Disability Insurance Planning for Professionals
Keller, Lawrence B., Wigler, Harry R., The CPA Journal
Doctors, lawyers, and other professional clients of CPAs often pay attention to their family's life insurance needs, but concerns about becoming disabled usually go unaddressed. Statistically, however, a professional is far more likely to suffer a severe disability that damages the ability to work, rather than die prematurely. While some people have the financial resources to fund a disability on their own, most need disability income insurance to cover the risk. Good planning on the part of a CPA can result in peace of mind and financial security-the perfect gift for one's family and other loved ones.
Disability insurance planning has changed dramatically over the last decade. Professionals and their financial advisors have demanded more flexibility when structuring disability policies. The insurance industry has responded by offering myriad options. Now more than ever, CPAs can help clients protect their most valuable asset-the ability to earn an income. This is one area where what applies to all professionals also applies to CPAs themselves and to their businesses.
How Policies Are Offered
Disability insurance can be purchased on an individual or group basis. Group insurance is usually provided by an employer or purchased individually through a sponsoring professional association. Although initially low in cost and a reasonable alternative for some professionals, such group policies do not provide the customized benefits that can be achieved through quality individual policies.
Group policies can be canceled (by the sponsoring association or the insurance company), rates increase with age, and premiums are subject to adjustments based on the claims experience of the group. In addition, group and association contracts often contain more restrictive definitions of disability as well as less generous contract provisions when compared to well-structured individual policies. On the other hand, they are initially far less expensive than individual policies.
Most insurance companies will issue disability insurance coverage equal to approximately 60% of earned income. Certain occupations, however, are provided with "special limits." The limits permit new professionals to purchase benefits in excess of what their current earnings would normally allow. The most common maximum monthly benefit available to professionals is $15,000. However, some companies, depending on occupation, may allow a professional to purchase up to $20,000 in coverage combined with group long-term disability (LTD) insurance provided by the professional's employer.
Cost of Disability Insurance
Premium rates are based on factors such as the insurerd's age, gender, monthly benefit, optional riders, and the occupational classification that the insurance company assigns to each profession. As a general rule, the younger the policy owner, the lower the cost. Professionals should purchase a policy as early in one's career as possible to lock in lower premium rates.
Although women are better risks for life insurance, this does not hold for disability insurance. Rates for females are substantially higher, and their policies can cost 50% to 75% more than policies for men. Unisex rates may be available by taking advantage of a "multilife" discount. This arrangement typically requires that three or more policies be purchased by individuals employed at the same law firm, medical practice, or other professional firm. While this strategy allows females to save as much as 50% on the cost of their policies, males' rates may actually increase. One must consider any potential savings against the overall makeup of the individuals to be insured.
The occupational classification assigned to a profession or medical specialty by the insurance company will significantly impact premium rates, as well as the policy provisions made available to the insured. The classifications are generally based on the insurer's claims experience. …