8: Personal Insurance Needs

CHAPTER 8
Personal Insurance Needs

I detest life insurance agents; they always argue that I shall some day die, which is not so.

Stephen Leacock

The process of risk management involves identifying and managing a person’s risk exposures to protect assets and income. People cannot live in a risk‐free world, and there is always the possibility of loss. However, a person can protect their assets against significant, unexpected losses that could financially devastate themselves or others. Everyone needs to accept some risk. In analyzing risk, a person needs to separate those risks and determine which they can accept and which they need to manage through some type of insurance. This chapter discusses forms of personal insurance, and professional insurance is discussed in Chapter 28.

UNDERSTANDING INSURANCE

Insurance is one of the most‐used risk management techniques. Insurance is available to cover almost any potential loss (Box 8.1), although here we are only looking at personal insurance. A person must decide if the loss is significant or common enough to insure against. (Someone may purchase flood insurance, but if they live on a mountaintop, why bother?) As a rule, if the loss can be self‐sustained, it is cheaper, over time, not to buy the insurance and to self‐insure and accept the loss. For example, a dentist probably should not buy dental insurance for their family because they can afford most dental costs incurred by family members. A dentist should probably buy medical and accident insurance because the potential loss would be significant. An automobile accident involving a week in hospital for one person can easily cost $100 000, not including liability if that person caused the accident.

Insurance is a commodity. That means the insurance is the same from one company to another (assuming comparable policies). Therefore, someone can shop for insurance based solely on price. Agents work for the insurer, not for the consumer. A person may pay extra for an extended insurance product, which means that they pay extra for convenience, familiarity with the agent, or broad forms of coverage. However, the insurance itself is the same. Insurance agents are all different. The dentist should shop around for an insurance agent. Often, they will get better rates and better service if they have all types of coverage with one carrier, and may also get better rates if they stay with an insurer for several years without a claim.

Insurance aims to guard against an unexpected, significant financial loss. The basic theory of insurance is that many people pay a small amount (the premium) into a pool of funds. If any payers are unfortunate enough to suffer a significant loss, then part of the pool of funds covers that loss. For example, many people pay a small premium to an insurance company to cover if their home is damaged or destroyed by a disaster, such as a fire. Most people do not have any damage and therefore do not collect from their insurance company. However, if a fire damages a home, that home’s owner will receive money from the pool (as a “payout”) to cover the damages. However, insurance usually only reimburses for a demonstrated loss.

Insurance companies set premium rates based on several factors that influence their expected payout from the pool of premiums. The insurer needs to cover all expected losses and make a reasonable profit. The frequency of occurrence and the size of the typical award both influence the expected payout from the company. A person’s history of claims, age, and other personal factors help determine the company’s estimate of their particular risk as an insured party. Insurers use actuaries (like statistical accountants) to figure out risk tables and rates to charge their clients. For example, the chance of an 85‐year‐old man dying is much greater than that of a 5‐year‐old dying in a given year. The life insurance rates for the 85‐year‐old man will be higher than for the 5‐year‐old.

Insurers face the risk that more people will die, have a house fire, or have a car wreck in any given year than they anticipated. If that happens, they initially lose money, raise everyone’s rates the following year, or cancel policies for the poorer risks. Most also carry insurance through Lloyd’s of London or other insurance underwriters. They call this the secondary insurance market, which helps cover the insurers for significant losses, such as natural (hurricane) or human (terrorist) disasters. Insurers use other techniques to control how much risk they face. Copays, deductibles, payment limits, exclusions, and other riders all help control their potential losses.

Each person must decide when to use insurance. There are times when the law requires that they have insurance. (Workers’ compensation and unemployment insurance are required insurance for employers. Most states require auto liability insurance.) Other than required times, a person should use insurance to help cover an unexpected, unpredictable loss that they would not be able to afford to pay out of pocket. The owner of a new $70 000 car often chooses to insure the car in case an accident causes such damage to the automobile that they cannot afford to have repaired. The owner of an old $1000 junk car may choose to carry no insurance on the vehicle. If they wreck the car, they lose the cost of the car. (Again, insuring liability, in case the owner of the junker caused the accident, is required by law in many states.) Other significant, unpredictable losses that can be insured against include damage to the home, hospitalization, loss of income because of a disability, liability as a professional (malpractice), or liability as a private individual (personal liability).

The person signs a contract (policy) with the insurance company. The contract states that the insurer (the company) will indemnify (make good a loss to) the policyholder in case of proven loss (as specified in the policy), given the restrictions written into the policy. Insurance companies usually sell policies through insurance agents. Agents may work for one company (a “captive” agent) or they may represent many companies (an “independent” agent), shopping around for the best rates for a given situation. A person’s relationship with an insurance agent may be as close as that with an accountant, so they need to find a compatible agent. The buyer should be sure that the agent explains all the options of the policies and integrates the various types of coverage for the various insurances they purchase. The state where someone resides, not the federal government, regulates insurance companies and agents.

If a policyholder has a loss, the agent will be the initial contact with the company. The policyholder must understand that the agent does not decide whether the policyholder is reimbursed for a loss. The insurance company does that. The agent only acts as a go‐between, often splitting their allegiance between the policyholder and the company. An adjuster is someone hired by the insurer to decide the amount of covered loss. After a car accident, the adjuster will determine how much it ought to cost to fix the car (and therefore the reimbursable loss). The agent will act as a best friend while someone is paying premiums. If that person files a claim, things change. The agents then play “good cop, bad cop” with the loss adjustors and the insurance company. Policyholders must remember that agents work for the insurer.

MEDICAL INSURANCE

Medical (healthcare) insurance originally reimbursed a person for high, unexpected medical costs, such as hospitalization. It has evolved into a mechanism to help pay for the costs of healthcare, large and small. The world of healthcare insurance is complex, and marketplace and governmental influences drive it. It is a constantly changing system, so here we only present the basics of health insurance.

