By Ronald P. Perilstein, CLU
In practically every discussion I have with a physician the topic of income and asset protection dominates. Frequently, the merits and pitfalls of the “latest and greatest” schemes are lobbed back and forth like the latest weekend tennis match.
“What can you tell me about this plan?” or “Do you think I’m pushing the envelope too much if85” My answer is usually the same. I ask, “What are you trying to accomplish and what’s really important to you?” The answer is usually the same. Most people want to protect their assets and income so they, and their family, will not be wiped out by a catastrophic illness, accident, death or malpractice claim.
Death is addressed very easily by having adequate life insurance, which is outside the scope of this article. In addition, while the potential of financial calamity brought about by a malpractice claim is certainly real, most awards or settlements do not exceed the limits of the malpractice insurance.
So, when I ask a physician what he or she has done to accomplish their objective, most list the usual, well-established planning techniques, such as: the preparation and regular updating of wills, purchasing of basic insurance protection, contributing as much as possible to a qualified retirement plan and the adherence to a well-diversified and regularly re-balanced investment portfolio.
A few take it a step or two further to include added business protection such as buy-sell planning (and funding) for death and disability, succession planning, liquidity planning and asset-shifting to the next generation. So what’s left?
This article will expose you to just a couple of the lesser-known, but easy-to-understand strategies, which will help you establish a firmer base of income and asset protection for you and your family.
First, it is necessary to understand the basic strategy of income protection. The first layer of protection, ideally, should always be individual disability income insurance. Once in place, most experts agree that the next layer should be group disability insurance. This theory works great if one is able to build an income protection plan from the ground up. Since most people are not able to do this, be aware that group insurance might very well prevent you from buying enough individual insurance to provide adequate protection.
Problem #1 is making sure you have adequate after-tax income protection. This usually affects physicians employed by a larger group, where the group disability insurance began before having the opportunity to maximize individual disability insurance.
Solution #1 suggests you look for an individual disability insurance policy that has a Catastrophic Benefit Rider. This relatively new option is rarely discussed and can provide a significant layer of additional protection for catastrophic-type disabilities. In these cases the benefit will pay, in addition to other insurance, up to 100 percent of your pre-disability income. The qualifications to collect this part of the benefit are more stringent than the “regular” part of the insurance policy and frequently will include the inability to perform two out of six activities of daily living (bathing, eating, dressing, toileting, transferring and continence). This Catastrophic Benefit Rider will also pay if the need exists for supervision due to organic brain disorders exists (Alzheimer’s/dementia) and/or if one suffers the loss of speech, hearing, sight or the use of two limbs.
Problem #2 is the high probability that retirement assets and savings, intended to pay for retirement living expenses, will have to be used to pay for long term care needs instead. We all work hard, pay taxes and save what we can to be used in our retirement. Due to advances is our ability to diagnose and treat illness and disease, life spans have been significantly prolonged for many conditions that used to bring about certain death. The fact remains that most of us are going to live a long life and we do need to be concerned about having the money to live that life. We all hope that our money will be used, during our non-working years, for housing, food, and other “normal” retirement expenses. But when these funds are consumed by long term care expenses the probability of having enough money is greatly diminished.
Solution #2 suggests you protect those retirement assets from premature consumption by purchasing long term care insurance. LTCi provides the money, at the exact time it’s needed, to pay for covered care regardless of whether that care is received at home, in an assisted living facility or in a skilled nursing facility. It also removes the huge burden of having to rely on family members to provide care and supervision. And don’t assume they won’t be there! Regardless of our wishes, family takes care of family. They interrupt their lives and just do it. Who among us would let a parent, sibling or grandparent in need of adequate care, live without it? LTCi truly solves the problem by providing the funds to have a professional care-giver perform the chores and services that we can’t perform (due to time, money or distance) or don’t want to perform. Just think how much happier you and other family members will be if no one has to severely disrupt their daily routine to provide care.
Bonus Solution #2. Many physicians, seemingly “maxed out” on disability insurance, consider LTCi to be their supplemental, catastrophic disability plan because it pays benefits when they are unable to perform two out of six ADLs or are diagnosed with organic brain disorders. While it does cost more than a Catastrophic Disability Benefit Rider on a disability policy, LTCi will pay benefits without regard to income. Unlike many disability policies that end at age 65, the LTCi policy can provide coverage for life. This means that long term care expenses can be covered and paid (up to the policy’s limit) for as long as needed.
Problem #3 pertains to all people who are more than a few years away from retirement. Almost every physician contributes to his or her qualified retirement plan each year. These plans, with such names as 401(k), 403(b), 457, pension, profit sharing, money purchase, defined benefit, etc., typically allow tax-deductible contributions. The popularity of these plans was built on the premise of paying fewer taxes now and fewer taxes later (in retirement) when the tax bracket is usually lower. Because these tax-deductible contributions have to be deducted from earned income each year, they must stop if you aren’t working due to a disabling illness or accident. Without adequate contributions, financial hardship in retirement appears almost certain.
Solution #3 transfers the responsibility of continuing the retirement plan contributions, in the event of disability, to an insurance company through the purchase of a special Retirement Protection disability policy. These policies will make payments to a trust, in which the disabled person can direct the investment and access at retirement. The funds in the trust are not available to the disabled person until retirement.
All three problems are real and the solutions, while available today, are not well-known or highly publicized. They provide additional income and protect the consumption of other assets, allowing those assets to be used for their intended purpose. These easy-to-understand strategies and inexpensive solutions are only one piece of a financial security plan that, together with the other pieces, will help to prevent financial disaster for you and your family.
Ronald P. Perilstein, CLU, ChFC, CLTC is the President of The Arjay Group, Inc. an independent insurance firm in Narberth, Pa.