Protecting Your Greatest Asset
Make sure you have the right kind of insurance
for all kinds of situations.
JEFFREY P. BENOWITZ, C.L.U., Ch.F.C.
you progress in your career as an optometrist, one aspect of your financial world
will always continue to be true: The greatest asset you possess is the ability to
earn an income, and protecting this asset should be a paramount concern.
As a society, we are programmed and even mandated to insure inanimate
objects and yet we leave our greatest asset vulnerable. We must pay an insurance
premium on a $30,000 car in order to insure it, and we don't even question paying
the $2,000 annual premium. If an optometrist is 32 years old, earning an annual
income of $90,000, the O.D.'s income potential is $2,970,000 if he or she works
until typical retirement age (65). This does not take into account an increase in
income over a 33-year career or the investment potential of this income. Obviously,
the income potential is far more valuable than the car, but, all too often, optometrists
fail to recognize themselves and their considerable skills as an insurable asset.
Private practice O.D.s often also fail to understand that they
are business owners who make critical business decisions. If an optometrist were
presented with two job opportunities one that pays an annual income of $85,000
and the other $83,000 assuming all other aspects of the jobs are equal, most,
if not all, optometrists would choose the job with the higher salary.
Now, put yourself in that situation and add a single variable
to the equation. Let's say the employer who pays $85,000 informs you that you will
not be paid if you become too sick or injured to work. But the employer offering
$83,000 promises that if you are too sick or injured to work as an optometrist you
will receive $48,000 tax-free. Which would you choose? In my years of working with
optometrists, I have never had even one O.D. pick the first job when presented with
this choice. All optometrists would sacrifice $2,000 of annual salary for the assurance
that their greatest asset their ability to earn an income as an O.D.
So how do you go about protecting your greatest asset? What products
and features are available and what should your income protection solution con-
tain? We'll address the options.
Individual disability income insurance
Individual disability income insurance will protect your greatest
asset with a monthly benefit that you can receive tax-free if you don't deduct the
premium as a business expense. Within this contract, there are several definitions
and riders that differentiate insurance companies' contracts:
1. Non-cancelable. This means as long as you continue to pay the
premiums, the company cannot cancel your contract.
2. Guaranteed renewable. Once you lock into a premium rate, this
rate is guaranteed for the life of the contract.
3. Definition of total disability. This portion is very important!
The definition clearly distinguishes the value and quality of certain contracts.
The definition you want should resemble the following: "Total disability means that,
because of sickness or injury, you are not able to perform the material and substantial
duties of your occupation. You will be totally disabled even if you are at work
in some other capacity (as a professor of optometry, for example) as long as you
are not able to work in your occupation."
4. Benefit period. Some contracts will provide a benefit to the
age of 65, some to the age of 67 and others to the age of 65 with a lifetime extension.
Even if you become too sick or injured to work as an optometrist, your overall life
expectancy may be no less than someone who is considered "healthy." Therefore, in
my opinion, having a benefit pay you for as long as possible is the best option.
The lifetime extension will provide a benefit past the age of 65. The amount you
receive after age 65 depends on how old you are when you stop working as an optometrist
due to an illness or accident.
5. Elimination period. This is the amount of time you must wait
before receiving your first payment after an illness or injury. A standard interval
is 90 days.
6. Future increase option rider. Different companies have different
names for this benefit, which allows you to increase your disability insurance coverage
in the future with no medical questions asked. You still must demonstrate that you
are financially eligible, but your medical insurability will not be called into
7. Residual rider. If you cannot work as an optometrist full time
due to illness or accident and your income has dropped as a result, then this rider
affords you the opportunity to make a claim for part of the benefit. In other words,
you do not need to be totally disabled to receive something from this contract.
8. Cost of living adjustment rider. This rider will multiply your
benefit by a factor (usually tied annually to the consumer price index) after one
year of disability. Look for a rider that continues to multiply your benefit each
year you can't work, and make sure it compounds.
