News
Law Practice
Jun. 21, 2002
Planning for Disability
Dicta Column - By Ralph Bovitz - Is your family's financial security at risk? Most lawyers don't know that their chance of becoming disabled during their working years is 63 percent higher than the likelihood of dying in that time. As most lawyers have life insurance policies, so they should have disability insurance.
Dicta Column
By Ralph Bovitz
Is your family's financial security at risk? Most lawyers don't know that their chance of becoming disabled during their working years is 63 percent higher than the likelihood of dying in that time. As most lawyers have life insurance policies, so they should have disability insurance.
Some law firms and bar associations offer group disability coverage. If your firm does not offer disability coverage, if you don't belong to a bar association group plan or if you don't have an individual disability policy, your financial plan and family are at considerable risk. Yet many attorneys either don't have disability insurance or lack adequate coverage.
How much disability insurance should an attorney have? Determine how much your family needs to meet the cost of living: food, clothing, shelter, recreation and any other important expenditure. That number tells you how much disability insurance you need. How much you need and how much you can afford may be two different issues, however. Insurance companies rarely issue a policy to replace 100 percent of your earned income for there would be too much incentive not to return to work. Instead, disability policies often pay out 60 percent to 70 percent of earned income.
Attorneys often have a unique problem when it comes to disability insurance - defining disability. Lawyers should want the policy to kick in when they cannot perform the duties of an attorney, a so-called "own-occupation" policy. You don't want a policy that grants benefits only if you are unable to engage in any gainful occupation for which you are reasonably suited by education, training or experience. Such a policy would be cheaper than an own-occupation policy, but it means that you might have to prove that you are unable to take a job outside the practice of law before you qualify for benefits.
There are other ways to reduce disability insurance premiums. The longer you can wait before drawing benefits, called the elimination or waiting period, the lower the premium. The most common waiting period is 90 days.
That means, however, that you will need an alternative source of income until benefits are paid, such as your investment income or a spouse's earned income.
Another possible source of income during the waiting period is your firm's disability plan, if there is one. The firm's policy might pay for four to six months of disability benefits, which could hold you over until your individual policy kicked in.
Finally, you could accumulate a four- to six-month reserve of living expenses to tide you over until the disability benefits are tapped. A four- to six-month waiting period would mean a dramatic reduction in premiums.
Disability benefit policies also differ with respect to ending dates. It's best to have a policy that extends to age 65 for both sickness and injury. There are, however, policies that offer benefit periods of two, three or five years, with premiums that are much less expensive than a policy that covers you to age 65. The disadvantage of these specific-term policies is a loss of benefits during a long-term disability. Your health at the time of application and the premium cost will influence this policy selection decision.
Here are some other options to look for in a good disability policy:
• Recurrent disability coverage. With this feature, you don't have to satisfy a waiting period again when the same disability reappears.
• Partial disability coverage. These policies recognize that recoveries are often slow and insureds are often not able to perform some important duties of their occupation even when they can return to work. In these situations, reduced benefits are available until you are up to speed.
• Cost-of-living adjustment. Recognizes inflation, and its increased benefits can be valuable during periods of disability.
• Right to increase future benefits. This option gives you the right to purchase increased benefits in the future, regardless of health.
Of course, all these additional options will add to your premium, but they all are worth considering before signing a policy.
Probably the most important feature of a good disability policy is that it's guaranteed renewable and is noncancelable. That means the insurance company cannot change the contract terms, including premiums or benefits. Only you can cancel the contract; the insurance company cannot cancel.
There is usually little flexibility in disability plans offered by law firms or bar associations. The chief advantage of such plans is that they are relatively inexpensive. These are some of the likely disadvantages of group or employer-provided plans: maximum benefits are restricted, the definition of disability is weak and it's unlikely to include a quality conversion privilege to an individual policy if your employment or bar association membership is terminated. Attorneys should, therefore, design their disability planning around their employer-provided plan, if offered, and consider purchasing an individual disability policy for more certainty.
Finally, there are tax implications in a disability insurance policy. In general, benefits are tax free if you pay the premiums. If your employer pays the premium, including the firm for which you work or your own corporation, the benefits are not tax deductible. Thus, lawyers who pay their own premiums should pay with a personal check, in order to make them tax free.
