Essential Guide to Disability Insurance For Doctors

New Physicians, Residents and Fellows: The Doctor's Essential Guide to Disability Insurance and Benefits

What IS Disability Insurance?

Disability insurance is a type of insurance that protects an individual against the financial consequences of disability. This can be either partial disability, where you lose a portion of your ability to work and earn a living, or total disability, where you lose your complete ability to generate income. The financial benefit you receive when disabled provides the income necessary to cover your basic living needs and costs, and can help cover the additional costs associated with a disability, such as medical bills, prescriptions and therapy.

Why is Disability Coverage ESSENTIAL For New Physicians? Residents? Fellows?

Most young people feel invincible. But the real truth is that approximately 25-33% of 20 year old individuals will have some long term disability (> 90 days) during their career. A career ending disability due to accident, injury or illness can happen at any time, to anyone....without warning. If you were one of those individuals without disability insurance coverage, the loss of income would be financially devastating to the future for you and your family.

Understanding Disability Insurance: The Two Phases of a Disability Policy

Although most agents don't think about disability insurance in this manner, it better illustrates the "lifetime benefit" of a disability policy.

There are two major phases of disability insurance. The "protection" phase and the "benefit" phase.

Protection Phase

This is the phase of disability insurance when you have obtained your policy, pay your premiums and enjoy the benefit of being financially protected against the loss of income from a covered disability. During this time, while your are actively working, you are not receiving any direct financial benefit, but you do have the comfort of knowing you will not experience loss of income due to a covered disabling event, such as illness, injury or accident. This helps reduce your stress and risk over future financial uncertainty.

Benefit Phase

The benefit phase of disability insurance starts when you have experienced a qualifying illness, injury or accident which is covered under your policy terms. First there is a waiting (elimination) period where there is no benefit paid.  It is then followed by financial payout of your benefit (either due to full or partial disability). This payout period is defined in your policy, but commonly runs until age 65. The benefit you receive is the monthly amount you were approved for when you first obtained your policy, as well as any modifiers, such as automatic or applied-for increases or cost-of-living adjustments. If you claim less than full disability, your benefit may be modified accordingly.

Understanding Disability Insurance: Short Term Versus Long Term Disability Policies

Disability insurance can be divided into two different policy types based on the length of time that your disability is covered. Short term, or "temporary" disability policies and long term disability policies. Both serve the function of providing income benefit to you when you are unable to work. However there are differences between the two. Ideally, both policies can work together in a sequential manner to financially help you though a disability income loss.

Short Term Disability Policies

Short term disability policies provide benefit for a short period of time, just as the name implies. Personal short term disability plans are rare, and are often expensive. These policies, more often part of a group disability plan from an employer, provides financial benefits more quickly when a disability occurs, but only provides them for a shorter period. The intent of such plans is to provide financial benefit for short, temporary disabilities, such as an simple injury, during the convalescent period of recovery. Some states require employers to provide short term disability insurance to their full time employees; Other do not.

Waiting periods for short term disability plans may only be a week or two but the benefits may only last a few months to a year. Think of these types of plans as helping you through the temporary loss of a paycheck during the time you are unable to work, such as if you have broken a bone or other type of temporary disability.

Long Term Disability Plans

Long term disability plans are designed to cover disabilities that are long lasting or permanent. These are the plans that we are discussing in this article. They can be either employer sponsored (group plans) or individual (personal) plans, and there are significant differences between the two types of plans. No states currently require employers to provide long term disability policies to their employees.

These plans provide long term financial security in the event of a prolonged or permanent illness or injury that prevents you from working. Benefits typically start later (often a several months waiting period), but those benefits can continue for years...or even decades, resulting in a significant financial security blanket for those severely or permanently disabled.

Understanding Policy Ownership: The Two Major Types of Long Term Disability Insurance Policies.

There are two major types of disability insurance that you can obtain. One is a policy that your employer may offer, a "group" policy. The other is an independent policy that you purchase and own, a "personal" or "individual" disability policy. Both types of disability insurance, group and individual, provide similar objectives and outcome: Income during a period of disability. But that may be where the similarities end. In reality, there are likely more differences that similarities between these two classes of disability insurance.

