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Protecting an Attorney's Greatest Financial Asset: Disability Insurance

Attorney Specific Risk Management

If there’s one thing you learn early on as an attorney, it’s how to minimize life’s risks. You’re trained to sniff out risks buried in the fine print that your clients haven’t even read. You learn to bulk up on your own malpractice and professional liability coverage, just in case. So why do so many attorneys fail to manage one of the greatest risks they and their families face: the potential loss of their own income stream should they become disabled?

In our estimation, decent disability insurance is not an “if” but a “must have” for any attorney who depends on an ongoing income stream to sustain their current lifestyle. And let’s be blunt: That’s probably you.

“It Won’t Happen To Me”

Advisors often recommend that clients consider including disability insurance policies in their long-term financial plans, even when the initial suggestion is met with resistance. This is still true for successful attorneys, whose stalwart optimism typically serves as the backbone of their success. Unfortunately, as accomplishments accumulate, that admirable optimism can mutate into a damaging sense of invincibility: “Financial misfortune is for others,” you think to yourself. “It won’t happen to me.”

You may even have taken all of the other right steps to plan for your financial security: establishing a well-funded investment portfolio, purchasing solid life insurance and preparing an air-tight estate plan.

All of those planning areas are important (and also recommended). But consider this reality, as reported by the Council for Disability Awareness:

A typical, 35-year-old male non-smoker, 5’10” at 170 pounds, with a white- collar office job and a healthy lifestyle has a one in five chance of being disabled for three months or longer sometime during his career.

If this same individual smokes and gains a little weight, at 210 pounds his chances increase to 45 percent. Those are nearly 50/50 odds. Should he actually become disabled, the average expected length of down time is considerably longer at nearly seven years. And, ladies, your statistics are similar.

Would your current financial plan remain on track if you were required to take a multi-year break from your career? Do you still believe it can’t happen to you?

Murphy’s Law and Attorney Disability

Consider this analogy. Imagine you decide to upgrade your family vehicle’s well-worn tires with premium replacements. The enhanced tires don’t come cheaply, but you’ll put a lot of miles on them and your family’s safety and comfort is worth it. Your son or daughter has just turned 16. Need we say more?

don't be left without a spare tireThe fellow writing up the order asks if you’d like to replace your spare tire while you’re at it. You look at the bottom line and realize that it’s a little higher than you’d planned. “Nah,” you say. “Why bother? I’ve never even used it.”

Because we live in a world where anything can happen, think about how frustrated you’ll feel when you’re stranded by the side of the road with nobody to blame but yourself.

In other words, as every attorney knows, “what ifs” abound in this life:

  • What if you suffer a disability and cannot work at all?
  • What if you can work, but not in the manner you’re used to?
  • What if you need to invest time and money to re-career yourself?
  • What if you need to hire and train support staff to continue your business?
  • What if the role of the family breadwinner must shift to your spouse?

Given the consequences of not having disability insurance when you need it, coupled with its relative affordability for healthy professionals, otherwise financially secure families should consider taking advantage of the coverage available to them. You wouldn’t leave your spare tire in the garage because you’ve never needed it before. You haven’t overlooked the importance of automobile insurance or life insurance. And yet all too often, attorneys and other individuals in high-profile or higher-risk professions fail to protect against the possibility that their careers could well experience a proverbial “flat.”

Disability Insurance: A Pound-Wise Decision

Let’s talk about the costs of disability insurance, which are typically in the range of 1 percent to 3 percent of your annual salary. Admittedly, it’s not a fun expense. Especially for those eternal optimists, it’s unpleasant to even think about being disabled, let alone spending money to prepare for it. In raw dollars, it can feel “not worth it.” But homeowner’s insurance is a significant expense as well, and yet you don’t feel you’ve wasted the money if your house doesn’t burn down every so often.

It’s a good, “pound-wise” decision to think of disability insurance in the same way. If you forgo 1 percent to 3 percent of your annual income for those credible “what ifs,” and worse does come to worst, you’ll be free to focus on the things that really matter – regaining your health, keeping your family secure, establishing professional continuity – instead of being so heavily weighed down by financial fears and burdens. Personally, we can’t think of a better use for such a slim percentage of one’s total earnings.

Choosing a Policy

Disability insurance policies vary widely in quality, and no one policy is right for everyone. Also, don’t assume you can rely solely on your firm’s disability insurance coverage; it may or may not meet your true needs. For starters, consider these questions:

  • What wages or salary will the policy replace? Many policies are designed to replace 60 percent of your income. Is this adequate for your circumstances?
  • Does the policy offer an “own occupation” or “any occupation” definition of disability? This is a critical component of selecting the right policy. “Own occupation” coverage protects you if you cannot work in your current occupation. To collect on “any occupation” coverage, you must be disabled from working in ANY available occupation. Think cautiously about this distinction.
  • What are the tax ramifications? If you buy the policy yourself, the income will be tax-free. If your firm buys it for you, or you buy it through your own firm, it will be taxed as income. Choose carefully.
  • What is the waiting period before benefits begin?
  • Are the benefits indexed to inflation or the cost of living?
  • How long will you receive the payments?

Your Next Steps

Hopefully, by now, you’re resolved to secure disability insurance if it’s right for your financial plan and you haven’t yet done so. Of course resolve is one thing; action is another. Considering how high the stakes can be if you’re left unprotected against disability, consider this a case worth closing soon.
Now, about that spare tire.