Like other forms of insurance, health insurance is a contract that requires a health insurer or company to pay some or all of a consumer’s healthcare costs in exchange for a premium. It pays different amounts for different types of care and who provides it. A person can generally shop for a healthcare insurance plan to find the one that best meets their needs. If, for example, they have a child with a developmental disability, they will need an entirely different plan from that for a healthy, single person with no dependents. If someone is employed, their employer may offer one insurance plan or a mix of plans from which to choose.

PAYING FOR HEALTHCARE

There are several ways in which insurers share the cost of healthcare with their plan participants. This encourages the consumers to become more knowledgeable and participate more in their healthcare decisions.

Premium

Medical insurance can be selected and paid for by the individual. If the dentist is employed, the employer often establishes a benefit plan that pays all or part of the insurance cost. The employee may be required to share in the cost through salary reduction. A general rule is that the more the purchaser (individual or employer) pays in premiums, the less the individual pays when seeing their healthcare provider. Premiums are paid each month. The government helps with premiums for low‐income families.

Out‐of‐Pocket Costs

Out‐of‐pocket costs are consumers’ costs for medical care that the insurer does not reimburse. Thus, consumers pay out‐of‐pocket costs and their monthly premiums, but the insurance contract has a limit on out‐of‐pocket costs. Once the consumer reaches that limit (an annual maximum amount determined in the contract), the insurance company pays all or a part of any further covered costs. Typical out‐of‐pocket expenses include the following:

  • Deductible

    A deductible is the amount consumers owe for healthcare services before their health insurance plan begins to pay. (Premiums do not count toward the deductible.) For example, if a consumer’s deductible is $1000, the plan will not pay anything until the consumer has paid $1000 for covered healthcare services. However, some healthcare services (often preventive services) are not subject to the deductible and may be covered by health insurance plans even if consumers have not met the deductible. Generally, the higher the deductible, the lower the premiums’ cost. The insurance company will pay less because the insured pays more. The trade‐off for a lower deductible is higher premium payments.

  • Copayment (“copay”)

    Copayments require the insured to pay a fixed part of the cost (e.g. $30) out of pocket, usually at the time of service. Often copayments are lower for preventive services. They are also lower for in‐network providers than copayments for out‐of‐network providers. This encourages consumers to use the insurance company’s network of providers. Copayments do not take the place of deductibles.

  • Coinsurance

    Coinsurance is like a copayment. Here, the consumer pays a percentage (e.g. 20%) of the cost instead of a fixed amount. Coinsurance also does not replace deductible amounts; they are paid in addition.

Allowed Amount

An allowed amount is the maximum amount the insurer will pay for a covered procedure. (It is sometimes called an “eligible expense” or “negotiated rate.”) If providers charge more than the allowed amount, consumers may have to pay the difference, especially if they see an out‐ofnetwork provider.

Balance Billing

Balance billing is when providers bill consumers for the difference between the provider’s charge and the amount allowed by the health insurance plan. Say a provider charges $300 for a procedure and the insurance plan’s “negotiated rate” is $200. The provider may bill the balance ($100) to the individual. However, if the provider has signed a contract with the insurer to be in their network of providers, they generally may not bill the balance. Out‐of‐network providers generally can. This is another incentive for the consumer to get care from a network provider.

TYPES OF HEALTH INSURANCE PLANS

Indemnity Plans

In the past, indemnity (traditional insurance) plans were the norm. In these plans, the patient went to the provider they chose, received care, and the insurance paid all or a portion of the bill. These indemnity plans – fee‐for‐service (FFS) plans – still exist, although they are becoming rare. Because the insurance company cannot enter into a contractual obligation with the providers, they cannot control the cost of care. So, these plans are often prohibitively expensive.

Flexible Spending Accounts and Healthcare Savings Accounts

Several types of accounts allow a person to deduct money from their pay (pretax) and then use that to pay for out‐of‐pocket medical expenses. Two common types are FSAs (Flexible Spending Accounts) and HSAs (Healthcare Savings Accounts). These are not actual health insurance plans, but savings plans that work together with a health insurance plan. A consumer uses money in the HSA or FSA to help meet out‐of‐pocket expenses that the insurer does not pay. When a consumer uses an HSA or FSA to pay their qualified out‐of‐pocket medical expenses, they pay these on a pretax basis. The money someone contributes to an HSA or an FSA is not subject to federal income tax. However, there are strict rules on which expenses qualify. Companies establish FSAs as employee benefits. Individuals can use HSAs. Insurance companies, banks, or other financial institutions set up these accounts. An online search will find many companies to help a practitioner set one up. All these accounts have specific rules and are subject to the whims of Congress and the Internal Revenue Service (IRS). The practitioner needs to check with their advisor to get the right plan.

High Deductible Health Plan

A High Deductible Health Plan (HDHP) features higher deductibles than traditional insurance plans in exchange for lower monthly premiums. HDHPs are often combined with an HSA or an FSA to pay the higher deductible costs that the patient must pay. The patient pays the out‐of‐pocket expenses with tax‐deductible contributions to the HSA or FSA. HDHPs are often called catastrophic health plans.

Managed Care Plans

Because of the high cost of medical insurance premiums, many individuals and employers buy managed healthcare contracts for their employees. These are generally not actual insurance products (which indemnify or agree to pay for a loss), but instead are forms of prepayment for care, which shift the risk of overutilization of health services from the insurer to the provider and the subscriber. Consumers with these private health insurance plans can generally choose between several types of care plans.