Group vs. Individual Disability Policies

The first difference in these policies is who OWNS the policy. Group policies are owned by the company and all employees' coverage is combined together in a single company-wide policy. You get what is offered. No more, no less. Those benefits are constructed in that manner for the benefit of the company and less so for the employee. Because of that focus, there are many limitations of a group policy, and it is why you should obtain a personal policy for your protection. Group policies are the type of policies that may be offered through your residency or fellowship program.

So let's compare the benefits of an individual disability policy and how it differs from a group policy.

But first, let's get the one drawback of an individual policy out of the way. You have to pay the premium for an individual policy. It costs money out of your pocket. But as we explore the advantages of an individual disability policy, you will see the benefits outweigh this single negative element.

Portable Ownership of an Individual Policy

With an individual policy, YOU own the policy. YOU control everything about it. Moreover because it is your policy, it stays with you...regardless if you change jobs. It is "portable". You won't lose your coverage if you leave or change employers, unlike a group policy. With a group policy, you lose that benefit the minute you are no longer employed. You are left without protection. Not so with a personal policy.

Tax Free Benefit of an Individual Policy

With an individual or personal disability plan, when you pay the premiums with after tax dollars, the benefit you receive is tax free. With a prolonged disability, one that lasts years or decades, that tax saving can be enormous. Moreover the monthly income benefit you receive is all yours.

With a group policy, you may be provided the same "gross" monthly income benefit, but the net benefit received isn't really the same after you have to pay taxes. Depending on the amount of benefit, the current tax laws, rates and other factors, a group policy monthly benefit could be reduced by 25%, 30% or even more by taxes. Now that is a surprise you don't want to have happen to you when you need that income the most.

Customization of a Personal Policy

When you obtain an individual disability policy, you have the ability to pick various elements to customize that policy. You choose the waiting period before payment ("elimination period"). You choose the benefit amount you received (subject to guidelines). You also choose the length of time that you can receive benefits while disabled. These personal choices are not available to you in a group policy.

Other customization can be obtained by purchasing riders to your policy for additional disability benefits. This may include coverage of your student loans during disability. Contributions to a qualified retirement plan. Cost of Living increase coverage. Or the ability to qualify for larger monthly benefits based on your income history, often without any additional medical qualification. Another important rider is the residual disability rider.

Last, there is a very important (and essential) customization to your private policy:

Own Occupation Definition With Your Personal Policy

You have special skills that are unique. If you can't perform those specific skills, your income suffers or is lost. Using an "own occupation" rider (some may term this your "true occupation") allows you to narrowly define your definition of disability. You may still be able to "work", but if it's not in your trained specialty, you could qualify for disability payment. This is true even if you are able to work in a different specialty. For example, a surgeon who loses function in their hands or perhaps becomes blinded, may still be able to practice another specialty (i.e. psychiatry), yet be receiving full disability payments because of their inability to perform the original "own occupation" of their policy. This one specific rider may be one of the most important features of a physician's disability policy.

Common Questions Physicians Have About Disability Insurance.

Why Isn't An Employer Group Plan Good Enough?

An employer group disability plan is okay to have, but because of the reasons just given above, a group plan alone should never be considered as sufficient for a physician's income protection. There are just too many limitations and pitfalls, compared to having your own personal (individual) disability policy.

When should I buy Disability Insurance?

The answer is pretty simple, but often one people don't want to hear.

Now is the time to purchase disability insurance.

There are numerous excuses why people delay getting disability insurance. But if you do delay, for some it becomes too late. You can become disabled at any time, and you can't buy a policy once you are disabled. At that point, you are out of luck. Your chance to obtain financial support during the disability is lost.

Once again, the simple answer is buy your disability insurance as soon as you can.

There are multiple reasons to do this.

