Dr James, 9s:

Stop spending so much on your income protection. That's what we're here to talk about today, with returning face on the d invest podcast, Mr Warren Robins, and you know what? Income protection is one of those things. A lot of dentists have it and it kind of creeps up on us. Do the premiums and do the renewals over the years and you know what, Warren, I've got to. I've got to ask you a question because I was mulling this over earlier. Would you say it's akin to energy companies and how they save the best tariffs for their new customers and maybe not so much people who've been around for a while. Is that a good analogy?

Warren, 42s:

That's a really interesting it's not a bad analogy. I think probably the closest analogy is actually when you see mobile phone contracts you're always seeing them saying cpi plus 3.9. All the four big networks they do that um and on the face of it that doesn't seem like it's a big deal. You think that cpi bit inflation, 3.9 not a big deal. But if you actually look at that over a 10-year period your, your starting cost of your mobile phone contract will increase by 94% in 10 years. So based on the average, the average in the last 10 years is 3% for the CPI. So that's almost doubling in 10 years. So those little increases really add up. So I think that's probably the very closest analogy.

Dr James, 1m 36s:

It's an example of compounding working against us. Right, and we're very bad as human beings at understanding the power of compounding. You know the way everybody Einstein raves about compounding the eighth wonder of the universe. Right, and obviously that's what we harness in our investment portfolio. This is a good example of when it works against us. Us. Whenever we've got these fees, that low level just accumulate and exponentially grow with the year with with time over the years yeah, 100.

Warren, 2m 2s:

And it's great when it works in your favor, um, because it, you know, putting regular stuff away, you can build a sum and if you get a decent return, you end up with a nice nest egg. The absolute flip side does work and Einstein was right about this. Um, you know, he understood the power of that and he was one of the smarter guys you're ever going to come across. Um, if it works against you, you know, beware, because those little increases really do add up. Um, so you need to be conscious of something. It looks like it's not going to cost a great deal. You know, 50 pound a month policy, yeah, that seems fine. Um, yeah, if it goes up by, say, three and a half percent a year, 30 odd years you're going to be around about 160 170 pounds a month. If it goes by another one and a half, two percent, then you're going to end up with a policy that's going to end up with a policy that's going to cost you 300 pounds a month in that sort of region. So there's little, you know. Just a less than two percent difference can over 30 odd years, will double the premium, and that's the sort of thing you've got to be aware of. And, yeah, make sure you don't start with an expensive one to begin with. It's always a good thing, but sometimes a policy that is slightly more expensive to begin with can end up costing a load less over the policy term. So never a good idea just to base your choice on the lowest starting premium, because invariably that's not going to be the best value over the long term.

Dr James, 3m 26s:

Grants and numbers. In essence. Yeah, exactly you know what? There's something we always bang on about on the Dentistry Invest podcast and it's fees whenever it comes to your investing portfolio. And a 2% fee on your investment portfolio over fairly long periods of time maybe years to decades actually costs us so flipping much, and this is no exception maybe five figures, six figures, even seven figures sometimes, in our invest portfolio, depending on on the size, of course. So minimizing drag and minimizing that working against you is massive, and this is another example of it potentially working against you. You and I caught up off camera Warren on this very topic, and we did. What you told me was which I was intrigued to hear there's two biggies that it's helpful to watch out for whenever it comes to not spending as much on our income protection, and they are executive income protection versus personal income protection as in understanding how we can be tax efficient on that front. And then the second. Of course, this is not a comprehensive list. These are just two biggies that we're pulling out today. There's loads more. And then the other one was fixed premiums versus variable premiums, and what are those? We're going to get into them in just a second. Have I got that right.

Warren, 4m 38s:

First of all, yeah, yeah, essentially uh fixed and variable is the guaranteed and reviewable premiums.

Dr James, 4m 43s:

So yeah, so maybe we'll start there.