9. Premium structures. Some companies offer a graded or
step premium and all offer a level premium. A level premium will lock you
into a premium at your current age. A graded or step premium will start off with
a lower amount, but will rise each year. I recommend you make sure you can switch
the premiums from the graded or step to the level at some point before it becomes
Overhead expense coverage
These are some of the key points of an individual policy, but
there are two other types of business insurance policies to consider depending on
your situation. If you're in private practice, you have monthly expenses; therefore,
consider overhead expense coverage. The key question to ask yourself is: "What happens
to my practice if I cannot work for an extended period say, seven months?"
Overhead coverage provides a benefit to cover your expenses while
you recover, or to pay another optometrist's income, within the first six months
of an illness or accident. Choose an elimination period for this policy of 30 days,
then choose the benefit period: 12, 18 or 24 months.
Disability buyout insurance
If you are in partnership with another O.D. you should also execute
a buy/sell agreement with an attorney. This legal document spells out what happens
if one partner dies, becomes disabled, quits or has to leave involuntarily. You
then fund the "dying" and "becoming disabled" parts with insurance. Disability buyout
insurance will provide you a lump sum after a specified period of time, either 12,
18 or 24 months. This money is then used to buy out the disabled partner's share
of the business.
For example, say Sarah and Jane are partners in a successful practice
in New Jersey. The business is valued at $750,000. They execute a buy/sell agreement
that spells out the terms if one of them dies, becomes disabled, quits or has to
leave involuntarily. Like most O.D.s, they readily buy life insurance to fund the
"dying" part, but do not fund the "becoming disabled" part.
Shortly thereafter, Jane develops a severe disability and can
no longer work as an O.D. She now wants Sarah to buy-out her share of the practice:
$375,000. Sarah does not have the capital to do this. What happens now? Sarah will
have to use practice income to pay Jane over time and hire someone new to assist
her in the meantime. As a result, she must pay two people when only one is working.
This is a tremendous drain on the practice. The buyout policy would have provided
Sarah with the $375,000 in one lump sum. She then could have used that money to
buy Jane's share at a minimal cost for her and the business.
You may have noticed that both partners in the example were female.
The Association of Schools and Colleges of Optometry (ASCO) reports that more than
half of new optometry school graduates are women. As women implement more individual
disability insurance, they become a larger block of premium- paying policyholders
for insurance carriers. However, among all professions women still comprise a very
small percentage of the overall policyholders for insurance carriers, but have a
larger percentage of the disability claims. According to the National Association
of Insurance Commissioners (NAIC), women have a higher likelihood of becoming disabled
at all ages. Because of this morbidity experience, women's premiums for disability
insurance are higher than men's.
When a married couple has a single income earner, there is a feeling
that the "breadwinner" should possess the individual disability insurance because
without this income their family's lifestyle would be drastically altered, a completely
valid belief. However, more and more households are now dual-income, with families
relying on two incomes to support their way of life. When I meet with couples, I
often hear, "one income is enough if one of us were to be too sick or injured to
work." But this is usually proven incorrect when they really look at their monthly
expenditures and realize how much they would have to give up.
No one envisions a disability; however, when someone is too sick
or injured to work, a family's household expenses usually increase instead of decrease.
Having protection for both incomes is extremely important. The whole idea of risk
management is to self-insure small risks and transfer the large risks to the insurance
carrier. If a 32-year-old, female O.D. can't continue to work as an optometrist,
most families do not have the millions of dollars necessary to replace that person's
What if that same O.D. happens not to be working at the time of
her illness or accident because she had given birth four months prior and decided
to stay home with her child for six months? As long as this doctor implements the
correct individual disability insurance policy with a true own-occupation provision,
then that O.D. is protected whether she is earning income or taking time off. Remember,
the definition of total disability states that you are deemed disabled, "if you
cannot perform the material and substantial duties of your occupation." It does
not mention anything about income; therefore, she is protected as long as she continues
to pay her premium while at home.
Protecting your greatest asset is the most important thing you
can do for yourself, your family and your practice. Making sure you have the correct
insurance for this protection can be just as important.
Mr. Benowitz is
a Financial Representative with Certified Financial Services, LLC, in Ridgewood,
N.J., an agency of The Guardian Life Insurance Company of America. Contact him at
Optometric Management, Issue: November 2006