Ralph Bovitz, a certified public accountant in Woodland Hills, is chair of the personal financial planning committee of the California CPA Society's Los Angeles Chapter.
By Ralph Bovitz
Is your family's financial security at risk? Most lawyers don't know that their chance of becoming disabled during their working years is 63 percent higher than the likelihood of dying in that time. As most lawyers have life insurance policies, so they should have disability insurance.
Some law firms and bar associations offer group disability coverage. If your firm does not offer disability coverage, if you don't belong to a bar association group plan or if you don't have an individual disability policy, your financial plan and family are at considerable risk. Yet many attorneys either don't have disability insurance or lack adequate coverage.
How much disability insurance should an attorney have? Determine how much your family needs to meet the cost of living: food, clothing, shelter, recreation and any other important expenditure. That number tells you how much disability insurance you need. How much you need and how much you can afford may be two different issues, however. Insurance companies rarely issue a policy to replace 100 percent of your earned income for there would be too much incentive not to return to work. Instead, disability policies often pay out 60 percent to 70 percent of earned income.
Attorneys often have a unique problem when it comes to disability insurance - defining disability. Lawyers should want the policy to kick in when they cannot perform the duties of an attorney, a so-called "own-occupation" policy. You don't want a policy that grants benefits only if you are unable to engage in any gainful occupation for which you are reasonably suited by education, training or experience. Such a policy would be cheaper than an own-occupation policy, but it means that you might have to prove that you are unable to take a job outside the practice of law before you qualify for benefits.
There are other ways to reduce disability insurance premiums. The longer you can wait before drawing benefits, called the elimination or waiting period, the lower the premium. The most common waiting period is 90 days.
That means, however, that you will need an alternative source of income until benefits are paid, such as your investment income or a spouse's earned income.
Another possible source of income during the waiting period is your firm's disability plan, if there is one. The firm's policy might pay for four to six months of disability benefits, which could hold you over until your individual policy kicked in.
Finally, you could accumulate a four- to six-month reserve of living expenses to tide you over until the disability benefits are tapped. A four- to six-month waiting period would mean a dramatic reduction in premiums.
Disability benefit policies also differ with respect to ending dates. It's best to have a policy that extends to age 65 for both sickness and injury. There are, however, policies that offer benefit periods of two, three or five years, with premiums that are much less expensive than a policy that covers you to age 65. The disadvantage of these specific-term policies is a loss of benefits during a long-term disability. Your health at the time of application and the premium cost will influence this policy selection decision.
Here are some other options to look for in a good disability policy:
• Recurrent disability coverage. With this feature, you don't have to satisfy a waiting period again when the same disability reappears.
• Partial disability coverage. These policies recognize that recoveries are often slow and insureds are often not able to perform some important duties of their occupation even when they can return to work. In these situations, reduced benefits are available until you are up to speed.
• Cost-of-living adjustment. Recognizes inflation, and its increased benefits can be valuable during periods of disability.
• Right to increase future benefits. This option gives you the right to purchase increased benefits in the future, regardless of health.
Of course, all these additional options will add to your premium, but they all are worth considering before signing a policy.
Probably the most important feature of a good disability policy is that it's guaranteed renewable and is noncancelable. That means the insurance company cannot change the contract terms, including premiums or benefits. Only you can cancel the contract; the insurance company cannot cancel.
There is usually little flexibility in disability plans offered by law firms or bar associations. The chief advantage of such plans is that they are relatively inexpensive. These are some of the likely disadvantages of group or employer-provided plans: maximum benefits are restricted, the definition of disability is weak and it's unlikely to include a quality conversion privilege to an individual policy if your employment or bar association membership is terminated. Attorneys should, therefore, design their disability planning around their employer-provided plan, if offered, and consider purchasing an individual disability policy for more certainty.
Finally, there are tax implications in a disability insurance policy. In general, benefits are tax free if you pay the premiums. If your employer pays the premium, including the firm for which you work or your own corporation, the benefits are not tax deductible. Thus, lawyers who pay their own premiums should pay with a personal check, in order to make them tax free.
Ralph Bovitz, a certified public accountant in Woodland Hills, is chair of the personal financial planning committee of the California CPA Society's Los Angeles Chapter.
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