the IRS allows this practice, health-care legislation does not.

Health-care reform rules in many states mandate that employers offer "guaranteed health coverage with coverage for pre-existing conditions" to all eligible, full-time employees. This usually requires a contribution by employers equal to what they are doing for their employee/spouse and family. If you are paying and taking a 100 percent tax deduction for your spouse and dependents, you may be required to make the same health-care offer to all of your full-time staff members and their dependents.

We typically recommend that a dentist terminate any type of group health-insurance policy. Have everyone who needs health insurance purchase it individually. The exception is when maternity coverage is needed or in instances where there are uninsurable health considerations within the group. This will not always be possible for reasons such as staff morale or the inability to increase wages of staff members enough to help them purchase their own individual policies. In many states, increasing a staff member`s wages so that he/she can purchase an individual health-insurance policy could be considered an employer-sponsored plan. If this were the case, it would require you to be in compliance with both state and federal health-care reform rules.

When terminating employees that have had health coverage through a group-health insurance policy in your office, make them aware that purchasing a temporary health policy or taking a group-conversion policy could make them ineligible to take advantage of health-care reform guarantee-issue plans. This should be a problem only if the terminated employee has a pre-existing health condition. (This was fully explained in the previously mentioned June Dental Economics article.)

Disability-income insurance

Many dentists purchase personal-disability insurance based on price rather than the quality of the definitions of disability. Be sure to purchase only a policy that you truly own, which means that no changes to the policy - including price increases - can be made once it is in force. About one-half of all disabilities that last over 90 days will continue for at least six months. Most long-term disability lasts under two years. Most disabilities also are partial and not total. The majority of dentists will return to work following a disability. However, these dentists will not have an office to come back to, since the majority of their patient base will have dissipated or the practice will have been sold.

Several practice-management firms have informed me that it takes between three and five years to re-establish a successful dental practice. If your policy no longer will pay you after returning to work following an extended disability, you will have to learn to survive on a substantially reduced income for the next three plus years. How will you pay your bills? You may have to claim bankruptcy unless your reduced income is supplemented until you practice can be re-established. It is crucial to have a disability-income policy that will continue to pay as long as there is a continued income loss due to the disability.

A myth is being perpetuated in the dental community by uninformed insurance agents that there are no longer any truly good disability-income policies available for a dentist. Although many carriers that used to offer quality policies have withdrawn from the marketplace, one or two companies still continue to offer quality disability-income insurance for dentists. The edge that a truly independent insurance agent (one that does not favor one particular company over another, but seeks only the best policy definitions for each client) has is the ability to offer a selection of quality policies. Most captive agents (those agents who sell for primarily one company) tend to sell the product that their carrier offers, regardless of whether or not it is the most beneficial for the dentist.

More than 41 key provisions are contained in a personal disability-income policy. All of them are important to consider when selecting the right policy. Due to space constraints, I am unable to cover all of them. However, be sure to purchase a policy that contains at least the following provisions:

Medicare Care Waiver - You should not be required to be under medical care to collect a benefit. Once your physician releases you from routine medical care, many policies will stop payments. In other words, will the policy pay once the injury has healed if you still continue to suffer a loss of income? If your policy requires the continued care of a physician, you should consider replacing it with one that does not require continuing medical care. If your policy requires medical care only during the waiting period, but not after the waiting period, we might recommend keeping it.

Full-Residual Benefit (Return-to-Work Benefit) - This provision will assure continued payment once you have returned to work, if you continue to suffer loss of income as a result of your disability. This usually happens to most dentists because the patient base has shrunk. If your policy does not contain this provision, you need not look any further for problems in your policy. This definition is the heart of a disability-income insurance policy for a dentist. If you are capable of obtaining other insurance, do it! Without a full residual benefit, your policy is inferior.

Noncancelable and Guaranteed Renewable - This means that the policy cannot be changed, modified, or canceled once it has been issued.

