If you were told that there is an insurancecompany that offers physiciansan additional $40,000 in coverage ayear over and above any other disabilityinsurance, would that interest you? Itshould. How can this be true whenphysicians have been told for years thatthey cannot buy additional disabilityinsurance? The answer is very simple.
Disability insurance carriers will sellphysicians protection against the cost offunding their retirement plans (eg, simplifiedemployee pension plans, profitsharing plans, 401(k) plans, etc).Therefore, if a physician pays $40,000 ayear to fund their retirement plan, thedisability carrier will pick up that costwith retirement plan disability insurance.
The most effective approach uses anindividual disability insurance policy thatpays benefits into a trust, which is set upspecifically for the benefit of the insuredphysician. If a disability occurs, monthlybenefits from the policy will be paiddirectly into the trust.
With input from the disabled physician,the trustee will then invest the moniesreceived into mutual funds, annuities, orindividual securities. The trustee will continueto invest the monies until the insured(ie, the trust beneficiary) reaches age 65.At that point, the trust's assets are distributedto the individual to provide supplementalincome for retirement.
The policy benefits and trust earningsare subject to the normal IRS rules thatgovern the taxation of trusts and individualdisability income insurance. Trust earnings are generallytaxable to the insured, as they are thebeneficiary of the trust.
Let's look at an example to get a betteridea of how this coverage works. Atage 40, John Smith, MD, earns $250,000a year. And every year he puts aside$40,000 to fund his 401(k)/profit sharingplan. Two weeks ago, Dr. Smith decidedto purchase retirement plan protectiondisability insurance with an annual maximumbenefit of $40,000.
With this protection, if Dr. Smithbecomes totally disabled at age 40, theinsurance company will deposit approximately$40,000 a year into a trustaccount, where the money will grow.These funds can be used in retirement.If Dr. Smith stays disabled, his total benefitsat age 65 will be $993,720. If Dr.Smith had purchased a cost of livingadjustment (COLA) with a 6% inflationrider, his total benefits at age 65 wouldbe $2,205,396.
What did it cost Dr. Smith to purchasethis type of protection? If he hadpurchased a COLA rider, Dr. Smith'sannual premium would be $2385. Butsince he didn't purchase a COLA rider,his premium is only $1883 a year. WhileDr. Smith can deduct this premium fromhis medical practice, the benefits will betaxable when received.
Physician-investors looking for morepremiums should strongly consider purchasingretirement plan protection disabilityinsurance. If you're wonderingwhy you've never heard about this typeof coverage before, it's because very fewinsurance agents in the country are familiarwith this product. For the most part,the general public has never heard of it.
Roccy DeFrancesco, JD, is anattorney and author of "The Doctor'sWealth Preservation Guide."He has run a medical practice andlectured for many state andnational medical associations. Fora free asset protection, income, and estate taxreduction CD, or for questions, call 269-469-0537or e-mail email@example.com.