Managed care plans are networks of providers organized by the insurer to manage the patient’s care. Health insurance companies contract with specific hospitals, doctors, pharmacies, and other healthcare providers to deliver medical services for agreed‐upon rates. The plans that use these networks give consumers different levels of access to providers, with different premium price points, different consumer payment requirements, and different requirements for choosing providers.

  • Health Maintenance Organization

    A Health Maintenance Organization (HMO) is a type of health insurance plan that usually requires the consumer to choose from a list of in‐network doctors who work for or contract with the HMO. They generally have specific hospitals in their network as well. They require participants to be referred to a specialist by their primary care doctor. Typically, HMOs only pay for the care provided in their network (except for emergency care). HMOs generally charge only premiums. There are often no (or low) out‐of‐pocket expenses for the consumer. Premiums are typically lower in an HMO than in other plans because of the requirement to see a network provider.

  • Preferred Provider Organization

    A Preferred Provider Organization (PPO) also creates a network of healthcare providers (doctors, hospitals, therapists). They have contracts with those providers that cover reimbursement and other care requirements. Consumers pay less if they use providers that belong to the plan’s network (i.e. in‐network providers). They can see out‐of‐network providers, but it will cost the patient more in out‐of‐pocket expenses. Patients do not need a referral to see a specialist. In exchange for greater access to providers, premiums are generally higher in a PPO than in an HMO.

  • Point of Service plan

    Like a PPO, a Point of Service (POS) plan is a type of plan in which consumers pay less if they use doctors, hospitals, and other healthcare providers that belong to the plan’s network. With this plan, consumers may go to out‐of‐network providers at a higher cost. Unlike PPO plans, POS plans require consumers to get a referral from their primary care doctor to see a specialist.

  • Exclusive Provider Organization

    An Exclusive Provider Organization (EPO) is a managed care plan that covers services only if the patient uses doctors, specialists, or hospitals in the plan’s network (except in an emergency). It generally does not cover services received outside the network; the patient must pay for these out‐of‐network services themselves.

Government Healthcare Plans

The US government provides insurance plans or direct care for a large segment of the population. Like private insurance, there may be small out‐of‐pocket expenses that consumers in these programs pay. Several of these programs are joint state–federal programs, so the funding, benefits, and terms vary from state to state. Depending on the dentist’s history and present situation, they may qualify for one of these plans.

  • Medicaid

    This is a joint (state‐administered) health coverage program for low‐income families and children, pregnant women, some older adults, people with disabilities, and, in some states, other adults. The federal government provides a portion of the funding for Medicaid and sets guidelines for the program. States also have choices in how they design their programs, so Medicaid varies state by state and may have a different name in each state.

  • Children‘s Health Insurance Program

    The Children’s Health Insurance Program (CHIP) is a joint federal and state program that provides health coverage to uninsured low‐income children. In some states, certain pregnant women are included.

  • Medicare

    Medicare is a federal health coverage program primarily for people who are 65 or older. Some young people with disabilities or kidney failure also qualify. Medicare beneficiaries pay a premium or qualify for benefits coverage based on previous payment of payroll taxes.

  • TRICARE

    TRICARE is the Department of Defense’s healthcare program available to eligible members and their families of the seven US uniformed services: the Army, Navy, Air Force, Marine Corps, Coast Guard, Commissioned Corps of the US Public Health Service, and National Oceanic and Atmospheric Administration.

  • Veterans Administration health benefits

    The Veterans Administration (VA) administers various benefits and services that provide financial and other assistance to service members, veterans, and their dependents and survivors. The VA provides medical coverage for eligible veterans who served in the US military.

PRESCRIPTION DRUG PLANS

Most health insurance plans include coverage for drugs and medicine prescribed by a physician. They use the term “formulary” or “drug list” to describe the list of prescription drugs that they cover. This formulary includes details about how much a consumer pays for each type of covered drug. Like other health insurance, there are various combinations of out‐of‐pocket expenses for the consumer.

Insurers group the covered drugs into tiers. (The plan may not cover all drugs.) Each of these tiers has a different consumer payment rate associated with it. This encourages patients to select lower‐cost prescription (generic) drugs. For example:

  • Tier 1 requires a $10 copayment.
  • Tier 2 requires a $25 copayment.
  • Tier 3 requires a $50 copayment.

The plan’s formulary will list which drugs are in which tier.

GUIDELINES FOR CHOOSING A HEALTH INSURANCE PLAN

Choosing the right health insurance plan can be a complex decision. Here are a few recommendations, based on employee status:

  • Employee

    The employer of an employee dentist will generally offer one or a limited number of related plans. These have different coverages and costs associated with them. The dentist should look at their past medical utilization to help determine future needs. Family plans will be more expensive (more people are covered) than individual plans. The dentist may opt for a higher‐premium plan with lower out‐of‐pocket expenses if the employer pays part of the premium as an employee benefit, which decreases the cost. If the employer offers an FSA or similar plan, most people will take advantage of them to decrease out‐of‐pocket expenses.

  • Government plans

    If the dentist qualifies for a government plan, this is usually the most cost‐effective way to get coverage. Common qualifiers include low income and veteran status, and various state and national online portals help qualified people begin the decision process.

  • Self‐employed

    The self‐employed dentist can buy insurance from a private company or an online government portal.

  • Practice owner dentist

    Current law requires business owners with more than 50 employees to provide health insurance coverage. Smaller firms are not required but may opt to provide health insurance as a benefit to attract employees. There are several tax implications that the owner needs to discuss with their accountant. There are also rules about eligibility and payments. This is a complex process. The owner will probably need to contact a broker or a health insurance company directly to begin the process and ensure compliance. They may be able to include an FSA‐ or HSA‐type account as well.

