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INCOME PROTECTION STRATEGIES
Disability Insurance for
Attorneys and Law Firm Partners
Executive Summary
1 in 4 of today’s 20-year-olds will become disabled before reaching age 67, according to the April
2014 Social Security Administration Basic Facts (http://www.ssa.gov/news/press/basicfact.html).
This paper addresses three strategies to help protect the current income and future earning
potential of attorneys and law firm managing partners:
Strategy 1
Strategy 2
Strategy 3
Review
contract
language
Ensure enough
replacement
income
Maintain
retirement
funding
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Contract Language: What to Look for
Here are some questions to ask:
Q
A
How is disability defined?
The most important definition in the contract is
Q
A
the definition of disability.
How is business profit handled?
in the disability contract’s definition of earnings.
attorneys by evaluating disability based on the
managing partner’s total compensation. It is
important that any profit-sharing is also included
An own occupation definition can protect
inability to practice law when disability begins.
Profit generally makes up a large part of a
It is also important to understand that business
profits may be considered an offset during total
If an attorney is highly specialized or practices
disability. Make sure to look for a contract that
in a niche market, consider upgrading the
doesn’t offset against the disability benefit during
definition of own occupation to own occupation
total disability, reducing the net benefit amount.
for attorneys – commonly referred to as own
specialty. This type of definition can provide even
more protection. For example, if a trial lawyer
Q
is unable to go to court because of a disability
that restricts their ability to talk, they may qualify
A
as disabled. Under this same scenario, the trial
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Q
2
A
Some insurance contracts will incent an attorney
to work part-time by providing up to 100% of
attorney may not qualify with a definition of own
pre-disability income replacement between the
occupation not specific to attorneys.
disability benefit and part-time earnings.
How are earnings defined?
Is there a work incentive benefit?
Q
The amount of a long-term disability benefit
is linked directly to an attorney’s pre-disability
A
earnings. Depending on how earnings
Does the attorney work more than
40 hours a week?
If that’s the case, look out for contract
language that says employees aren’t
are defined (base wage or W-2) – it may
considered disabled if they can work at least
exclude bonuses, leaving part of their
40 hours. For example, if an attorney normally
income unprotected.
works 60 hours per week, becomes disabled
and is restricted to only work 40 hours, they
Q
A
Would the firm be protected if a
partner could no longer practice?
would not be considered disabled.
Q
Some insurance companies offer an optional
business protection provision to help
cover ongoing overhead expenses and help
A
Is there extended earnings protection?
When an attorney returns from a disability, it
will take some time to rebuild a client base and
ensure a firm’s operation if a key partner
return billable hours to normal levels. Providing
becomes disabled.
an extended earnings protection benefit can help
bridge the potential gap in earnings while the
attorney works to rebuild their client base after
recovering from the disability.
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Disability contract language can be confusing, and the differences between contracts can be
significant. Take the time to fully review contract provisions and look closely at the wording.
Maximize Replacement Income
The maximum benefit under a group disability contract doesn’t always meet the income replacement needs of
higher-paid attorneys. Group plans typically cover 60% – 66% of base salary to a maximum of $6,000 a month
with some companies offering up to $20,000 a month for attorneys.
Here are a couple of ways to increase their benefit amount:
Gross-up premiums for tax-free benefits
When employers pay the premium for long-term disability coverage, employee disability benefits are taxed
which reduces the amount of employees’ take-home pay (partners receive a tax-free benefit as business
owners).
Employers may alleviate this reduction with a gross-up plan. Using this type of plan, an employer adds
post-tax dollars to the employee’s salary to cover the cost of the benefit premium. When disability
coverage premiums are paid on a post-tax basis, disability benefits are not taxed. This creates a higher
level of income replacement for employees and can potentially lower the employers’ premium.
Add individual disability insurance
Individual coverage can increase the income replacement ratio to about 75% – 80%. Premiums can be
paid for by the employer or employee. And if paid by the firm, the premium may be a tax-deductible
business expense.
Protect Retirement Savings
Even with both group and individual coverage, there may not be money left over to save for retirement after
paying everyday expenses and ever-increasing medical costs.
Insurance companies have developed special programs designed to help replace lost retirement savings. For
group disability, some carriers offer a supplemental insurance benefit that contributes additional dollars into a
retirement plan for disabled employees. For individual disability, some carriers offer a supplemental benefit that
places additional dollars into a trust. The trust invests the money then pays the balance at the end of the benefit
period, which is typically retirement age.
In addition to individual disability income replacement products, overhead expense insurance is available. This
coverage reimburses a business owner for business expenses incurred during a disability – ensuring they don’t
have to use personal funds that could be used to fund retirement to pay for those expenses.
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The coverage can also be carved out for a specific employee group, like partners, as an added benefit. And
it is portable so the employee can take the coverage with them if they leave the company.
3
Conclusion
Attorneys and managing partners have unique needs for disability insurance protection.
Reviewing contract language, ensuring replacement income and using programs to reduce lost
retirement savings are three strategies to help protect their income.
About the Principal Financial Group
The Principal Financial Group® (The Principal®)1 is a global investment management leader offering retirement services,
insurance solutions and asset management. The Principal offers businesses, individuals and institutional clients a wide
range of financial products and services, including retirement, asset management and insurance through its diverse family
of financial services companies. Founded in 1879 and a member of the FORTUNE 500®, the Principal Financial Group
has $530.3 billion in assets under management2 and serves some 19.9 million customers worldwide from offices in Asia,
Australia, Europe, Latin America and the United States. Principal Financial Group, Inc. is traded on the New York Stock
Exchange under the ticker symbol PFG.
1
“The Principal Financial Group” and “The Principal” are registered service marks of Principal Financial Services, Inc., a member of the
Principal Financial Group.
2
As of March 31, 2015.
FOR MORE INFORMATION
Visit www.principal.com/alaprogram.
WE’LL GIVE YOU AN EDGE®
Principal Life Insurance Company, Des Moines, Iowa 50392-0002, www.principal.com
Group and individual insurance coverage offered by Principal Life Insurance Company, a member of the Principal Financial Group®.
Examples are for illustrative purposes only. Disability insurance has exclusions and limitations. Contact Principal Life for costs and
coverage details.
The ALA program cannot be combined with other special underwriting programs and may be changed or discontinued at any time.
This information is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. Consult with
appropriate counsel or other advisors on all matters pertaining to legal, tax or accounting obligations and requirements.
GP60953ALA-01 | 09/2015 | © 2015 Principal Financial Services, Inc.