No Time and/or Duties Requirement - To collect on a partial disability claim, most policies require the dentist to be unable to perform at least one major duty of his or her profession or to spend as much time as previously spent in the profession. The better policies only require a 20-percent income loss to trigger a benefit. You should not have to prove a time or duties loss in order to collect. Many conditions can occur in which a dentist has a significant income loss due to a disability, but still is working the same hours and doing all of the duties of dentistry. A good example of this would be Carpal Tunnel Syndrome. Many dentists suffer income loss because they cannot handle their instruments easily and, therefore, they cannot turn patients as quickly as they used to. However, they have no time or duties loss, so they would not be eligible for a partial (residual) claim. Some policies only require this definition during the waiting period (normally 90 days), after which only the 20-percent income loss is required to collect a benefit.

Averaging - Very few policies contain an "averaging position." This definition could be important, because dentists do not trade even time for even money. You are not paid an hourly rate. If your policy does not average your earnings on a month-to-month basis following your return to work, your benefit could be terminated prematurely. An example would be a dentist who earned $10,000 a month prior to his disability. To continue to receive a policy benefit, he must earn under $8,000 a month (20 percent loss). The first month back to work following an extended disability claim, he earns $1,000. The second month, he earns $3,000. The third month, he does a substantial amount of high-priced cosmetic dentistry and earns $8,001, but only works 20 patient hours. Most carriers would have stopped his checks after the third month, because he exceeded the 20 percent loss threshold that is calculated on a month-to-month basis. If his policy had contained an "averaging" clause, the insurance company would have "averaged" the three months: i.e., $1,000 + $3,000 + $8,001 = $12,001 ÷ 3 = $4,000 a month in earnings. The carrier will continue to pay the claim until the averaged monthly earnings reach over $8,000. This is an invaluable definition to have in your policy, because it will pay you more and pay you longer than a policy that does not contain this provision.

The statement, "You should never replace older policies with newer ones," is false. Many agents make "blanket" statements such as, "You`ve had that policy for 15 years ... there is no way you can get a better one now, especially with such a low premium." This is a very misleading statement and one not supported by facts. Almost any policy purchased prior to 1986 has inferior definitions of a disability. The new version of disability had not been conceived until after that time. Many disability-income insurance companies had both good and bad policy definitions, depending upon the year the policy was issued. Many of the more popular carriers that sold these policies did not upgrade to quality definitions until after 1993, and then subsequently reverted to an inferior definitions policy after 1996!

Two companies that insure about 60 to 70 percent of the dentists we review have never changed to all of the quality definitions of disability. Some agents have been selling on the notoriety of the insurance company`s name rather than on the quality of the policy definitions. They simply tell their clients that they have the best definitions of disability, even though they don`t.

We have been recommending a relatively new form of disability-income policy to our clients. It is a form of excess catastrophic disability-income protection. Generally, this policy is layered onto your existing disability-income policy. A client will purchase up to an additional $8,000 a month of excess benefit, which, in effect, covers 100 percent of wages, rather than the traditional 60 to70 percent coverage. Rather than the benefit being triggered by income loss and policy definition, it is paid as a result of the loss of the ability to perform daily activities. It works in a similar way to a long-term care/nursing-home policy, where benefits begin once a predetermined waiting period (typically 90 days) expires and after the client is unable to perform at least two out of six crucial daily living activities (ADLs). These activities include such things as eating, bathing, dressing, etc. This is a relatively inexpensive policy that typically costs $300 to $600 a year. One other benefit of this policy is the ability, at age 65, to convert some of the benefit to a real nursing home policy without evidence of medical insurability.

Business-overhead insurance

Do not confuse your office property and casualty policy with a business-overhead, disability-income policy. They are two separate and distinct policies that cover completely different risks. A business-overhead, disability-income policy will pay your business, upon your disability, a monthly reimbursement check for most expenses incurred in operating a dental office. Beware of agents who want to increase the policy face amount to cover expenses such as lab bills, dental supplies, meeting, and seminar expenses. These expenses do not need to be covered. To gauge the correct waiting period, you must consider the amount of your accounts receivables. Take your average month`s receivables and divide by the amount of insurance that will be needed each month. This will show you what waiting period to select.

For example, a dentist with an insurance need of $15,000 a month had receivables of $30,000. That means he has two months of collected receivables ($30,000 ÷ $15,000 = 2) that could support the practice if he becomes disabled. Based on this scenario, we would recommend a 60-day wait period for a new dentist and possibly a 90-day wait for an established dentist. The cost-savings between a policy with a 30-day wait and a 90-day wait period is approximately 100 percent. For that reason, we encourage taking as high a waiting period as possible.