DISABILITY (INCOME) INSURANCE

The chance of someone becoming disabled at some point during their professional career is much greater than the chance of dying during that same time. According to the Social Security Administration, 25% of today’s 20‐year‐olds can expect to be out of work for at least a year because of a disabling condition before they reach the average retirement age. Although death is undoubtedly a more critical event than disability, many professionals carry life insurance but do not include disability insurance as part of their financial risk management plan.

Flu can disable someone for several days; an actual disability is an inability to work for at least 30 days. Less than that is considered a simple illness. Disability insurance does not insure someone against becoming disabled and does not automatically pay if they become disabled. It does protect their loss of income if they are disabled. So, the more proper name for this type of insurance is disability income insurance. As with other insurable losses, a person generally needs to show the loss to collect the benefits. For example, a dentist must show that they lost $10 000 per month in income for the policy to replace it. If they only had $3000 per month of income, that is all the policy would replace, even if it had a $10 000‐per‐month face amount (limit). Disability insurance coverage, regardless of the source, usually only replaces about two‐thirds to threefourths of pretax income. (Usually, the benefits are tax free, so there is no need to include the cost of taxes in the benefit.) With multiple policies, disability income insurance will generally exclude or offset payments from other policies. A common “insurance with other insurers” clause reduces payments proportional to any other policies.

Disability can occur for many reasons. An automobile accident can leave someone unable to practice for the rest of their life. A skiing accident or a simple fall in the home can render them incapable for many months. Contagious diseases (e.g. hepatitis B, HIV) can leave someone incapable of practice. A heart attack can disable them for weeks or years. Modern medicine has changed many diseases, such as diabetes or cardiovascular problems, from deadly acute diseases to more chronic diseases. However, these lead to more disability claims. The most common long‐term disabling conditions include musculoskeletal disorders (back, spine, knees, and shoulders), cancers, and injuries.

Some disability insurance only covers a person for a specific type of disabling condition. Some policies only cover accidental disability; they do not cover disabling illnesses. Occupational policies cover someone if the disability is job related, and non‐occupational policies only cover non‐work‐related disabilities. (The theory is that workers’ compensation insurance pays for occupation‐related disabilities. However, this amount is entirely inadequate for most dentists.)

If someone becomes disabled, they should not assume that the insurer or agent is a friend. It can often be a nightmare getting the insurer to agree that the person is, in fact, disabled and not just trying to defraud the company. The dentist may need to prove to the insurer, through letters from physicians and medical test results, that they are genuinely unable to practice. The policyholder must keep excellent paperwork (and copies), including all medical reports, correspondence, and phone conversations with insurers and physicians. They must be sure to use a physician knowledgeable about the disabling problem (e.g. a general practitioner should not certify an orthopedic disability). Sometimes the insurer will even require that the policyholder see a particular physician for evaluation. The dentist needs to get the best board‐certified orthopedic surgeon in the area. Some people have had to sue their disability insurers to get the insurance company to pay benefits.

SOURCES OF INCOME IF DISABLED

Several sources of income will be available to a practicing dentist during a disability:

  • Suppose a practice owner and accounts receivable provide an initial income flow. This flow lasts for 30–60 days before it dwindles. However, the dentist will have an additional cash‐flow problem when they return to work after the disability is over, and it takes a while to get the cash flowing through the practice. They need to have savings or an emergency fund established for this possibility. This is the perfect use and justification for having such a fund.
  • Social Security provides some disability income. This is not significant for most professionals, and it is limited to people who have 40 quarters of payments into the system and also who are permanently disabled. Payments are meager compared to the lifestyle of most professionals.
  • A dentist in a group practice may have arrangements built into a contract that protects each person in case of a disability.
  • A spouse or other family member can support the family without the practitioner’s income being replaced.
  • Depending on the disability, a dentist may continue to own and manage the practice. For example, assume that a dentist suffers a compound fracture of their right (dominant) arm in a skiing accident and they cannot pick up a handpiece. However, they can hire an associate dentist to keep the practice going. The owner–dentist can then come to the office to conduct staff meetings, meet and greet patients, and perform other ownership duties. Most insurers consider any profit earned from these activities to be income and will decrease payments by this amount.
  • Disability income insurance will provide the bulk of a lost income stream. Because this income replacement is necessary, a dentist must understand their policy and review it annually.

FACTORS IN CHOOSING A POLICY

Many factors affect the individual policy’s limitations and benefits (and therefore cost):

  • The definition of disability

    A stricter definition of the term disability means that fewer people will become disabled. This lowers the insurer’s payout, and therefore the cost of the policy, but it decreases protection. Is someone disabled if they cannot practice dentistry or if they cannot do any meaningful work? If someone loses a hand in an automobile accident but can pull cans of peas across the laser scanner at the local grocery store, are they disabled? Some policies will pay benefits if someone cannot perform the duties of their occupation (so‐called own‐occupation or “own occ” policies). This means that if someone is a practicing periodontist and cannot perform the duties of a practicing periodontist, they are disabled. Other policies require that a person be unable to do the duties of any occupation (“any occ” policies) to be disabled. If the person can work in any occupation (such as at the local grocery store), they are not disabled. Own occ policies have been abused by practitioners, but many occupational policies do not offer enough protection. Most insurers now have language that defines disability in terms such as “substantially similar occupations,” “occupational specific,” or “work in which a person is qualified by education, training, and experience.” This protects someone from having to dig ditches, but does not allow them to claim that they are a periodontist, not a general dentist. Many policies also allow for the insurer to provide retraining. For a practitioner, this means that under the insurance policy provisions, the insurer might retrain them to review insurance claims or teach in a dental school. The policy will declare this.

