All dentists have a number of important decisions to make when planning their financial future, such as:
– Should I invest more into pensions?
– What is the best mortgage available?
– I've sold the practice – what do I do with the realized capital?
Unfortunately, some dentists forget to put in place what is probably the most important component of their financial jigsaw: income protection (which is also referred to as income replacement cover and permanent health insurance).
Now, it's also worth pointing out that some dentists are well aware of the importance of the benefits of this form of insurance and decide against insuring themselves.
It may be that they have sufficient assets in place to live off if the worst were to happen and their income ceased the next day. Or since they have decided to take the risks firmly on their own shoulders and are prepared to suffer any consequences.
If that applies to you, then providing you have considered all the facts I can not see a problem with it.
But what about the major who wants to take responsibility for their situation and purchase income protection cover?
– Which companies offer income protection for dentists?
– How do you choose the right plan (s)?
– What small print do you need to watch out for?
– Where do I purchase cover from?
My aim today is to point you in the right direction so that you will know exactly where to start and who to approach for more advice should you need it. Even if you have cover in place already, you may want to check that it has been set up correctly.
Before we get into the nitty gritty, let's briefly look at the purpose of income protection insurance.
The main benefit is that, in the event of a successful claim, you will be able to sustain all your monthly living costs such as the mortgage. Any income protection benefit will be paid to you tax free and the maximum you are able to cover yourself for is approximately 60% of your gross income (net profit if you're self-employed).
It's worth mentioning that some older policies provide cover up to 75% of gross income.
You are able to claim if you are ill and unable to work.
The insurance company will then pay you until you return to work, retire or die, whichever is the earlier.
There are a number of income protection plans available (over 30) to purchase provided by many of the leading insurance companies and banks, as well as some smaller providers that you're probably not familiar with.
Only a handful of policies are suitable for scholars at any one time.
One important point is that the market is quite dynamic so a policy that is suitable for a dentist today may not be appropriate tomorrow. The small print can change so you do need to watch out for any changes (if you have cover already the provider is unable to alter the original policy).
As the cost of cover is based upon your age, health and with some providers, your sex, the earlier you purchase the lower the premium. Another factor is that the market rates for income protection do vary year to year.
Perhaps the most important factor to remember is that, unlike some forms of insurance where you are encouraged to shop around every year, with income protection it's vital you take the time to do as much research as you can before you purchase cover as once it's in place it's recommended that you leave it for the long term.
If you did, for example, have cover for 5 years and then replace it the new cover is likely to be more expensive as you will be older. In addition, if you have had any health issues since you purchased the original cover you will need to declare them.
The result is that exclusions may apply to the new cover or the monthly premium may increase (in this situation you may decide to retain the current cover, even if it is not the most appropriate for your needs).
In no particular order, let's look at the key areas that you will need to consider:
Insurance companies will assess how ill you are when considering a claim.
There are 3 main definitions of disability:
– Own occupation; your claim will be assessed on your inability to perform your duties as a dentist
– Suited by training education or experience; benefits would only be payable if you were unable to do a job such as research or a similar one offered by the insurance company
– Any occupation; as you may have guessed, you've got to be quite ill to qualify for a claim under this definition – you have to be able to perform any job
It's fairly easy to work out that the 'own occupation' definition of disability is the preferred option.
Insurance companies risk rate all occupations, therefore you will not need to pay a higher premium to obtain own occupation cover. It's simply the case that some offer own occupation for dentists whereas others do not.
One definition to watch out for is where the initial claim is assessed on own occupation terms, however after 6/12/24 months of you receiving benefit the insurance company alters the definition to qualified.
You will normally pay for cover on a monthly basis.
There are two types of promotions available; reviewable or guaranteed.
With the former, you will usually pay a set amount for the first 5 years. At this point the insurance company is likely to review this in light of their overall claims experience, which includes the amount of claims that they paid and their prediction of what may happen in future years.
Therefore, the monthly premium may increase (in theory, it could also decrease). Thereafter, reviews will take place annually or every 5 years.
With guaranteed premiums, you will normally pay a slightly higher premium at outset. You will then pay the same amount until the date the cover is set up to, usually 60 or 65. The amount you pay the insurance
company is not affected by their overall claims experience.
Not all companies offer guaranteed premiums but you should definitely consider them during your research.
