by Jim Biesterfelt
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You're not the same person you were 20, 10, or even five years ago, and chances are your insurance needs have changed, too. In fact, you may be inviting a financial crisis if you bought a life or disability insurance policy years ago, stuck it in a drawer, and forgot about it. If something unexpected happens, you could find out too late that your coverage is inadequate or not properly set up.
The solution: Schedule periodic reviews of your insurance portfolio just like your patients schedule regular dental checkups. Year-end is a perfect time to complete such a review. To get started, ask yourself three basic questions: 1)Has my income changed? 2) Has my practice changed? and 3) Have the people in my life changed?
Has my income changed?
As your income changes, reevaluate your insurance coverage and make adjustments. For example, the disability income plan you purchased years ago may not be sufficient to protect your lifestyle if you were disabled tomorrow. A good rule of thumb is to cover 60% of your net monthly earned income after expenses, but before taxes.
Your life insurance also may not provide enough future income to preserve your family's standard of living. Experts recommend having an amount of life insurance that equals 8 to 10 times your annual income. Using this guideline, a dentist who earns $200,000 a year should have $1.6 million to $2 million in life insurance.
These rough estimates can provide helpful guidelines, but they are no substitute for an analysis of your unique situation. To obtain a more accurate measurement of your insurance needs, take advantage of online calculators on reputable Web sites such as the ADA Insurance Plans (www.insurance.ada.org).
Has my practice changed?
As your practice has grown and your operating expenses have increased, has your business overhead insurance kept pace? (Business overhead insurance is a type of disability insurance that reimburses a disabled dentist for certain business-related expenses.) Tally expenses that would be eligible for business overhead coverage, such as payroll, utilities, rent, and a replacement dentist, to determine if your current insurance is adequate to cover those costs in the event you become disabled and cannot work. If not, apply for additional coverage. (Up to $25,000 a month in business overhead insurance is available through the ADA Insurance Plans.)
Or maybe you've brought in a partner. Have you considered setting up a succession plan using a buy-sell agreement funded by life insurance? Is your son or daughter joining the practice? If so, you may want to purchase life insurance as a way to leave an equitable inheritance to your other children.
Another change comes when you've paid off your practice loan. If the loan was secured with life insurance, be sure to obtain a release letter from the lender and notify the insurance company to release the collateral assignment.
In this way, the proceeds of the policy will go directly to your beneficiaries rather than burdening them with the sometimes difficult task of locating the lender and getting the assignment released.
Have the people in my life changed?
Life events such as a marriage, divorce, birth, death, disability, and kids leaving home should be flags to review your insurance. For example, you may need to increase your life insurance coverage if your family has grown, or perhaps decrease it if you no longer have someone depending on you.
Changes with the people in your life could also signal the need to revisit your life insurance beneficiary designations. This is particularly important when there has been a divorce and remarriage or death of a named beneficiary. Always make sure your beneficiary designations are current so policy proceeds can be distributed in accordance with your intention.
It's not always easy to make the time for an annual review, but just like regular dental checkups are smart health management, periodic insurance reviews are smart risk management. The key is to have the right kinds and amounts of insurance at every stage of your life.
Editor's note: This article does not constitute legal, tax, or financial advice. Please seek professional input as appropriate to your situation.
Jim Biesterfelt is vice president of Group Special Accounts at Great-West Life & Annuity Insurance Company, which underwrites and administers the ADA Insurance Plans and is the sole provider of ADA-sponsored life and disability insurance to ADA members. For more information or a complimentary insurance review, call (866) 607-5330, e-mail [email protected], or go to www.insurance.ada.org.