  • Amount of monthly benefit

    The more a benefit someone receives, the more the policy will cost. Practitioners must be realistic about how much income is insured, and it is possible to be overinsured. As mentioned, insurers will generally only pay for income that they can show that they have lost (i.e. the amount they made before the disability). This is to prevent fraudulent disability claims. (If someone can make more income while disabled, why work?) It also prevents malingering or someone being exceedingly slow to return to work.

  • Length of elimination period

    The time before the insurer’s payments begin (the elimination period) affects the cost of the policy. The shorter the elimination period, the more likely it is that the policyholder will collect from the policy at some time, and the higher the cost. Someone may recover from a disabling condition when a longer elimination period takes effect. They are much less likely to collect if they must wait 90 or 120 days than if they must wait 30 or 60 days. Someone could theoretically buy a policy that covers them from the first day of disability, but it would be prohibitively expensive. Some people buy a short‐term disability policy to cover the elimination period.

  • The length of the benefit payment

    How long someone continues to collect benefits if they are totally or permanently disabled affects the policy. Standard periods include lifetime, until age 65 or 70, and for 5 or 10 years. The longer the potential payout for the insurer, the higher the cost of the policy (premiums).

  • Guaranteed renewability and non‐cancellability

    If someone contracts a potentially recurring disease (such as a heart condition or cancer), they want to be sure they can renew the disability policy when renewal time comes. Otherwise, the insurer might claim that person is now a poor risk and cancel the policy or refuse to insure them. Other insurers would also refuse to insure that person based on their history, or charge such high rates that the insurance would not be affordable. Dentists should be sure that a policy is guaranteed to be renewable to age 65 or 70. This means that the policy cannot be canceled if they continue to make payments. Premiums can rise if they rise for everyone (contingent on state approval). A more favorable policy is a non‐cancellable policy. In this type, the insurer cannot increase the premium over the term of the policy. A non‐cancellable, guaranteed renewable policy provides the most protection, but at an added cost.

  • Inflation rider

    This factor helps someone maintain purchasing power if they become disabled for an extended period by increasing benefits at the same rate as inflation. These are often called cost of living adjustment (COLA) policies.

  • Residual or “back‐to‐work” clause

    These clauses protect both the insured and the insurer. A residual clause allows the insured to continue to receive partial benefits when they return to work part‐time. For example, assume that someone had a heart attack. After six months of total disability, the physician clears that person fir to return to work two days per week, to build gradually until they are back five days per week as before the illness. A residual clause pays partial benefits while that person is working part‐time. Without this clause, benefits end when the person returns to work, even part‐time, although their income is much less than before the illness.

  • Guaranteed purchase option

    This is the right to buy additional insurance as income rises without new medical examinations or tests. This option allows someone to purchase additional insurance at specified times (e.g. every three years) if their income warrants it. This is important for dentists because their incomes often increase because of inflation and practitioner maturity.

  • Exclusions

    Disability income policies do not cover every disabling condition. An exclusion is a condition that is not a covered disabling condition. Many are the result of individual choice. Typical policy exclusions include:

    • Self‐inflicted injuries.
    • Attempted (unsuccessful) suicide.
    • Illegal drug use.
    • Injuries that happen while flying in a noncommercial airplane.
    • Injuries that happen because of a war.
    • Conditions that existed before a person was eligible for coverage (preexisting condition).

GUIDELINES FOR CHOOSING A DISABILITY POLICY

Given the apparent complexity of these policies, what ought someone look for in a disability income policy? There are several general rules to consider:

  • A dentist should plan for disability as if it will happen tomorrow. In this way, they will be prepared when it does happen. The practitioner should plan with a group of local practitioners to cover each other’s practices in case one individual has a disability. They need to let family and advisors know where the policies are and who the agents are.
  • Group plans are usually cheaper than individual policies. If there is coverage via a group policy through work, the dentist should participate in that. The coverage may not be ideal, and they may need to supplement it with another policy, but these group policies are usually a good starting place.
  • A dentist should plan to replace 60–80% of pretax income. Because the benefits received will usually be tax free, they do not need to replace the income that would have been spent on income taxes. However, retirement plan contributions need to be included with a policy that ends at age 65 or 70. Most insurers will limit the benefit based on proven income, which is tough on beginning practitioners (who can show little income). Nevertheless, many insurers will write beginning policies to gain someone as a customer for the firm.
  • Dentists need shorter elimination periods and more extended payment periods early in a dental career than later in their career. Unfortunately, this is also when a practitioner can least afford the higher premiums that come with this type of insurance. A practice owner needs to look at accounts receivable and the emergency fund to decide how long an elimination period they can weather. Initially, they may need a short (30–60‐day) elimination period, which they may lengthen when they build up funds. A 90‐ or 120‐day elimination period policy will save someone a substantial amount of money in lower premium payments.
  • Dentists should review policies every year. A person’s needs change as their income and assets change. They need to carry enough insurance but not overinsure; both are costly mistakes.
  • A practitioner should have a residual or return‐to‐work clause. Many people become disabled by illness and return to work gradually; they should be sure that insurance reflects this.
  • Most practitioners would like a non‐cancellable policy to lock in premiums until age 65 or 70.
  • Disability income insurance covers income for personal family budget needs; a separate office overhead policy helps defray the costs of office expenses. A business‐reducing term disability (BRTD) insurance policy remains in place for a specific time to cover a particular need. For example, if someone buys a practice that requires a monthly loan payment of $4000 for five years, BRTD insurance is an excellent low‐cost way to ensure the need. A personal disability income replacement policy is more expensive and is required for personal income needs.
  • A practitioner should skip any riders that are intended to feed a retirement plan while they are disabled. The riders cost a lot and often require the policyholder to invest only with the insurance company’s affiliates. A dentist needs adequate disability income coverage to contribute to their retirement plan.
  • Some insurance advisors suggest sticking with a company that has the endorsement of professional organizations (such as the American Dental Association, ADA). They are easier to deal with if a large portion of their business is from a single, tight‐knit profession. These “association policies” are packages that are not as flexible as an individual policy. However, if they meet someone’s needs (they are designed to meet the needs of typical association members), they can provide significant cost savings.