NB You will normally have your cover (and premium) increase with inflation annually regardless of the type of premium you are paying.
Many providers have a number of exclusions where they will not pay a claim, so while it's good to know when they will pay it's as important to know when they will not.
Some common exclusions include alcohol abuse, pregnancy (where complications do not arise) and drug abuse.
If you are involved in dangerous sports, such as mountaineering or sky diving, exclusions may be added to your cover. Therefore, you would not be able to claim in the event of being unable to work if you had an accident while performing certain activities.
Lastly, if you have existing health issues exceptions may also be applied. Note that if you are a smoker you will normally pay a higher premium. If you do stop smoking you may be able to notify the insurance company after 12 months and ask for a premium reduction (you may also be able to ask the insurer to consider removing any other exclusions).
You should check that your cover includes:
– HIV cover, included for needlestick injuries
– Ceasing age of the policy to tie in with drawing your NHS Pension / retirement date (usually 60 – 65)
– Worldwide cover; are you able to claim benefits if you're not in the UK (especially important if you are planning to move abroad or return to an overseas home)
– Infection protection, so that your cover retains its purchasing power. The majority of providers allow you to increase cover by the Retail Prices Index or a set percentage
– Deferred period, many dentists prefer day one cover.
If you are working in the NHS hospital system you will probably be enticed to NHS sick pay there before you will not need cover to start until after 26/52 weeks
– Claims are paid to you tax-free
– Some providers will cover you for 60% of your earnings, whereas others will only cover 50%
– Tax relief is not available on personal income protection policy (ies) premiums
– Many providers now publish their actual claims data, so you should ask to see their latest statistics. This way you should be able to get a feel for their approach to claims
– If you are self-employed it's the net profit that you should cover, not your gross earnings from the practice. This figure will be available from your accounts
– If you used to be self-employed or trading as a partnership and are now trading as a limited company the situation is not as clear. Some providers will allow you to cover your share of the company's profits. Their view is that you've performed an administrative exercise and expect that your turnover will continue to be similar as before. Other providers will only cover your salary while some others will allow you to include any dispute payments.
If you have cover in place already and have incorporated it's critical that you check wherever your cover will be affected. I'm sure you would not want to find out bad news at the time of a claim!
As mentioned, there are a number of plans available in the marketplace. One of the most well known providers is Dentists' Provident Society. They offer a number of plans, including day one cover. Another feature is that you are able to increase your monthly contribution to the investment element that is available. This money is returned to you (plus any potential growth) free of income and capital gains tax on retirement.
Whether you should invest more money via this method will depend upon individual circumstances. As you'd expect, there are a number of investment alternatives available that you should also consider.
There are other providers that offer guaranteed premiums, however one day cover is not available with their plans.
As the marketplace can change at short notice, it does not make sense to publish who these providers are at the time of writing. If you would like to know then just drop me an email and I'll let you know. That way you'll have the up to date list to choose from.
Our experience is that most dentists will apply for either:
– Day one cover
– Day one cover plus a guaranteed premium plan (plans will dovetail with each other)
– Guaranteed premiums plan (s)
As mentioned, even if you have cover in place it makes sense to ensure it ticks all the boxes mentioned above.
Getting Help / Advice
It's sometimes said that a little knowledge can be dangerous, so it may be prudent to use a specialist to help you find the right cover. There are a number of financial planners / advisors that you can approach to help you.
You should ensure that they:
– Provide choice from the 'whole of the market'. In other words, they are independent from product provider and can choose from any product provider. Some advisors are tied or multi-tied so they will not have access to all providers
– Offer a specialist service to scholars and are experienced in dealing with the financial planning needs of dentists.
There are a number of firms that can claim this specialist status so wherever you are based you should be able to find one (although just because they are specialist does not guarantee that they will be 'whole of market')
– Offer you the option to pay for their services via fee or commission
The Financial Tips Bottom Line
My wish is that after reading this article you'll be more aware of the key issues to consider when purchasing income protection cover. If you think about it logically, insuring the continuity of your income (due to illness) is one of the most sensible and responsible decisions anyone can take.
Do not leave it to chance; It's just not worth the risk!
Take the opportunity now (whilst it's in your mind) to dig out your income protection policies and check wherever they tick the main areas covered above. If you're unsure (or do not have the time), just drop me an email and we'll try and point you in the right direction.