1. You can become disabled at any time, without warning.
2. Once you become disabled, your ability to purchase the financial protection of a disability policy... is lost.
3. The younger you are, the less expensive your policy premium will be.
4. The younger you are, the longer the time for potential disability and financial loss.
5. New in practice, residents and fellows often don't consider the risk of disability, however remember this: Physicians make their income from the knowledge they have. As you acquire it, it has value. But without the ability to convert that knowledge into a career, your investment of time, energy and money is lost. The only way of protecting that financial opportunity from disability...is with insurance.

How Long Should I Keep My Disability Insurance?

This is a common question. Typically individuals will keep their disability insurance during their entire career, to protect them financially against disabilities which would render them unable to maintain their income. Insurances will automatically stop at the the end of the defined benefit period. Some insurance will allow you to extend coverage beyond that period of time, however such extensions typically are year-to-year and require annual re-application and approval.

When individuals have accumulated a significant assets, there may be a time when they choose to no longer maintain their disability insurance, because their assets alone can maintain their lifestyle. But others, despite such financial assets, choose to maintain their disability insurance as long as possible due to the financial leverage (i.e. the total benefit outweighs the premium cost). In the end, such decision is up to each individual based on their personal financial situation.

How Long Will My Disability Insurance Protect Me?

The length of time that the insurance will protect you is defined by the age or interval at which your benefit will stop. That is an element of your protection that you would choose at the time of your policy application. You can discuss this with your insurance representative. Typically your policy will go to "retirement age", often age 65 or 67. Some can be extended beyond that, with limitations, which may include annual reapplication (after that point).

How Much Can I Be Protected For?

The amount of monthly benefit you can receive is based on your income and other modifying factors at the time of application. Insurance companies look to provide replacement income, but not more, based on your current income.   The starting point is the maximum that you qualify for based on your current income and other factors.  You may choose to obtain an amount less than that when you apply for your personal policy.

How Much Benefit Do I Need?

Each person may look for a different amount of coverage. They wonder, "How much disability insurance can I get?" . The maximum disability income benefit you qualify for by the insurance company is the "upper end" of benefit available to you. This is based on your current and future income. However, in some cases, you may elect to select a lower level of benefit, either due to less need (i.e. you have a high salary that is in excess of your needs) or you choose to have a lower premium. Certainly, you should look to obtain sufficient monthly benefit to cover your costs of living, as well as additional funds to help cover any additional costs incurred due to your disability. It's not unusual for individuals to "max out" the benefit that is available to them.

What If My Future Income Increases?

Disability insurance policies have various "riders" (customization) that can help you maintain your monthly income disability benefit when your working income increases, and also means of adjusting (upward) your benefit due to the impact of inflation. These are often company specific, so it's worth discussing with your insurance representative. It's important to remember that these options for future increases without additional underwriting are typically only available at the time of your initial application.

What About Inflation?

Yes, that can be covered with specific riders, called "COLA" (cost of living) increases. COLA riders are available for most policies at the time of initial application.

How Much Does Disability Insurance Cost?

Disability insurance is surprisingly affordable, especially considering the protection, and potential long term financial benefit, derived from it. If one considers the "cost" of loss of income for months, years or decades due to a disability, and compares it to the annual premium, it becomes clear that the premium paid is very reasonable for the protection and benefit received.

What "Special" Elements Should Be Considered When Buying Disability Insurance?

There are several very specific "special" elements that you should ensure you have in your own disability policy. Some of these are elements written into the policy itself, while some may require the purchase of a specific rider. These may be called "disability income riders". These include "Own Occupation", COLA, Income Increases, Elimination Period, Benefit Period, and others, many of which are covered in this article.

Are Disability Benefits Taxable? Or can they be "Tax-Free"?

In general, it's relatively easy to understand this concept. The money involved in a disability policy has to be taxed at some point. It's either done "up front" on the money that you use to pay your premium, or it is taxed when the benefit is paid out "at the back end".

Group policies, such as from an employer, are typically paid for with pre-tax dollars. In that case, the benefit is considered taxable. However, if you have a personal policy and you personally pay the premiums with after-tax dollars, then the benefits are typically tax-free.

