Need advice on Disability Insurance - Future Increase Option and Riders

[Easdds]

Hi all,

I apologize if this has already been covered on the forum.  I didn't find much on some of these topics in the blog posts, so I thought I'd come here to the forum.

- I'm at the point where I probably need more disability coverage. I'm a 37 years old.

- I am currently covered at $8500/month between 2 policies:  Guardian/Berkshire ($3500) and Standard ($5000).

- The agent who helped me set up the original Guardian policy 12 years ago said I am eligible for $16,000/month according to the underwriting department.

- The agent can help me exercise a $6500/month future increase option that I've had through Guardian, which will get me to $15,000/month.

- The agent can also help me get the additional $1000/month with Standard if I want.

- Included in the proposal are some riders that I'm not too familiar with.

- One is a COLA 3% compounded.  I think I understand this one, but not sure it is worth buying as it sounds like the adjustment wouldn't start until a year after disability.  If I get disabled tomorrow I guess this would be good. But if I get disabled in 10 years I'm not sure this would be worth it. This rider costs  $436/year.

- Another rider is a partial disability benefit rider. This would cost $493/year.  Any thoughts on this one?  Reading the descriptive paragraph on this one made my head hurt.

- Another rider is called graded lifetime indemnity. It is really expensive at about $3000/year.  Any thoughts on this one?

- So the base policy would be $2347/year.  Then all these proposed riders would be another $3929/year!

Interested in what White Coat Investor and other bright minds do personally, and what the agents think as well.

Thanks in advance!

[jfoxcpacfp]

LBKCLU, car 54 (where are you)?

[LBKCLU]

The COLA Rider will increase your disability benefit after your disability has lasted one year. If budget is an issue, the question becomes https://www.whitecoatinvestor.com/disability-insurance-to-cola-or-not-to-cola/. However, at your age, I would recommend the COLA Rider if the affordability is there.

Keep in mind that Guardian's COLA Rider is 3% compound and that Standard's COLA is up to 3% compound based upon changes in the Consumer Price Index for Urban Workers (CPI-U).

The graded lifetime benefit is extremely expensive. In the "old days" when you purchased the policy, there was not much difference between a policy that paid benefits until age 65 or one that paid for lifetime. Guardian has increased the cost of this rider several times (if you look at the illustration of coverage, you will see that this rider alone represents approximately 50% of the cost of the entire policy). They will also be increasing the cost for it again (approximately 35%) when the new policy series is released. Last I checked, about 3% of policyholders purchased coverage with either the graded lifetime or lump sum rider. I'm sure that most of these purchases were a result of FIO exercises. I would definitely take a pass on this rider due to the cost.

[Easdds]

Thanks for the advice.  That is what I was leaning towards doing.  The COLA is relatively affordable, but the lifetime rider seems a little overkill.

 

Do you have an opinion on the partial disability rider?

Thanks!

[LBKCLU]

Yes, the Residual Disability/ Partial Disability Rider is a must. Otherwise, your policy will be "All or Nothing". If you can't practice dentistry (or your specific dental specialty), you would receive full benefits. However, if your physician states that you can work - even with minimal hours, days or limits the number of procedures you can perform, nothing would be payable (ie. you have a loss of time or duties but are still practicing as a dentist with a loss of income).

Therefore, the Residual Disability/ Partial Disability Rider will pay you in the event you have a loss of income (15% or more for Berkshire assuming the ProVider Plus policy and 20% or more for Standard). Benefits are typically payable proportionate to your loss of income. However, for the first 12 months of a Residual Disability claim, Berkshire will reimburse you for dollars lost, up to the maximum monthly benefit. Standard will pay you the full benefit for the first six months of a Partial Disability claim (assuming the Protector Platinum). After that, both policies will pay based on the percentage of lost income and give you that percentage of your monthly benefit.

Both policies also have an unlimited Recovery Benefit which will continue to pay benefits to you in the event you return to work on a full-time basis but you must rebuild your practice as your patients and referral sources have all but dried up. This provision will help you with your financial recovery - you are no longer sick but your income is as a direct result of your prior disability (there is a demonstrable relationship between the current income loss and your prior disability).

 

[Easdds]

Thanks so much!  This is very helpful.  My last question is regarding graded vs. level premium and your take on that.  I think I read elsewhere that graded is preferred until you get to the point where the premiums become extremely expensive, and then you can decide if you want to keep graded, switch to level, or discontinue the policy altogether because you are reaching financial independence.  My current policies with Guardian and Standard are both level, and cost about $4560 annually.  I would need to get a new proposal from the agent without the lifetime rider to compare the graded vs. level premiums for the FIO, but what is your view on this.

 

Thanks for taking the time.

[LBKCLU]

I agree with Rex. If you plan is to keep the policy long term, the level premium will be less expensive.