ACCIDENTAL DEATH AND DISMEMBERMENT INSURANCE

Accidental death and dismemberment (AD&D) policies, although common, serve a limited need for independent dental practitioners. Their purpose is to provide a lumpsum payment if someone dies or loses a limb in an accident. Some policies require that the limb be severed for payment; others only require loss of use or function to pay the benefit. Most policies cover the policyholder whether the accident was at work or not. The policies will not cover if someone dies or loses a limb from an illness or disease (these are not accidents). Some policies have additional discriminators that qualify the accident for coverage.

Most dental practitioners do not need AD&D policies. They should have adequate disability and life insurance to cover their unique financial needs. AD&D policies are less expensive to cover some of those needs, but most practitioners need a more comprehensive insurance plan. Some practitioners have AD&D policies in an insurance package for staff members as an employee benefit. An employee dentist eligible for this insurance needs to coordinate it with a disability income policy.

LIFE INSURANCE

Like disability insurance, life insurance is a bit of a misnomer. People do not insure against death, and everyone will die eventually. Instead, someone buys life insurance to guard against premature death or death before they have had a chance to build assets to provide for a given financial need. They will lose if life insurance is viewed as a bet or a game of chance. They will also lose if they do not collect because their actuaries have determined premiums to profit the company. They will certainly lose if they collect, because they will be dead and unable to enjoy the benefits. This is not to say that people never need life insurance. Instead, they ought to buy it for a specific purpose.

The terminology of life insurance is like other types of insurance. Someone buys a contract or policy that offers specific coverage, and they pay premiums to the insurer. If that person dies, the person named as the beneficiary receives the benefits or payout of the policy.

Insurance sales agents are good at making people feel obligated to buy life insurance or guilty if they do not have any. First, it is essential to consider why someone would buy life insurance, its potential purpose. If someone does not fit into one of the categories outlined shortly, they do not need life insurance and should not feel guilty about not having any.

PURPOSES OF LIFE INSURANCE

The purposes of life insurance include the following:

  • Someone may want to provide money after they are gone to maintain a standard of living for their family. Suppose that person is the sole support or provides a significant contribution to the family budget. In that case, they need to plan to replace that income if they die prematurely (before adequate savings and assets have been built up). On the other hand, if a spouse is an employed professional who can earn an adequate family income if that person dies, they may choose not to carry life insurance. Life insurance is not winning the lottery for the family. Practitioners should plan a specific amount to replace income.
  • Lending agencies may require a person to carry life insurance to secure business assets. A banker may require a life insurance policy, naming the bank as beneficiary, to the amount of a practice loan. If the insured person dies prematurely (before the loan is paid off), the insurance policy will pay the remainder of the loan to the bank. Practice assets go to the person’s estate for heirs’ handling.
  • Life insurance can fund cross‐purchase agreements for practice purchases in estate planning. If someone is a member of a group practice, they and their partners may carry life insurance on each other. (One person carries a policy on their partner; the partner carries one on the first person.) If one of them dies, the other has the money (and a contractual obligation) to buy out the other’s portion of the practice. (Hence the name, cross‐purchase agreement.) The person’s estate, and therefore the family, benefits by having a previously agreed purchase price and not having to sell the person’s portion of the practice at the time of death. The partner(s) benefits by knowing that the other person’s heirs will not sell their portion of the practice to a stranger, who may not fit into the practice style that the group has developed.
  • Someone may have specific financial needs for which to plan. A spouse might provide for the family budget but cannot contribute to certain family benefits, such as paying for children’s higher education. Others may be paying off business start‐up costs or paying a mortgage on vacation property.
  • Life insurance has been touted as a savings and retirement planning mechanism. As a rule, there are much better savings and retirement planning techniques. Someone might want to use life insurance as a savings mechanism if they are a terrible money manager and cannot budget a savings plan any other way.
  • Life insurance can be used as an estate planning technique, saving estate taxes. Most people will not need these techniques until late in their careers. When someone gets to this point, they will have tax advisors to help.

TYPES OF LIFE INSURANCE

There are two basic types of life insurance and several hybrid or combinations of the basic types.

  • Term life insurance

    Term insurance is also known as pure life insurance. This type of policy is valid only for a specific period. Someone may have a term life insurance policy effective from July 1 through June 30 of the following year. If they die at 12:01 a.m. on July 1 of the following year, the death is not covered, and the beneficiaries receive no benefits. If that person dies two minutes earlier, at 11:59 on June 30, the beneficiary receives the policy’s full benefit. Many policies are renewable, which means that the policy owner can pay an additional premium and extend coverage for another period. Other policies, especially those that cover a specific event, such as a practice purchase, are non‐renewable and exist only for the insurance period. Term insurance is pure insurance because, unlike whole‐life policies, no cash value accumulates in the policy. A person cannot save money or borrow against a term life policy. Nevertheless, term policies are much cheaper than other types of policies for comparable levels of insurance coverage.

  • Whole‐life insurance

    Whole life is also known as “ordinary,” “permanent,” or “cash value” insurance. Unlike term policies, whole‐life policies last for an entire lifetime. They allocate part of each payment to pure life insurance (like a term policy) and a portion to a savings account within the policy. The policyholder can then borrow against the value accumulated within the policy or cash it in after payments at maturity (e.g. retirement). The value accumulates tax free within the insurance policy. This makes whole‐life insurance a combination of a pure insurance product and a tax‐advantaged savings vehicle. Before rushing to buy this type of insurance, consider the following. Insurance executives are conservative investors. (As well they should be: people do not want them squandering their insurance payout by investing in risky ventures.) The return within the policy is safe but low. The company charges the policyholder interest to borrow on the account, essentially charging interest to borrow their own money. Moreover, whole‐life policies are so profitable for insurers that they generally give 50–75% of the first two years’ premium payments as commission to the agent selling the policy. That is quite an incentive for agents to sell whole‐life policies.

