WHY SHOULD DOCTORS PURCHASE DISABILITY INCOME INSURANCE?
"It won't happen to me."
That thought is a common reason many physicians put off purchasing Disability Income (DI) insurance. Most of us believe disability will occur in the form of a catastrophic event like a car accident or severe injury, but the statistical reality is that the most common cause of disability is illness, not accidents or injuries. Arthritis, back pain, neurological problems and cardiovascular illnesses are all more common than injuries when it comes to disability claims. [1]
Your income is your single-biggest asset. It is critical that you protect it in the event that illness prevents you from working. A smart risk-management attitude is "It might happen to me." DI insurance is a great strategy for protecting your income in the event that you become too ill or disabled to perform the daily functions your job requires.
BASIC ANSWERS TO QUESTIONS ABOUT DISABILITY INCOME INSURANCE:
Options are helpful but can also be overwhelming. The right DI insurance policy will help you with the protection you require.
But which one is right?
Here is a quick, helpful list of FAQ's about DI insurance to help you in your research:
1: HOW MUCH COVERAGE DO I NEED?
For doctors in residency or fellowships, benefits are usually capped between $4,000-$6,000 per month. When you complete your training and have a job with more income, benefits can increase. You have the option of adding a rider to your policy during training called a "Future Increase Option" (if available) that allows for an increase in benefit based on your future income without any medical underwriting. This is a tremendous benefit to residents and fellows because you fully expect to earn more income in the future and will likely wish to insure it; however, there's always the potential for health to change during the stressful years of training. We think it's important for clients to receive monthly benefits until age 65. This captures what the industry calls your human asset value, which multiplies the years you intend to work by the amount you make. The hope is to replace the income that your family would have received had your situation allowed you to work well into the future as you intended.
The monthly benefit amount for practicing physicians is typically capped at $15,000 or $17,000 for most carriers. This would be the cap for individual coverage beyond what your group plan at work provides; however, the insurance company will calculate the total amount you can receive from both group and individual coverage based on your income. Obviously, they don't want to create an incentive for someone to be disabled, so they will always approve a benefit that is less than your current earnings.
If your income exceeds $800,000 or so, there are specialty insurers that will provide additional disability coverage beyond the $17,000 monthly benefit cap mentioned previously. These plans are structured to pay a monthly benefit for only five years, and then a lump sum is paid after year five if you are still considered permanently disabled. The lump sum will normally equal what the monthly benefit would total if it had been paid until age 65.
2: WILL I PAY TAXES ON BENEFITS RECEIVED FROM DISABILITY INCOME INSURANCE?
No. Benefits received from disability policies paid with after-tax dollars will always be tax-free because you pay the premiums with after-tax dollars. Only benefits received from a disability policy paid with pre-tax dollars, such as your group disability policy, will be taxed.
3: WHAT ARE THE DIFFERENT TYPES OF DISABILITY INCOME INSURANCE?
A: The three main forms of disability insurance for physicians are: Own-Occupation ("own-occ"), Medical Occupation ("med-occ"), and Any Occupation ("any-occ"). Each comes with pros and cons, and a good financial planner will help tailor a policy that's just right for you. Here is a quick description of each:
What type of Disability Income insurance do physicians need?
"Own Occupation" (own-occ) definition states that you are totally disabled if you are not able to perform the material and substantial duties of your occupation. If you are a physician or dentist and have limited your duties to the performance of the usual and customary functions of a specific, professionally recognized medical or dental specialty, the insurer will consider that specialty your occupation. For instance, if you are a neurosurgeon and develop an illness preventing you from performing surgery, but are still able to examine patients full-time, you would be considered totally disabled under own-occ because the primary function of your medical specialty was lost. The key is that a significant portion - around 75% or more - of your responsibilities at the time of your illness or injury are no longer possible. Lastly, with own-occ, you are paid full benefits even in the event that you begin a new job or career. There is no limit to the amount of income you can earn while receiving a payout from an own-occ policy.
"Medical Occupation" (med-occ) definition states that the physician or dentist can be considered totally disabled if:
They can no longer perform the substantial and material duties of their regular occupation.
OR
If they can do one or more of their substantial and material duties of their regular occupation, they will be considered Totally Disabled if: they are not gainfully employed in any occupation, more than 50% of their time in their regular occupation at the time the disability began was spent in direct patient care AND they are unable to perform the substantial and material duties which accounted for more than 50% of their income. In the example above about the neurosurgeon, a medical occupation definition gives the neurosurgeon the option to continue seeing patients and receive partial disability benefits, or quit practice, choosing to be considered totally disabled, and receive full benefits.
