Ralph Bovitz, CPA, PFS

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Disability is a Bigger Risk than Death


By Ralph Bovitz, CPA, PFS


Is your familyís financial security at risk?


Did you know that the chance of becoming disabled during your working years is 63% higher than the likelihood of your death!  You probably have life insurance, but do you have disability insurance?


If you cannot practice law, due to sickness or injury, for a prolonged period of time or, worse yet, permanently, you need disability insurance to cover the daily costs of living, until you can return to practice.   Some law firms and bar associations offer group disability coverage.  If your firm does not offer disability coverage, if you donít belong to a bar association group plan, or if you donít have an individual disability policy, your financial plan and family is at considerable risk.  Yet many professionals, including attorneys, donít have disability insurance --- or perhaps have inadequate 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 are two different issues, however.  Insurance companies rarely issue a policy to replace 100% of your earned income.  At 100%, there would be too much incentive not to return to work.  Instead, disability policies are often pegged at 60% to 70% of earned income.  That might be all you need if you have investment income or your spouse is also working or could work, if necessary, to supplement the disability benefit.


Attorneys have a unique problem when it comes to disability insurance Ė defining disability.  Attorneys should want the policy to kick-in when they cannot perform the duties of an attorney, a so-called ďown-occupationĒ policy.  What you donít want is 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 means you might have to be unable to take a job outside the practice of law, that is most likely to pay a lot less than law, before you qualify for benefits.  What you want is a stream of income to tide you over until you can return to practice.


Turning to the cost of disability insurance, letís review some of the ways to reduce premiums, if you have to pay for your own policy. The longer you can wait before drawing benefits, called the elimination or waiting period, the lower your premium.  That means you need an alternative source of income until benefits are paid, such as your investment income or a spouseís earned income.  Another possible source of income during the waiting period is your firmís disability plan, if there is one.  Then, perhaps the firmís policy might pay for four to six months of disability benefits and that could be the period you would wait before needing to tap your individual policy.    Finally, you could accumulate a four to six month reserve of living expenses, deposited in a savings account, to tide you over until the disability benefits were tapped.  A four to six month waiting period would make a dramatic reduction in premiums. The most common waiting period is 90 days.


How long should disability benefits last is another important question to ask.  Itís best to have a policy that extends to age 65 for both sickness and injury.  There are policies offering benefit periods of two, three or five years, with premiums much less than a policy going to age 65.  The disadvantage of these specific-term policies is a loss of benefits during a long-term disability.  However, your health at the time of application and the premium cost will influence your decision in policy selection.


   Here are some other options to look for in a good disability policy:

  •  Recognition of a recurrent disability.  With this feature, you don't have to satisfy a waiting period again when the same disability reappears.

  •  Partial disability.  Here the policy recognizes recoveries are often slow and insureds are not able to perform some important duties of their occupation.  In that situation, reduced benefits are available until you are up to speed.

  •  Cost-of-living adjustment.  With inflation, living costs increase and the option to receive 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 itís worth knowing they are out there.


Probably the most important features of a good disability policy are that itís 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, even if its claims experience, that is, how much they are paying out under the contract, is bad.


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.    Here are some of the likely disadvantages of group or employer-provided plans.  Maximum benefits are restricted, the definition of disability is weak, and itís unlikely a quality conversion privilege to an individual policy is available, if employment or association membership is terminated.  Thus, when an attorney may most need disability coverage, such as becoming self-employed, it is not available because of health reasons.  Therefore, attorneys should design their disability planning around the employer-provided plan, if offered, but consider the purchase of an individual disability policy for more certainty, even if more expensive than a group policy. 


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 you work for or your own corporation, the benefits are taxable.  Thus, premiums should be paid with your personal check, to make them tax-free.












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