Warren, 4m 45s:

Maybe we'll start with those okay, um, essentially there's there's two classes of premium you can get. Um, there is a third one which I'll sort of maybe touch on as well, but essentially you've got reviewable and guaranteed premium. So if you have a guaranteed premium from the insurance company, then essentially what the insurance company is saying to you is that the cost of your cover is not going to change. But you need to be aware that if you have a guaranteed premium income protection policy, if you have it with annual cover increases to protect against increasing costs of living, the premium will go up. It's not the premium for the cover that you already have in place, but when you have the additional cover added each year, they charge for that because that's not built into the starting premium. So, but it goes up essentially at a known rate. So some insurers, if it's a three percent increase in cover, it will be a three percent increase in premium. Some it may be three percent, four and a half percent, but it will be the information that determines how that premium will go up is built into your policy. Now, if you have a reviewable premium, they're normally lower than a guaranteed premium to begin with, but the insurer carries out reviews on the cost of your existing cover on a regular basis. Normally for five years they won't, and then on the fifth anniversary, they'll look at it and they may decide that, as well as increasing the premium because your cover's going up, they're going to increase the cost of the cover that you've already got in place, and that then is normally done on an annual basis as well. At the same time they offer you, the cover increases. Now, if you go down that route, essentially the premiums can go up a lot. The premiums can go up a lot. Um, and there is some fine print on the policy document of one of the insurers that is very popular with dentists, which says there is no limit to the increases that they can apply when they do their premium reviews. Um, and 20 years of work in insurance has taught me that insurance is all about the fine print, and fine print is putting policies for a reason. It's not just randomly put in there and ignored. So with that sort of wording in the policy, you need to be very cautious. Um, I'm not gonna mention names because I don't like being sued, but uh, but, yeah, it's. It's probably the insurance company that, in my experience, is the most popular when we're young dentists. So feel free to put two and two together.

Dr James, 7m 18s:

Well, let everybody do their own math on that one. Fair enough, fair enough. And you know what, Warren? Another thing that was interesting with regards to our conversation just before we caught up off camera conversation just before we caught up off camera. There was some of the reasons in there that, alongside what you said, some of the reasons that they can justify putting the premiums up whenever it comes to variable premiums, that's what that's terminology yeah, yeah, with the reviewable premiums that there's um, there's a wide range of different reasons.

Warren, 7m 46s:

um, you know, it can be that sort of their claims have been higher than they expected, in which case it's a fairly logical approach to increase the premiums so they've got enough money to cover future claims. But it can be something as basic, as their profits are not high enough. And that was one of the things that shocked me when I read that in the policy document that one of the reviews that will, for them, will justify this one insurance company that will justify them increasing the cost of your insurance, is that they're not making enough money. And, yeah, that still baffles me, to be honest. It always takes my words away.

Dr James, 8m 33s:

There's just a lot of leeway there to be able to do what you want effectively if that's a valid justification.

Warren, 8m 37s:

Yeah, and what I've seen with with dentists as they get older. So, yeah, my clients range from people who are just foundation dentists right through to ones that are getting closer to retirement and my experience is that if you do have reviewable premiums, the bigger increases tend to come in as you get into your 50s and onwards maybe late 40s, 50s onwards and the issue you then have if you then decide you're going to look elsewhere because you don't like the sizeable increases you get each year, there's a good chance you may have some sort of medical condition, maybe a bit of a shoulder injury or a back injury, or you've hurt your hand and you made a claim. If you switch to a new policy, that is then excluded from the new insurer, so effectively you're locked in to that policy and swallowing the big increases that come through the pipeline every year to avoid getting into that situation in the first place, because you can end up having just to live with those big increases. And I see dentists at the moment paying sometimes £550, £600 a month on their policies in their mid-50s and getting sort of £60, £70 a month increases in the premium at the review point and they've got no choice but to swallow it. They don't like it at all, but they got no choice but to swallow it. They don't like it at all, but they have no choice. So it is something to if you can avoid it, because at least if you've got a guaranteed premium and if you don't want the premium to increase, you can just turn down an annual cover.

Dr James, 10m 14s:

Increase premium is not going to change a penny and are you able to say how much one would expect to pay for similar ish cover who fits into that bracket you were talking about just a second ago? So let's say they're paying 550 600 a month, what in your experience would be a ballpark figure for what somebody could potentially pay for similar cover. Obviously it's a case-by-case basis, uh, but maybe just as a rough, give us a rough idea.

Warren, 10m 43s:

Yeah, there's an example that sticks in my head. About 18 months ago I had a dentist who's local to me and he was paying about $5.50 a month with one of the dental specialist insurers and he was getting pretty big premium increases. I looked at an equivalent cover with a mainstream insurer and could reduce the premium by about £192 a month and put him on a guaranteed premium. But he'd had a claim in about two years previous for a frozen shoulder. He had physio on it. And when I did the underwriting, if he'd had a claim in about two years previous for a frozen shoulder, he had physio on it. And when I did the underwriting, if he'd switched to another insurer, they would exclude the shoulder condition. And because he was managing it with occasional physiotherapy quite sensibly, I told him it's not worth the risk of switching to another insurer because if you can't work for one period because your shoulder goes again, you're not going to get paid out. So reluctantly he stuck with his existing cover, um, and he he was sort of fairly gutted that he had no choice but to do that, um, but you know, that's the way the world.

