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Investments

Dentists: Your best asset is you

Feb. 17, 2020
Dentists, it’s important to protect and invest in yourself. While investments play an important role, they are only one element out of many moving pieces.

Your best asset is you, dentists. It’s important to protect and invest in yourself. But it’s common for young dentists to think of financial planning as simply “investment focused.” The financial media certainly does not help this thinking with constant headlines about the best stocks and mutual funds to choose. While investments play an important role, they are only one element out of many moving pieces. A common mistake I see with young dental professionals is that they focus too heavily on their investment portion before assessing the other areas in their financial plans. In this article, I’ll focus on protecting your most valuable financial planning asset.

Protecting your income 

For new dentists, starting net worth is probably negative. The elephant in the room is the large amount of student loans you have. For most, this may be well over $280,000.¹ Your most valuable asset is you—your ability to earn income as a practicing dentist. Without proper financial planning, your most valuable asset will be unprotected. Coupled with a large debt, any serious illness or accident could cripple your ability to achieve your long-term financial goals. Depending on the types of student loans, not all debts are automatically forgiven with a disability. Not to sound morbid, but the risk is real. One in four millennials can expect a long-term disability before they retire.² 

How can you plan for this? 

The answer to “How can you plan for this?” is “disability insurance.” The goal of disability insurance is to protect your income during your wealth accumulation years. Disability insurance will not make you more money, it will simply act as wage replacement. There are two types of disability insurance, short-term and long-term policies. Short-term policies typically cover you for up to a few months of not working, while long-term policies can cover you up to age 65. For the purposes of this article, we’ll discuss the greater risk, which is the long-term. 

What kind of policy should you look for? 

For high income earners such as dentists, an “own occupation” policy with a future increase option is necessary. Disability insurance policies come in a variety of options. Some have weak definitions of disability such as “any occupation,” and others have the strong “own occupation” definition. “Any occupation” means that if you are disabled and cannot perform nearly any job, the policy will not pay. For example, if you were diagnosed with cancer and could not return to your practice for a few years, you would experience a loss of earnings. With an “any occupation” policy, if you were deemed capable of working at a fast food restaurant or greeting people at a large box store, the policy would not pay. This type of policy definition is not appropriate for dentists, who spend years of training and invest hundreds of thousands of dollars into their skillsets.

Using the above scenario, an “own occupation” policy would replace a percentage of your predisability earnings as a dentist while you recover. An important add-on, the future increase option (FIO), allows you to increase the limits on your policy as you earn more. This allows your income to be protected in peak accumulation years. The nice part of this feature is that it allows you to increase the coverage on your policy without having to repeat medical underwriting. Disability insurance premiums are determined by your age and health. The ability to lock in your best health rating when you are young and healthy can significantly decrease the long-term cost of insurance. 

More importantly, this protects your future insurability if you develop any illness that would hinder your ability to receive coverage. For example, let’s say you bought a disability insurance policy immediately after dental graduation and structured it appropriately with a future increase option. If you wanted to increase the policy limits in the future to protect your increased earnings, your health would not matter in the eyes of the insurance company. Conversely, if you did not have a future increase option, the insurance company could deny you from increasing your policy limits for a variety of health issues. Oftentimes, it is minor health issues that trigger fear for insurance carriers. 

Where can you find an own occupation policy? 

There are over 100 disability insurance carriers, but only a handful provide true own occupation coverage. Some companies offer more favorable ratings based on factors such as state of residence, gender, lifestyle, previous medical history, and type of dentistry. Your employer may also provide disability insurance, or you may view policies through a dental association.

However, with these types of policies, be mindful to read the policy details and check the definitions. Often, these group policies lack key riders, are not portable if you leave, or the definition may shift to “any occupation” after a few years.

A prudent option is to work with a fee-only financial planner who helps you evaluate the various carriers and prospective offers. Because fee-only financial planners receive no commissions, they can provide unbiased advice that is in your best interest.

How much will it cost? 

Like most financial planning topics, cost depends on several factors. The premiums are based on your age and health. If you're young and healthy, the cost will be substantially lower. For a comprehensive policy, expect to pay somewhere in the range of 1%-3% of your income.³ Paying 1%-3% of your income to protect the other 97%-plus is actually fairly reasonable. Over time, as you accumulate more assets and get closer to reaching financial independence, your financial planner will help you evaluate whether it makes sense to modify the policy. Regardless, you should review all of your insurance needs at least once per year. 

The bottom line 

In financial planning, it is imperative to plan for the worst-case scenario before assuming the best. We have no crystal ball, and no one plans to become disabled. We must acknowledge these possibilities. However, like most things in life, financial planning is about focusing on the items within our control. We have immense control over our financial lives, e.g., how we save, how we tackle student loans, and how we protect our most valuable assets.

References 

1. Goldy-Brown S. Average dental school debt 2018. Student Debt Relief website. https://www.studentdebtrelief.us/news/average-dental-school-debt/. Updated May 9, 2019.

2. You, disabled? What are your chances? Council for Disability Awareness website.

https://disabilitycanhappen.org/overview/. Updated March 28, 2018. 

3. Sigel Z. How much disability insurance do I need? Policy Genius website.

https://www.policygenius.com/disability-insurance/how-much-disability-insurance-do-i-need/. Published March 16, 2018. 

Riley Poppy, CFP, BFA, CTS, is the founder of Ignite Financial Planning LLC. Located in Seattle, Washington, Poppy helps dentists build financial plans locally and throughout the country. Visit ignitefinancialplanning.com.