Modified Contract: Med-occ is a modified contract. Let's say your pre-existing income was $500,000 and your med-occ disability payout is $400,000. You can still work at another job or start a new career as long as your new income, plus the disability payout, does not exceed your pre-existing income. If your income from that second job, PLUS income received from the disability benefit payout exceeds your pre-existing salary, your disability payments will account for the increased income and proportionately reduce your total disability payout.
"Any Occupation" (any-occ) defines total disability as unable to perform ALL the substantial and material duties of ANY occupation for which you are fitted by education, training, and experience. This definition gives the insurer much more room to deny claims based on the physicians ability to practice in other medical specialties or even teach medicine.
4: DO I GET PAID IMMEDIATELY?
A: Probably not. Your Elimination Period (the amount of time between when your disability happens and when the insurance company starts paying you) is established in your policy. You will most likely see options for 30, 60, 90, 120, and 365-day Elimination Periods (EP). Shorter EP's pay benefits sooner, but usually cost more.
5: HOW LONG WILL MY DI INSURANCE CONTINUE TO PAY BENEFITS?
A: That's up to you. Your Benefit Period (the length of time your insurance company pays monthly benefits) is also established in your policy. Benefit Periods can be set for a specified amount of time (2 years is typically the minimum) or until you're 65. Most policies automatically terminate benefits at age 65, though some continue to 67 or 70.
6: CAN DI COVER MY STUDENT LOANS, RETIREMENT SAVINGS, & EMPLOYER MATCH?
A: Yes! Some companies offer riders or add-ons which provide added protection for student loan repayment and retirement savings if you choose to purchase it. Again, DI insurance is not just about replacing or supplementing your paycheck. Consider all of your financial needs when building a policy.
7: DOES MY SPECIALITY MATTER?
A: It could. A financial planner should be able to help you navigate this question based on your specialty. Surgeons, for example, might receive 60% of their salary from performing surgery and 40% from patient care or office visits. If the surgeon developed a tremor in his or her hand and could no longer perform surgery but could still make office visits, certain plans would provide full benefits and allow the physician to make unlimited income working in a different occupation.
8: SHOULD I ASK ABOUT COST OF LIVING INCREASES?
A: Absolutely! If you purchase a policy when you're 29 and become ill at age 56, cost of living will likely increase. You can add a COLA (Cost of Living Adjustment) rider that provides protection along with rates of inflation; however, the indexing with inflation begins at the time of claim. Again, be aware that this might cost extra, but it could be worth the expense if you want your benefits to keep pace with the cost of living when you receive them. Of note, the increases will not exceed the benefit cap, which will normally be no more than $17,000 of monthly benefit, so if you are near the cap, avoid wasting your money on this benefit.
9: CAN I QUALIFY FOR DISABILITY INSURANCE IF I BECOME DISABLED WHILE WORKING PART-TIME
To qualify for Disability Income insurance you must work at least 35 hours per week at the time of your illness or injury.
10: WHAT IF I BECOME ILL BUT CAN STILL WORK PART-TIME? DO I QUALIFY FOR DISABILITY?
A: Yes, with the right option. A Residual Disability Option pays benefits if you can only work in a limited or part-time capacity. Depending on the provider, Residual Disability generally requires you to demonstrate that at least 15-20% of your income is lost as a direct result of illness or injury. Some policies will pay 50% or 100% of the benefit for the first 6 months. After six months, the policy benefits adjust and you'll be paid a proportionate benefit based on loss of income, along with other necessary criteria depending on the carrier.
11: WHY DO I NEED INDIVIDUAL DISABILITY INCOME INSURANCE? WON'T THE GOVERNMENT PAY BENEFITS IF I CANNOT WORK?
A: Many people rely on Social Security programs to supplement income due to illness or disability. But keep in mind that most disabilities (close to 96%) are not work-related and are therefore not covered by Workers' Compensation. Also, to qualify for Social Security disability, you must be completely disabled with no hope of recovery for a period of at least one year, or have a disability expected to end in death. Even if you qualify, public assistance will only supplement your income, it won't help with other factors like student debt or retirement savings.
[1] Council for Disability Awareness, 2014 Long-Term Disability Claims Review Report