In last month’s eReport, we discussed the reasons why disability insurance is so important for solo and small firm attorneys. In Part 2, we discuss the kinds of coverage available and some specific provisions that can make a big difference if you become disabled for a significant period of time.
In Part 1 of this series, we cited statistics showing that most Americans significantly underestimate their probability of becoming disabled. The actual odds are about 1 in 4 (25%) that a 20 year old today will become disabled before he/she retires. And, perhaps more sobering, a healthy, nonsmoking 35 year old who becomes disabled has a greater than 1 in 3 chance the disability will last over six years.
One of your key assets is your ability to practice law and generate income
. Think of disability insurance as paycheck protection for you and your loved ones, for when you can’t work because of illness or accidents.
When reviewing personal disability plans, here are some fundamental questions to explore:
- Amount: While coverage is often described in terms of a fixed percentage of your normal monthly pay (typically 40–65%), it can be very useful to estimate how much you and your loved ones would need each month to live on in the event you were unable to work for a year or more. Then, simply look for a plan that provides a similar monthly benefit, or add a supplemental disability plan to increase your benefit amount. ABE provides a free online insurance coverage calculator that may be helpful in looking at appropriate amounts of coverage.
- Provisions: Disability insurance is a contract between you and the insurance underwriter, and attorneys should consider carefully the characteristics of most disability insurance contracts:
—What is the plan’s definition of disability? Is coverage based on the inability to work at any occupation, or the inability to work at your own occupation? What about your specific specialty of law? After years of law school, would you consider changing careers if you were no longer able to practice law? Some disability plans assume you will, and will thus only pay benefits if you’re unable to perform any job. Others may pay benefits if you’re no longer able to practice law, but don’t take into account your specialty of law, such as your ability to litigate. If you become disabled, but are still able to practice other forms of law, such as document review, coverage may not apply. This is a big difference that attorneys should consider.
—Does it pay benefits following a partial disability, or only a total disability?
—Are the premiums waived during your period of disability?
—Is it noncancellable and guaranteed renewable, which means that it is renewed automatically as long as you pay the premiums?
—What is the waiting period (the industry term is elimination period) following the accident or illness before benefit payments begin? Do you have a choice? If so, you’ll want to determine for yourself how long you could pay bills (possibly including new medical bills) and maintain your and your family’s lifestyle without a paycheck. The longer the waiting period you select, the more affordable the premium will be.
—What’s the benefit period? Some disabilities can last for years; so should your disability coverage. Mid-term plans typically cover disabilities from one to five years, while typical long-term plans provide coverage for five years, ten years, or until retirement.
—Is it portable? Can you take it with you regardless of your employer?
- Tax Treatment: If you become disabled and begin receiving disability insurance benefit payments, will you have to pay taxes on these benefit payments? Understanding the tax treatment is important for figuring out how much of the benefit payment you will actually net each month. Generally, if you pay the premiums yourself, the disability benefit is not taxable and your coverage is portable, meaning you can take the coverage with you if you move to another firm. Employer-paid plans often require benefit recipients to pay taxes on their monthly benefits, which will reduce the amount you will receive as a paycheck replacement. Remember, if your employer pays for your coverage, it will be cancelled if you leave the firm.
Professional Overhead Expense Disability Insurance
Personal disability insurance is intended to cover a portion of household expenses for you and your loved ones during the time you are unable to work due to a disability. But solo attorneys and small firm partners need to address the expenses of keeping your firm going, too. Professional overhead expense (POE) disability coverage is designed to enable a small firm to stay viable while an owner recovers from a short-term disability.
POE coverage reimburses your firm for overhead expenses in the event you become totally disabled. A plan typically helps cover expenses like non-attorney salaries, taxes, employee benefits, rent, mortgage, utilities, malpractice premiums, etc. It pays a monthly benefit, typically up to $10,000, for a period of up to 12 months to help your firm survive during your recovery.
Retirement Contribution Disability Insurance
If you become disabled for a period of months or years, you may find it difficult to continue funding your IRA, 401(k), or other qualified retirement plan(s), knocking your retirement planning off course.
Retirement Contribution Disability coverage helps you continue to fund your retirement savings accounts in the event that you become disabled and are unable to work. This coverage does not duplicate standard disability insurance, which is intended to replace a portion of your lost income. It pays a separate benefit in addition to other disability coverage you may have.
Next Month—Part 3
Solo and small firm lawyers often have complex insurance needs. The three kinds of disability coverage discussed in this edition can go a long way in helping you and your firm survive in the event of an accident or illness that prevents you from working.
In next month’s eReport we’ll discuss the main disability insurance purchase options and some pros and cons of each.
- Newly Solo, American Bar Endowment.
- Eight Questions to Ask Before Buying a Disability Insurance Policy, Council for Disability Awareness, December 2015.
- Should You Consider Disability Insurance?, USA Today Money Matters, May 2013.
- The Survey of Law Firm Economics, 2013 Survey Excerpt, ALM Legal Intelligence, August 2013.
- Disability Statistics, compiled from U.S. Social Security Administration, U.S. Census Bureau, Council for Disability Awareness and other data footnoted specifically in the document. Council for Disability Awareness, July 2013.
The American Bar Endowment (ABE), a 501(c)3 public charity, supports good works of importance to the public and the legal profession through grants made possible by sponsoring insurance plans for attorneys. ABE also authors “Lawyer’s Healthy Living” for GPSolo Magazine and other educational healthy living and insurance content at blog.abendowment.org.
*All ABE-sponsored plans are group insurance plans, meaning coverage is issued to an ABA member under a Certificate of Insurance. It is not provided under an individual policy, nor is it employer/employee insurance. Plans may vary and may not be available in all states. All plans are underwritten by New York Life Insurance Co., 51 Madison Ave., New York, NY 10010 on Policy Form GMR.