Whether you’re a doctor, attorney, accountant or other professional or own a small business, financial experts say you need to protect yourself in case you get sick or become disabled.
Leonard Wright, a San Diego-based certified public accountant and financial adviser with clients in Las Vegas, said risk management is the least “sexy and attractive” discussion, but it’s an important one.
“People don’t go broke from bad investments,” Wright said. “They go broke because they have inadequate risk-management planning.”
The first thing everyone should do is ensure they obtain disability insurance either through a company they work for or by taking out a policy themselves. People can get up to 65 to 70 percent of their income from it, so it’s not a panacea, Wright said.
“They don’t want to retire on disability income,” he said.
The second step is for business owners to obtain overhead insurance that pays the monthly expenses for their office and employees if the owner is incapacitated.
“The first thing I suggest for anybody working for a living is personal disability insurance,” said Joe Pantozzi, founder and CEO of Alpha Omega Wealth of Las Vegas, a financial planning firm. “It’s no use keeping your office open if you can’t pay your own bills. Secondly, if you want to keep your business open while you are disabled, there’s no other way to do it unless you have a business overhead expense policy.”
Daniel Gerety, president of accounting firm Gerety &Associates, said most professionals and sole proprietors have disability insurance, which is based on their annual earnings. The higher the annual compensation, the more costly it will be. It’s a way for them to protect their income if they become disabled.
“It could be cancer or an accident or anything that keeps you from doing what you do,” Gerety said. “If a surgeon messed up his hands, it would kick in. If an accountant had head trauma and wasn’t able to work, it would kick in. Disability insurance is important because you never know. You can be in a car accident that keeps you from working.”
Most businesspeople or professionals have disability insurance that can kick in after three or six months of being unable to work, Pantozzi said. That means people should have at least six months to cover their personal expenses, in case they get sick or are injured in an accident, he said.
Pantozzi used an example of a 46-year-old doctor earning between $200,000 and $300,000 a year paying anywhere between $500 a month or $1,500 a month for disability insurance.
A $500-a-month plan might pay the doctor $6,000 a month until age 65. A $1,500 plan would pay to age 70 and include cost-of-living benefits, a catastrophic pay bonus and other benefits, Pantozzi said. There are policies that cover only full disability and others that include a partial disability, he said.
Someone can pay for two years, five years or 10 years and the payments stop, or they can buy it until age 70, Pantozzi said.
“It’s a much more complicated product than buying life insurance or health insurance, and it’s much more custom-designed,” Pantozzi said. “You can have a premium that’s guaranteed or can go up in the future.”
Gerety said when one of his employees had cancer, the company self-insured him to cover his pay over the short term. When he could work a half-day for an extended period, disability insurance kicked in to cover that until the chemotherapy stopped.
“Doctors, attorneys and professionals (who) rely on being able to work because they bill by the hour, if they are out of commission, there goes their revenue,” Gerety said. “They will have some type of disability plan if they’re smart.”
Business overhead expense, however, is something a fraction of people own because they don’t understand the value of it or don’t think they can afford it, Pantozzi said. Once they become disabled, they wish they would have bought it, he said.
If you have a partner who can run a business while you’re out, that can work, but both partners tend to create revenue for the firm, Pantozzi said.
The overhead expense is a separate category and policy that covers fixed expenses. For example, an architect, lawyer or doctor has staff, utility bills, rent, advertising, legal fees and other fixed costs.
“If I become sick or hurt, I want to keep my doors open because I don’t want to lose all of my customers while I am out disabled,” Pantozzi said. “I want to keep my people on the payroll and my employees working, and keep their health insurance paid for. The business overhead expense covers those expenses. It could be $10,000 a month, $20,000, $30,000 or $50,000 a month.”
The benefit lasts as long as two years, Pantozzi said. If the business owner is disabled long-term, it’s probably time to sell the business or close it, he said.
The policies are available with a 30-day elimination period. After you are disabled, you wait 30 days for the company to approve the claim, and it will start paying your expenses on the 31st day, he said. The carrier also will waive your insurance premium for the overhead expense policy while you’re disabled, he added.
“Whether you’re a contractor, architect, dentist, attorney or doctor, your business classification will determine rate,” Pantozzi said. “If you own a plumbing company and do some of the plumbing yourself, it may be cost prohibitive to have a policy like that.
Pantozzi said the overhead insurance for a 46-year-old doctor with $20,000 in monthly expenses could cost $600 a month.
The cost also will be determined by your medical profile. If you’re healthy, you will get a better rate than if you are not, Pantozzi said. “If your cholesterol, triglycerides, blood pressure and weight are in range, you have a better rate. A 60-year-old will have a lot higher premium than a 30-year-old.”