Using your age and making a few assumptions, on a year-to-year basis, the graded premium will surpass the level premium at year 11. On a cumulative basis, the graded premium will surpass the level premium at year 19. This does not take time value of money into consideration.

Also, keep in mind, that you can only convert to a level premium (on any policy anniversary) through age 50. Those level premium rates are also based upon your then current age.

 

[Easdds]

Thanks again for all the advice.....I really appreciate it.  I plan on base policy, COLA rider, partial disability rider with a level premium structure.

The agent is pushing hard for this lifetime rider.  Just gonna say "nope"

 

 

[LBKCLU]

Agreed. No need to purchase that. Use the savings to purchase more coverage if you can.

FYI, if you wanted to layer another policy on top of the Berkshire and/or Standard (to get above $15,000 month), and are self-employed, MetLife will allow you to purchase coverage based upon 120% of your "net" income. You can do the same with Principal but the additional coverage (based upon using the 20% higher income) cannot allow for more than an additional $2,000 monthly benefit.

[Easdds]

That's interesting.  It is difficult to know how much coverage one actually needs.  I know my fixed expenses per month, but there are variable expenses that could be cut out or greatly reduced.  I mean, if I became totally disabled I'm sure a lot would change in my life and my expenses would be lower than they are now....they would have to be to live off the disability income.  Is your recommendation to usually get as much coverage as possible? Is there a general rule for this or is it based on someone's specific situation.   I am self employed with my own practice. Thanks.

 

[TheGipper]

Hi Lawrence, thanks for all your invaluable advice!

I purchased a Guardian policy with level premium as a fellow, now 7 years in at age 40.  In retrospect I wish I had purchased a graded policy.  Can I convert a level to a graded.  Would this make sense.  I plan to drop the coverage sometime around age 50, worse case scenario if age 55, at FI.

Thanks!

[LBKCLU]

Unfortunately, you cannot convert from Level to Graded without terminating and replacing your existing policy. Your current policy may also include a Student and Resident Discount that would not be available to you today and the new policy would be subject to medical underwriting. For that reason, it likely makes sense to keep things as they are now.

As you become more financially successful, you can potential increase the waiting period from 90 to 180 days, remove the COLA Rider or possibly do both of these things, neither of which require medical underwriting. They are non-underwritten administrative changes.

[LBKCLU]

Yes, while some might argue that they can live off of less and reduce their expenses, I have found that expenses during disability can actually increase. For that reason, I would recommend that you purchase as much as you can as early as you can. You can always make changes to your coverage later. You can also potentially "ladder" how your disability benefits are paid. For example, maybe you have one policy with a 90 day waiting period and a second with a 180 day waiting period.

Another thing to strongly consider if you are self employed is Disability Business Overhead Expense insurance. This will reimburse you for the fixed expenses associated with your practice (anything not directly paid for by a patient). This can include your rent, staff salaries, utilities, malpractice insurance, etc. I have seen self employed dentists and physicians have adequate personal coverage yet face financial devastation as they are contractually obligated to continue to pay the expenses associated with their practice.

While 90 or 180 days work well for personal disability insurance, I would recommend 30 days for a BOE policy. I would also recommend a short benefit (payout) period such as 12 or 18 months as you will know and have ample opportunity to sell you practice for maximum value if you cannot return to your practice.

The premiums for a BOE policy are income tax-deductible. As a result, when the benefits are paid, they are taxable but since you are using them for business expenses, they are deductible so the result is a "wash".

[Docbeans]

LBKCLU wrote:

Another thing to strongly consider if you are self employed is Disability Business Overhead Expense insurance. This will reimburse you for the fixed expenses associated with your practice (anything not directly paid for by a patient). This can include your rent, staff salaries, utilities, malpractice insurance, etc. I have seen self employed dentists and physicians have adequate personal coverage yet face financial devastation as they are contractually obligated to continue to pay the expenses associated with their practice.

While 90 or 180 days work well for personal disability insurance, I would recommend 30 days for a BOE policy. I would also recommend a short benefit (payout) period such as 12 or 18 months as you will know and have ample opportunity to sell you practice for maximum value if you cannot return to your practice.

The premiums for a BOE policy are income tax-deductible. As a result, when the benefits are paid, they are taxable but since you are using them for business expenses, they are deductible so the result is a “wash”.

Click to expand...

LBKCLU, if a group of physicians own a practice together, do they buy the BOE policy through the business or individually? Thanks

[LBKCLU]

They buy the policy through the practice to cover the percentage of fixed expenses (those that are not directly reimbursed by patients) that each physician is responsible for.

Premium payments for Overhead Expense Disability insurance are tax deductible as a reasonable and necessary business expense (Rev. Rul 55-264, 1955-1 C.B. 11). As such, benefits received during disability, while taxable on receipt, are used to pay practice-related expenses, which are tax deductible. The net tax result is a “wash,” so the net tax impact is neutral.