You should look for most of the same definitions for a business-overhead, disability-income policy that are contained in a personal disability-income policy. The "averaging" provision is not contained in this policy. It is very difficult to get a full "return-to-work" (residual) benefit in today`s policy environment. About the best you will be able to obtain is a six-month, return-to-work provision. Most policies have limits of $15,000 a month and contain some sort of "time and duty" requirement. One company that we are aware of is coming out with a full residual benefit (full return-to-work benefit) with no time or duty requirements. The maximum limit of coverage will be up to $20,000 a month. It should be available in most states by the end of 1998.

We encourage the purchase of a "replacement dentist" option if you do not have a partner or associate dentist. This is an amount that could be paid to a replacement dentist during a total (not partial) disability. We typically recommend $3,000 to $4,000 a month of this benefit. It should provide a base income to the replacement dentist so that he/she can come in and sign off on hygiene and take a minimal patient load. Additional salary could be paid to the replacement dentist out of the earnings that the dentist generates for the practice.

We recommend framing your business-overhead, disability-income policy and hanging it in the staff room. Your staff members need to be aware of the policy, since it will continue to pay for their salaries if you should ever become disabled. The worst thing that could happen would be to have the staff visit you in the hospital following a severe accident, see the severity of your injury, and think, "I`m unemployed!" Head this potential disaster off by making your staff fully aware of how the policy will work. Let staff members know they will be provided for even in the event of a sale of the practice to another dentist. They need to be assured that they are valuable employees, and the new owner will be sure to need their valuable services.

Some dentists use "dental circles" in lieu of purchasing a business-overhead, disability-income policy. A dentist will recruit five to 10 dentists who would be willing to give up a day of their personal production every week or every other week. These dentists would work in the office of the disabled dentist until that dentist could return to work. I agree with the concept of dental circles; however, they should be used as a temporary measure up to 90 days maximum. Any longer time frame would be unrealistic. How long would you be willing to give up 25 percent of your production to help out a colleague? Most of the business-overhead, disability-income policies we write have a 90-day waiting period. By having an agreement with a 90-day maximum and a policy with a 90-day wait, you will have the best of both worlds.

We recommend establishing a legal agreement that must be signed by all participants in the dental circle. It should define exactly what the terms of any illness or sickness are that would require the services of the replacement dentist(s). Ideally, the language of the contract would mirror that of a good policy`s definitions of disability.

Buy/sell insurance

Many dentists who have a co-owner of a building or practice set up a life and/or disability-income policy that would buy out the deceased or disabled partner`s interest in the building or practice in the event of death or total disability. A legal agreement is established that binds all owners` heirs to sell to the surviving partner(s) for a preset price. This creates an orderly transition for all parties. Without one of these agreements, the heirs have the right to sell out to the highest bidder. Many times, this results in being in business with your fiercest competitor!

Once the agreements are in place, life or disability insurance is taken out in the amount of the value of all owner(s)/partner(s) shares in the business. We recommend having the attorney who drew up the agreement hold onto the policies as well. This will allow for an orderly transition if and when the agreement needs to be exercised.

Be absolutely sure that your attorney defines the definition of disability within the agreement and that the wording is exactly the same as that contained in the insurance policy that the parties will be using to insure the buy-out agreement.

Life insurance

When purchasing life insurance, you must ask yourself two questions:

1) "How much life insurance do I need?"

2) "How long will I need my life insurance?"

We generally recommend taking a life insurance amount equal to nine to 10 times your taxable income to provide for ongoing living needs for your family, plus an additional amount of coverage that would be needed to pay off any debts. A $1,000,000 life insurance policy is really only $60,000 a year of after-tax income for your heirs. This assumes that they can get a sustained 10 percent return on their investment each and every year for the rest of their life in a safe, low-risk investment. It is worth even less if the investment return is less.

If your need for life insurance is for more than 40 years, then you should consider the purchase of some form of permanent life insurance called universal life or whole life. But if your need is shorter than 40 years, you definitely should not consider any form of permanent life insurance. Term life is the cheapest way to go in this situation.