Dr James, 11m 57s:

So you so worth potentially looking into this before anything goes wrong effectively.

Warren, 12m 5s:

Yeah, the sooner the better. Insurance gets more expensive as you get older. You don't get healthier as you get older, normally. So, yeah, if you have an insurance policy and you're not certain about whether it's set up correctly, review it while you're fit and healthy and as young as possible, because if you do switch, the sooner you do so, the sooner you can get locked into something that is beneficial, or you can find out that it is good enough, in which case stick with what you've got. But if you do need to switch for the long-term benefit, the sooner you do it, the sooner you start benefiting.

Dr James, 12m 38s:

So, yeah, understood, Thanks for breaking that down. Let's move on to the second thing that we plan to talk about today, which is personal cover versus eip executive executive income protection. So maybe if we could just have a little bit of a breakdown of what those two things are and how they differ from each other, and then we can yeah, yeah, I think to start with, just sort of touch on eligibility, because if you are a sole trader, um, then pretty much your only option is going to be the personal income protection.

Warren, 13m 7s:

But if you are working through your own limited company which I'm seeing more and more dentists moving to their own limited company because they're moving from doing NHS work to purely private, in which case they're not getting the NHS benefits, so they go tax efficient the advice of their accountant and go limited. Now, once you work through a limited company, you then have the choice of going through a personal policy which you pay the premiums through your own personal bank account and there's no tax relief on them and there's no tax relief on them. Now second option is to have an executive income protection policy which is taken out by your company and they insure you as the person on the policy and if there's a payout, the money is paid into the business and then distributed through the business for wherever you want that to go. The advantage of that is, generally speaking, it is potentially tax deductible, so you get the benefit of tax efficiency on the premiums. The flip side to that that you potentially need to be aware of is if you're then going to take that money out as salary or dividends, then you're going to have tax to pay on that. So if you want, say, £3,000 in your pocket, if you have a personal policy, you have three thousand pounds with the cover is paid tax free. If you can have executive income protection policy and that one is going to come out of your business, you need to calculate what sort of tax liability there will be on the payments that come out and then take more coverage. So you may may need to take £4,000 worth of cover After tax. That gets you £3,000 in your pocket Now. So most business owners that have their limited companies that I come across want to put as much as possible through their limited companies because they love the tax efficiency side of that. Now the thing to factor in when you're looking at executive versus personal income protection is you have to have more cover with the executive income protection, so therefore there's going to be a bigger premium. So, yes, you're going to get the tax deduction but you have to take more cover. So to some degree some of that will be lost. And the second thing to consider is only a couple of insurers offer the executive income protection and they're rarely the lowest cost providers. So to do a realistic comparison, you need to compare the lowest cost executive income protection provider against the lowest cost personal income protection provider. They're often different insurers and if you go on the insurer websites they show the same insurer. So do a proper comparison. Often, even after the tax efficiency of paying it through the business, you can end up paying more on the executive income protection if you take it out as income. Now, the one thing where it's particularly efficient is one of the things. There's a range of things. As well as your income, you can also cover some other things like P11D benefits. You can cover national insurance contributions through the business and you can also cover pension contributions made through the business. Now, if you're taking the cover and you're using it to cover pension contributions, you're getting the tax efficiency of the tax deduction on the premiums and you then shouldn't be paying any tax on the payout because it goes into the business and straight out of the business into your pension. So you don't have to gross it up. If you need 2K in pension contributions, that 2K is all the cover you need. It's paid in, paid out. You have to be aware that there are limits on the pension contributions in terms of absolute amounts you can pay and also as a proportion of your overall income. So you can't just think I've got five grand's worth of pension which I'm paying through the business and I'm taking out 50 grand's worth of dividends. I'm going to take 50 grand's worth of or five grand's worth of pension contributions and take that in executive protection and it goes through because it won't pay out. When it comes to claim, they'll look at your income structure and go you don't qualify for that level and you won't get what you think you're going to get. But under those circumstances it is particularly attractive. So you know that, depending on how people take their income out of the business and how much they take out, it can be the most efficient way to take a personal personal protection policy to cover what you want in your pocket and potentially take an executive protection policy to cover some of your pension payments. So you know you don't have to have one or the other.

