Article Date: 11/1/2006

assets
Protecting Your Greatest Asset

Make sure you have the right kind of insurance for all kinds of situations.
BY JEFFREY P. BENOWITZ, C.L.U., Ch.F.C.

As 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.

Earning potential

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. — is protected.

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 question.

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 too cost-prohibitive.

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.

Premium rates

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.

Dual-income households

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 lifetime income.

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 jeffrey_benowitz@glic.com.



Optometric Management, Issue: November 2006