Do attorneys need disability insurance? Well, consider this: you are elite. You passed the bar, and are now officially an attorney. Countless years of sacrificing time with family and friends, endless sleepless nights, and hours upon hours of rigorous study have paid off.
Above the wealth of knowledge you’ve accrued looms the burden of student loan debt. No big deal; you have a shiny new job and compensation package. We can table the debt talk – it isn’t going anywhere. The bottom line is: you have put in the work, and it has paid off. But as with all things in life, there is a flip side. The flip side to this coin? Disability.
What does disability have to do with anything? Everything. Suffering a disability during your working years is the greatest risk to your family’s finances. With a disability, your illness, injury, or surgery(ies) causes extra bills. Yet, you aren’t able to work. Regardless of whether you’re a dual-income household or a single-income household, the impact of no longer receiving a paycheck can be catastrophic. The good news is this risk can be lessened with disability insurance.
How Attorneys Can Evaluate Disability Insurance Benefits
Maybe you joined a large law firm or a medium-sized practice, or maybe you even started your own practice. Whatever the case, you might have access to some group disability benefits. Group benefits can offer a base layer of monthly income protection to higher-income earners, such as attorneys. However, this is a scenario where reading the fine print is crucial for you. Group disability benefits can be structured in many different ways, so acknowledging that these benefits can and will most likely be different based on where you work is important.
Definition of Earnings
There are four key areas to focus on when evaluating disability benefits. The first is the definition of earnings. What types of earnings are actually covered under the policy? Some policies only cover base earnings. So, that means bonuses, and K-1 distributions would not be included or covered earnings. This is a common misconception and one that often gets overlooked.
Second, focus on the monthly cap or maximum the policy will pay. Your contract might say that this policy covers 60% of your earnings. Then, in the small print, it states a maximum of $10,000 per month. With most group policies, these maximums inadvertently discriminate against high-income earners, such as attorneys. A high-income earner can be left only having between 30% – 40% of their total earnings covered, depending on what the group policy’s maximum is.
Tax Treatment of Disability Insurance
The third area of focus is taxability. Depending on how and who pays the premium for these group benefits, your monthly disability benefit could be taxable. So that $10,000 monthly maximum isn’t actually all yours. It could be subject to FICA, federal income taxes, and state income taxes.
Own Occupation Definition
Fourth, it is important to understand the definition of occupation inside the group policies. How is your occupation defined in the contract? Does your group policy use the general Dictionary of Occupational Titles (DOT) definitions, many of which are outdated? Or, does it include specialty occupation language?
Other Group Contractual Provisions
Lastly, group contractual provisions have cost containment features that limit mental illness benefits to a specified number of months, have pre-existing exclusion provisions, as well as limit the amount of time your own true occupation is covered to a period of 24 or 36 months in certain scenarios.
Individual Disability Insurance for Attorneys
Group benefits – as indicated earlier – provide a base layer of insurance for the high-earning attorney. So how do you fully, or even just adequately, protect yourself? With individual disability insurance (IDI). By augmenting your employer-provided (group) disability insurance with a private policy, you can protect as much as 67% of your total annual income.
IDI really sets itself apart with customization. Individual policies are based on your specific circumstances, health, financial situation, income, and priorities. This gives attorneys the ability to truly tailor the solution to the features most important to them. To some, having unlimited mental and nervous coverage might be extremely important, but for others, it might not. Private disability insurance has the flexibility to adjust whatever you like inside the individual contract. Additionally, these benefits are income tax free as long as you are paying the premium with post-tax dollars. You will see the entire monthly benefit in the event you need it.
The very general definition of occupation in the group plans can be customized to your specific specialty in an individual policy. In this case, it’s your own occupation as an attorney. Further, your monthly maximum benefit can be customized, based on your specific W-2’s and K-1’s [subject to the participation limits from that carrier].
Disability Insurance Offers Law School Loan Protection Rider for Attorneys
Now back to that law school and student loan debt we tabled earlier: individual policies can have student loan protection riders. These riders can provide an additional benefit payment on top of your base monthly disability income benefit. Student loan protection riders take care of your student or law school loan payments.
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Understanding your specific financial objectives and your overall financial plan when structuring an individual policy is a crucial piece of the puzzle. What is your monthly spend rate? How much per month needs to come in to fulfill your current debt obligations, to keep food in the fridge and the lights on, and to pay those additional medical bills? While some of these policies can be expensive, consider the alternative: not having the coverage when you need it.
So now what? It’s time to go read the fine print and dig into the details. You can do it yourself, researching the best disability insurance for lawyers. Or, the experts at Maycomb Wealth can help you.