If you are single and no bank or mortgage company requires you to have life insurance to support a loan (called a collateral-assignment policy), we do not recommend the purchase of life insurance. We also don`t recommend the purchase of life insurance on minor children. The purpose of life insurance is to provide restitution for the loss of income provided by the deceased. Our dental clients are not living off any income provided by their children. The exception to this rule is to purchase a $10,000 term-life option on one of the parent`s policies that will cover all children for a total of about $70 a year.

We recommend purchasing term-life insurance with a guaranteed-level payment period equal to the time until you will reach financial independence. With this philosophy in mind, the majority of our client select a guarantee period of 20 years or less. Some companies now offer level-term, life-insurance rates up to 40 years. We do not encourage purchasing one-year guarantee rates (called annual renewable term) unless the need for the life insurance is less than five years.

If you are going to be purchasing large amounts of life insurance, you should consider using the estate tax shelter of an irrevocable life-insurance trust. Use an attorney who is completely knowledgeable about how to establish this type of trust. Unfortunately, at your death (or the death of you and your spouse if you are married), the IRS considers the death-benefit amount of your personally owned life insurance to be the same as if it were sitting in your checking account. It will be taxed accordingly.

The IRS exempts the first $600,000 of your estate for both you and your spouse. As a result, it`s possible that your $1,000,000 life-insurance policy, when added to the remainder of your estate, might only translate to $500,000 to $600,000 net to your heirs. If the policy is owned by an irrevocable life-insurance trust, your heirs might have the use of the entire $1,000,000.

Many dentists have begun smoking the occasional cigar. Be aware that smoking just one cigar a year could trigger smoker rates with most life insurance companies. Frequently, the cost for smoker rates is nearly double that of a preferred nonsmoker. Unless you really enjoy cigars, we would encourage you to stop smoking them if you intend to purchase additional life insurance. Most carriers now require a three-year time frame without smoking to get the preferred nonsmoker rate.

Be aware of rates obtained off the Internet or through a radio or newspaper ad. Unless you have given your complete health history along with your driving record and immediate family history - as well as lifestyle activities such as scuba diving or flying - you cannot be assured of being quoted an accurate rate. There used to be two rates: smoker and nonsmoker. Now, there are 10 rates, with the best being a No. 1. The companies must test your blood and urine, as well as your vital signs such as blood pressure and cholesterol rates before an accurate rate can be calculated. Additionally, situations such as a recent bankruptcy could prohibit your obtaining coverage with many carriers.

The services offered on the Internet and in radio and newspaper ads tend to quote the No. 1 rates. Yet, with most carriers, less than 10 percent of all those who apply will qualify for this No. 1 rating. You would then end up with a higher rating and price than the original quote. We recommend working with a knowledgeable agent who can pre-shop your health history and lifestyle situation ahead of time with several carriers. By doing this, the agent can quote you a rate that is realistic for your situation. If you are a pilot or a scuba diver, you generally never will get better than a No. 3 rating on your life-insurance policy.

If you are an older dentist with too much money and property and you know your heirs will have to give up some of your estate to pay state and federal estate taxes, consider using a second-to-die, life-insurance policy that would be owned by an irrevocable trust. This policy would provide the appropriate amount of money to pay the known estate taxes that would be due upon your death and the death of your spouse. Many times, this policy is not used because insurance agents only show policies with high premiums. It is not uncommon to see rates for a healthy, 60-year-old couple as high as $30,000 a year for a $1,000,000 policy. It`s unfortunate that some agents don`t show a potential client how to minimally fund a policy. We routinely get the same $1,000,000 of insurance for less than $4,000 a year. This is a much wiser choice than having your heirs give up a $1,000,000 asset directly to taxes.

Complementary analysis

If you are concerned about your policies not containing all of the correct features and you want to be sure your insurance portfolio is in proper compliance, please take note. Our firm will provide you with a comprehensive analysis of your entire insurance needs on a complimentary basis. To complete this analysis process, you must provide us with several items. Please include all of your insurance documents, along with a copy of your most recent taxes and completed "Health and Lifestyle Questionnaire," which will be sent to you upon request. The questionnaire also may be downloaded directly off of our Web site. However, you must call us first to get the required password. Upon completion of this process, we will set up a teleconference meeting to review your analysis.

You may contact us at (614) 899-2541 or e-mail us at cdcallen@beol. net.You also are invited to visit our Web page at www.cdcallen.com for updates.

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