  • Hybrid policies

    To solve problems associated with whole‐life policies, insurers have developed a group of hybrid insurance products. These have characteristics of term policies, whole‐life policies, and actual investments. Variable life policies take the savings portion of a whole‐life premium and invest it in a mutual fund or another investment vehicle that pays (potentially) more than a traditional whole‐life policy. The cash value that builds up varies as the underlying investment return varies. Depending on the policy, the amount of insurance may also vary. Universal life policies are like whole‐life policies, except they pay a competitive interest rate. The underlying investment portion of the payment is tied to the money market or US Treasury Bill interest rates. Endowment life policies pay dividends as annuity or regular payments. These policies can supplement retirement income once someone has fully funded their retirement plan.

GUIDELINES FOR CHOOSING LIFE INSURANCE

If a person is considering buying life insurance, they need to answer several before they sign any contracts or checks. These include the following:

  • The person must know the reason for buying it and decide what specific financial goal will be accomplished by buying insurance. They must determine their insurance needs based on their income replacement needs. They might not need any life insurance at all. If someone is buying insurance because an agent called on the phone and said that a young dentist needs insurance, they should reconsider.
  • The person must decide how much insurance they need. The answer to the first question will help to answer this one. They should estimate the cost of a college education or family income needs, but they should only buy enough insurance to provide for the family’s benefit. If buying insurance to provide a family income, the purchaser must buy approximately six to eight times the annual net income. This is an amount that, if invested at 8%, would replace lost income.
  • The person needs to decide when to buy life insurance. If they have identified the need, they buy the insurance when required, not before and not after. If someone becomes a poor health risk (because of a disease or condition), they may have difficulty buying life insurance at any cost. This is the one valid reason for buying insurance before it is needed.
  • The person needs to decide when the insurance ends. They should end the coverage when the need ends. Insurance to cover a practice loan can end when the loan has been paid off. Insurance to provide a college education can end when a college fund is funded, or the child completes college. As a person ages, they usually need less insurance. As they move through their professional career, they pay off debts and build assets. These assets can provide income in case of death. Insurance provides for loss of income if someone dies before they have had a chance to build an asset base. Many professionals find renewable term policies ideal for this insurance coverage.
  • The person needs to decide what type of life insurance they should buy. The type of policy they buy should depend on the needs identified previously. A five‐year decreasing term policy would be most appropriate to secure a five‐year practice loan. The insurance ends after five years, but the loan is paid by then. The benefit decreases each year, but so does the remaining principal. A whole‐life policy, in this case, would be financial overkill and obligate someone to premium payments for years after the loan is paid.
  • People should not buy life insurance when purchasing automobiles or other large items. Sales agents try to sell this insurance as “mortgage protection” or “loan protection” insurance that will pay off the loan if the person dies without “burdening” the family. This is simply an expensive term policy. The purchaser should say “no” and mean it.
  • The person should not buy insurance from anyone who calls on the phone soliciting business. These callers are generally starting agents whose sole purpose is to sell policies, regardless of someone’s needs.
  • The person should not buy whole‐life insurance. Wholelife policies are expensive, and relative term policies cost about 50% as much as a whole‐life policy. The person ought to buy term insurance and invest the difference. If someone can manage a dental practice, they can manage the finances involved in insurance.
  • Be sure to name a specific beneficiary (individual or trust) on the policy, not the estate. The beneficiary is the person who will get the proceeds of the policy if a policyholder dies. There can be enormous adverse estate tax consequences if a person does not do this.

AUTOMOBILE INSURANCE

Automobile insurance is an area in which many professionals can save significant amounts of money. Most people keep the same automobile insurance year after year, yet dentists spend more money on this insurance annually than on malpractice insurance. Automobile insurance policies follow a standard procedure, so comparing one policy with another is easy.

As a rule, the auto owner is responsible for ensuring the auto. If someone grants another person permission to use their car, then the owner’s insurance generally will cover the other person. Some states have different rules, and some policies have specific exclusions, so the auto owner needs to check with the agent and policy to ensure coverage.

NO‐FAULT INSURANCE

Some states have a “no‐fault” auto insurance system. In these states, auto owners’ insurance covers their driver and passengers’ injuries, regardless of who caused the accident. Other coverage (such as collision or uninsured motorists) remains the same.

No‐fault insurance intends to reduce the number of auto accident‐related lawsuits. In most states, if someone is in an accident, the insurance companies try to determine who caused the accident or who is at fault. Once that is decided, the other driver can file a claim against the accident‐causing driver’s insurance for damages or injuries that resulted. In no‐fault states, it does not matter who was at fault. Instead, each driver files a claim with their insurance company, which then pays damages for the losses their driver sustained. (The other driver’s insurance pays for their losses.) In these states, a person cannot sue for injuries, damages, or pain and suffering unless the damages go beyond a threshold set by the state. No‐fault policies generally require coverage for bodily and property liability and personal injury protection (PIP). The individual state sets limits, requirements, and benefit payments for these kinds of coverage.

No‐fault insurance is mandatory in some (currently 12) states. In these “pure” no‐fault states, the driver’s insurance pays benefits to their driver and passengers, regardless of who is responsible for the accident. The trade‐off for this is that drivers are restricted in their rights to sue the other driver (and their insurance company) for damages. Several (currently three) states give residents the option of either a pure no‐fault or traditional auto policy that allows the driver to sue. Several other states have hybrid (or “addon”) policies where the primary insurer pays its driver’s benefits, but the driver still has the right to sue. To add to this confusion, states change their insurance laws from time to time, either enacting or eliminating no‐fault provisions. An experienced agent in the state of residence will help clear up the confusion.

