Over the past 30 years or so, there has been a distinct change in how financial planning has been presented by the financial press and by product providers. Too much attention has been placed on investment funds and not enough attention on protection products, like life cover and income protection.
When someone dies then, fairly obviously, their income ceases too so life cover is of utmost importance. This can have disastrous consequences particularly for orthodontists who have a young family. However, statistically, you are five times more likely to have a serious accident, illness, or injury before retirement age that you are to die prematurely before retirement age.
So, how can this potential problem be addressed? The most common approach is to take out income protection insurance (IPI) which used to be known as permanent health insurance.
Protecting your income
Effectively, the policy provides a regular tax-free monthly income in the event of a serious accident, illness or injury preventing you from fulfilling your normal occupational duties as an orthodontist. When the claim is made by the policyholder the insurance company normally requires some form of independent medical assessment for the claim to be settled.
Once the claim has been accepted the monthly benefit is paid through to the end of the policy term (normally age 60), until the orthodontist returns to work, or until date of death, whichever event happens first. Before the policy commences the orthodontist will be asked to nominate a deferment period.
This identifies the period before the benefit is actually paid in the event of a claim. For example, 26 weeks, 13 weeks, four weeks, one week, or no deferment period at all. Most self-employed orthodontists select no deferment period and most salaried orthodontists will select a 26-week deferment period (because they will continue to receive their salary in full for a minimum of 26 weeks).
There is no limit to the number of claims during the policy term or to the type of claim. There is only the requirement to demonstrate that the condition has prevented you from being able to fulfil your normal occupational duties.
Importantly, this differs from critical illness cover where the reason for the claim has to be on a list of pre-agreed policy conditions for a claim to be upheld. IPI is job-specific and, as such, offers a more comprehensive type of cover. Some of the conditions that may terminate an orthodontist’s career (neck whiplash following a car collision or carpal tunnel problems, for example) are very unlikely to be included in a critical illness cover policy document.
So, how much IPI cover should an orthodontist have? It is important to use net earnings (not gross earnings) as a marker because this is what the individual actually receives each year. Having established the net figure it would be reasonable to look to insure at least 50% of this figure. For example, if the net earnings are £60,000 pa. then the IPI policy should cover at least £30,000 pa. You will recall that IPI benefits are paid gross and not subject to income tax.
To give an idea of cost, for orthodontists in the 30-35 age range £600/week of benefit with no deferment period can be purchased for around £60-65/month, subject to underwriting. Given that, in the event of a serious accident, injury, or illness curtailing your career, the policy could provide nearly £800,000 of tax-free benefit (£600 x 52 weeks x 25 years) which represents excellent value for money.
Most orthodontists, even those working part-time, earn well above the national average wage (around £26,000 pa) and, typically, have a higher income than general dental practitioners. I make this point because even if the event forced you to pursue another profession, it may be impossible to generate an income anywhere near the level of earnings from orthodontic practice. Just something to bear in mind when you review your insurances.
Mark Horsey is a director of Dental Money Management, which provide pensions and investments advice for orthodontists. Mark is also a well-known dental postgraduate lecturer. www.dentalmm.com
Orthodontists who require investment and protection advice can contact Mark Horsey on [email protected]