Risk Management:
The common issues that jeopardized
my client’s financial security:
1.
Misunderstanding
“Own Occupation” Coverage:
As outlined above, my client’s disability was limited to
the use of his dominant hand. It did not prevent him
from engaging in other work activity. Prior to becoming
disabled at the age of 55, my client’s gross annual
income was approximately $400,000. His average gross
monthly income was approximately $33,333, resulting
in an approximate net monthly income of $21,666
(based on 35% tax liability). He subjectively believed
his combined monthly disability benefit was $16,000
a month, leaving a $5,666.45 gap in monthly earnings.
During our conversation, he advised that he could
reconcile the gap in his income by assisting in an
administrative position at his practice and by doing
expert work. He also expressed interest in pursuing a
teaching position at a dental school that did not require
him to utilize his dominant hand.
As we discussed his coverage, my client was correct,
that his policies provided “Own Occupation” coverage.
However, only his $6,000 a month ADA policy provided
“True Own Occupation” coverage through his 65 th
birthday. He was devastated when I confirmed that
his $10,000 a month policy provided “Limited Own
Occupation” coverage.
Per the terms of his policy, his “True Own Occupation”
coverage was limited to 5 years. After 5 years, his policy
converted to a “Modified Own Occupation” definition
and would not provide a benefit if he was working in
“Any Gainful Occupation.”
Before we reviewed his policies together, my client
believed he had approximately 10 years of “True
Own Occupation” coverage and anticipated living off
a $16,000 a month/$192,000 annual benefit.
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MAY/JU NE 2019 | P EN N S YLVA N IA D EN TA L J O UR N A L
He was hopeful he could engage in other work activity
to mitigate the gap in his income. However, based
on his coverage, his $10,000 a month benefit would
terminate after age 60 if he engaged in “Any Occupation.”
While this issue does not affect his $6,000 a month
ADA policy, the dentist stands to lose $10,000 a month,
$120,000 annually, and $600,000 of benefits if he
engages in any work activity after 5 years. My client
struggled to comprehend the financial consequences
of his misunderstanding.
2.
Altering Tax Liability:
Tax liability is another important topic to analyzing when
assessing disability insurance products. This is especially
true for dentists working in cities that have local wage
taxes. Depending on where the dentist resides, and how
the premiums are paid, a dentist’s IDI benefits can be
subject to federal, state and city income tax liability.
This tax liability can significantly reduce the perceived
net benefit.
As a general rule, IDI premiums that are paid for with
post-tax dollars create a non-taxable benefit. However,
it is very easy for a young dentist that is paying
premiums with post-tax dollars to join a practice that
assumes paying the premiums with pre-tax dollars.
When this occurs, the dentist alters the tax liability,
turning the IDI product into a taxable benefit.
Such was the case for my client. Prior to starting his
practice, he paid the premiums for both policies with
post-tax dollars. When he formed his partnership and
practice, he began paying the premiums through is
practice, with pre-tax dollars. In doing so, he converted
both policies benefits from non-taxable to taxable.
His perceived $16,000 a month non-taxable benefit
converted into a net monthly benefit of $10,400. By
altering his premium payment method, he reduced his
monthly benefit by $5,600/$67,200 a year. By adjusting
how he paid his premiums, his tax liability went from
$0 to $672,000 over the 10-year life of his potential claim.