TYPES OF CAR INSURANCE COVERAGE

Auto insurance is a package of coverage that protects the car owner from risks. Different states may require these kinds of coverage, and others may be optional. The insurance agent will help sort through the needed coverage, including the following:

  • Collision coverage pays to repair damage to the car if it is in a crash. Often banks, leasing companies, and rental car agencies require this coverage.
  • Comprehensive coverage handles damage to a car that is not caused by accident. Examples include stone chipping the windshield, car theft, or a tree falling on the car.
  • Liability coverage for property damage pays for repairs to someone else’s car if the policyholder cause an accident, and does not cover damage to the policyholder’s vehicle.
  • Liability coverage for bodily injury helps pay medical expenses for drivers and passengers in someone else’s car if the policyholder causes an accident. It does not cover the policyholder or their passengers.
  • Uninsured (and underinsured) motorist coverage helps to protect the policyholder if someone who does not have any (or adequate) insurance causes a wreck.
  • In states that have no‐fault insurance, PIP helps pay for injuries to a driver or passengers of the insured’s car. Depending on the policy, it may also pay for lost wages or required household help. This coverage is only found in states with no‐fault insurance laws, and it only covers passengers in the insured’s car. Liability coverage still pays for injury to people in the other car.
  • In states that do not have no‐fault insurance, medical payments coverage pays for injuries to the driver or passengers in the insured car due to an accident.

Components

Auto policies consist of four areas of insurance, and some policies may not include all four areas.

  • Part A: Liability covers a policyholder if they cause an accident. This person also may be required to pay for fixing someone else’s property (such as their automobile) or paying them for injuries.
  • Part B: Medical payments provides medical payments to the policyholder or someone in their car injured in an accident. These medical payment amounts are low, and the policyholder should have health and liability insurance to help cover these expenses.
  • Part C: Uninsured motorists covers the policyholder if an uninsured motorist causes an accident that damages the policyholder’s car or causes the policyholder or the passengers of the policyholder harm.
  • Part D: Damage to covered autos pays to fix the policyholder’s car if it is damaged. Comprehensive coverage includes damage not caused by a collision (e.g. windshield cracks because of a stone). Collision coverage pays (less the deductible) to repair the policyholder’s car if they damage it in a collision.

Cost Factors

Several factors affect the cost of an auto policy, including the age and sex of the drivers. Young males have more accidents and therefore cost more to insure. The use of the automobile changes rates. The more miles and more frequently a person drives, the more likely they will be to have an accident. The rates go up accordingly. Some areas, especially large cities, are more prone to accidents and theft. Higher rates are the norm in these areas. The operators’ driving record is essential. If a person has had several accidents or received several tickets for unsafe operations (speeding, etc.), that person is a bad risk. Their rates will probably go up. New cars have devices that can record someone’s driving habits. Many insurers will give customers better rates if one of these reporting devices is installed and linked to their system. These customers give up considerable personal privacy for lower rates.

One point to note: a practitioner’s automobile policy does not cover employees driving the dentist’s car for business reasons. So, if a staff member runs to the bank in the dentist’s car, the practice owner, not the staff member, runs the risk of being personally liable if the employee has an accident. The practitioner needs to be sure that the office liability policy has a rider to cover employees if they regularly use the dentist’s vehicle. If a practitioner deducts a portion of auto expenses as a business expense, they need to inform the insurance agent. It could change the insurance classification, making it more expensive but complete coverage.

GUIDELINES FOR CHOOSING AUTO INSURANCE

If someone is considering buying automobile insurance, they need to investigate several issues before they sign any contracts or checks. These include the following:

  • Auto insurance requirements vary significantly from state to state. Almost every state requires car owners to have basic liability coverage, although the amount is different in each state. Some states have no‐fault provisions and others do not.
  • Auto owners need to coordinate liability coverage with other insurance carefully. Often an “umbrella” liability coverage will be like auto, homeowner’s, and personal liability. If someone owns a business (such as a dental practice), they should be sure that their business use of the car is adequately insured.
  • As in all insurance, a higher deductible leads to lower premiums.
  • Be sure to have coverage for uninsured motorists. About 10% of drivers do not have insurance, despite laws requiring every car owner to have coverage.
  • Consider whether to purchase collision insurance. If a car is not valuable and someone has assets to cover that loss, it is cheaper not to buy the collision portion and to self‐insure.
  • Look for discounts. These include good student discounts, driver’s training, low mileage, safety, anti‐theft devices, and good driver history. Different states and companies may have these discounts.

Section I: Property coverage

  • Dwelling
  • Other structures
  • Personal property
  • Loss of use

Section II: Liability and medical

  • Personal liability
  • Medical payments to others
  • Damage to property of others

HOMEOWNER’S INSURANCE

GENERAL AREAS OF COVERAGE

Homeowner’s insurance protects the policyholder against losses: loss of property and the liability arising from owning the property. Box 8.2 shows the general areas of homeowner’s coverage. Like auto insurance, homeowner’s insurance policies follow standard formats.

Loss of Property

If someone’s house catches fire and burns down, they have lost their property and not only the house structure but the contents. Homeowner’s insurance covers those types of incidents and other structures on the property, such as sheds or detached garages. If someone’s house is damaged and cannot live in it (loss of use), the insurance will generally pay for them to live somewhere else while their home is being repaired.

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Nov 9, 2024 | Posted by in General Dentistry | Comments Off on 8: Personal Insurance Needs

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