Dr James, 17m 42s:

You can potentially go for both that's the real magic in the ip world right there, yeah, yeah great, so so speak, to an expert, that that's, that's the, the.

Warren, 17m 51s:

I guess the message of that little thing is um, you know, it's like anything sort of. If you look at things on the surface they are, they can often look very simple, um, but often that simplicity is belied by what's going on underneath. It's like the swan on the water. You think it's just trundling along. You look under the water and the legs are going crazy. So yeah, sort of, the surface doesn't always give away the reality.

Dr James, 18m 13s:

Most dentists can relate to that because whenever well, I'll speak on my own behalf for the moment. But I'm sure most dentists can relate to what I'm about to say. When I came out of uni, I thought I knew dentistry and I realized I was like actually, James, you know nothing. You really don't. You know like 150th of what you need to know to actually be a success as a dentist, and that you know there was a big, a low life out of the plans for me outside of the dentistry uh front. Let's just say that there was one big valuable lesson in there and it taught me that, no matter what body of knowledge that you're talking about, if you think it's simple, it's probably you don't know enough about it. Is it god's honest truth? It's actually a symptom that you probably don't appreciate how much depth there is to it.

Warren, 18m 53s:

And, of course, I would say that it's 100 applicable to to financial services and I think most if you ask any experienced financial advisor, whether it be investments, pensions, mort insurance, when you qualify and you're then let loose on the world, you're probably pretty dangerous at that point because you don't know a lot about what you don't know. You're in that level of ignorance where you haven't even got a clue about what you don't know yet. And it's only from I'm 20 years into financial services. I look back now and sort of think when I was let loose as a mortgage advisor, I first qualified yes, I was supervised, but it's you know you don't know enough in many ways to be doing the job and um, it's. It's easy to make a mistake and it's only with that hindsight and building up knowledge year on year that you realize you know gives you the ability to add value to what you do because you learn more and more and the more you learn you realise you know gives you the ability to add value to what you do Because you learn more and more and the more you learn, you realise how complex it is and how many people get what appears on the surface to be something very basic. I guess the most simple example of that is most people if they've not spoken to an advisor. You say, what life insurance have you got? They'll say I'm fine, I've got my mortgage covered. Advisor, you say, what life insurance have you got? They'll say I'm fine, I've got my mortgage covered. Now that's fine. And you need your mortgage paid off if you die. But people don't tend to think about what happens if you die. So if you die, the mortgage is paid off. Fantastic. So maybe £1,500 a month is gone, your mortgage payment's gone, but you've also lost your income. So if this is a family unit and you've got the predominant breadwinner dying and they were taking on four grand a month. There's a deficit of two and a half thousand pounds. But the bills are still there. You know, the council tax is still there, the heating, the electricity, the food bills, the car, etc. Everything is still there. But very few people actually think about replacing any income on death and there are policies that do that. But very few people actually think about replacing any income on death and there are policies that do that. Um, but very few people. If they've not spoken to a good advisor, will have one in place and then, when you ask them about it, they go oh, that's a great idea um, so it's something that's basically that, and this is smart people. Um, you know, I've had very intelligent people say I don't need, I don't need any additional cover. I've got 100 grand in the bank. You, you go, okay, well, how long would that last? And they've never thought about it. And they say, well, what are your outgoings? Yeah, your mortgage is gone. And they sort of, okay, 25,000 pounds a year would still be going out. And you go, okay, well, that's four years income you've got in the bank and you've got a two-year. But people never think it through, even really, really smart people. So that's just a very simple example. Um, and when it comes to anger protection, it's a lot more complex than that.

Dr James, 21m 37s:

Good for thought, Warren, listen. Thanks so much for being generous with your knowledge and time today. If anybody wants to talk to you off the back of this podcast, how would they be best off finding you?

Warren, 21m 47s:

um, I think there's going to be a link attached to this, so feel free to make contact through that. Or there is a link to my diary on the MediDent FS website, so feel free to reach out through that, and you can also email me through the website as well. So, yeah, whatever's most convenient, I would say Good stuff, Warren.

Dr James, 22m 7s:

Thank you so much. As I was saying earlier, thank you so much for your time and looking forward to having you back on the Dentists Who Invest podcast once again very soon. Pleasure, James, good to see you, as always. Take care.