It's important to remember that tax laws vary from year to year and different locations, so it's important to confirm this basic concept with your tax advisor, rather than this informational post.

What about Disability Insurance Coverage Through Social Security?

Coverage for disability is available through the Federal Government, in the Social Security Disability Insurance (SSDI) Program. Typically, a physician or other higher income individual won't utilize this program as a foundation for their financial protection because SSDI requirements are stringent and the benefits very limited.

Definition of disability for the SSDI program requires complete disability and inability to work in any job. The applicant must be "unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or is expected to last for a continuous period of at least 12 months." Furthermore the benefits paid to qualifying individuals under SSDI is only a fraction to that which is available through non-government (i.e. private insurance) plans.

In short, those individuals with a history of higher incomes should not consider SSDI as a plan upon which to base their future lifetime financial security. You can afford and should get better disability protection through a private insurance plan.

11 Common Disability Insurance Mistakes Doctors Make.

Mistake #1: Not Having Disability Insurance.

So you think you don't need it because you are a physician? Think again. Physicians are in a risky business. Accidents happen, but also importantly you have a high exposure to illnesses which may result in long term disability. A significant percentage of physicians (and others) will become disabled at some point during their career.

Mistake #2: Not Getting Disability Insurance Soon Enough.

It's never too soon to get disability insurance once you are earning a living. Just because you are at a lower level of income than you anticipate in the future (i.e. Residents, Fellows and New In Practice) doesn't mean your income should not be protected.  In many cases professional disability policies have provisions that anticipate such increases in income and provide benefits to cover that.  

Remember: You can't get coverage after you become disabled. Then, it's simply too late. 

Mistake #3: Not Having An "Own Occupation" Definition of Disability.

Your knowledge is specialized for the work you do. Your insurance should recognize that unique aspect of your career and protect that specific function that you provide.  Those special skills can be incorporated into your "own occupation" definition of disability, enhancing your policy.

Mistake #4: Not Constructing Your Policy To Maintain Your Financial Benefit When Your Income Goes Up.

Physicians incomes go up over time. Your policy should have the necessary provisions to help you keep your benefit congruent with your income.

Mistake #5: Not Constructing Your Policy To Provide Tax-Free Benefits

Why give Uncle Sam excess tax dollars? Proper construction of your policy payment can result in your receiving a tax free benefit, in the event of a disability.

Mistake #6: Not Constructing Your Policy To Provide Protection Against Inflation.

Inflation can erode your buying power over time. By having a specific cost-of-living rider, you can protect against the erosion of your benefit due to inflation.

Mistake #7: Not Selecting The "Sweet Spot" of Elimination Period.

The elimination period of a policy is the amount of time that you need to be disabled prior to collecting a benefit. The shorter the time, the higher your premium. The longer the elimination, the lower the premium. Selecting the "sweet spot" helps balance the time before benefits against the premium you pay.

Mistake #8. Not Paying Attention To The Definition of Disability.

Having "own occupation" definition is essential (see #3), but there are other elements that you should be familiar with. For example, some policies will include various "life events" as temporary disabilities, such as pregnancy. There is often specific language in policies that cover other potential long term disabilities, such as mental health, musculoskeletal disorders, cancer and other medical conditions. Each policy is different so it's important to read them carefully.

Mistake #9: Not Taking Advantage of Disability Policy Discounts.

Different insurance companies may provide various policy discounts, in some cases up to 10% reduction in the annual policy. Although not always available for all policies, your agent can investigate that possibility. Various discounts may apply, such as belonging (or creating) a "related" group or if spouses both apply for similar policies. Sometimes multiple policies (same company, different type) may result in premium discounts.

Mistake #10: Using An Association (or Similar) Offered Policy.

Although policies which are offered through medical or specialty associations may appear to be a good deal, there are potentially many problems with those plans. Premiums may be changed periodically; Changes in the policy wording and definition may occur; Some policies may not recognize partial disability; Some disabilities (such as mental disorders) may only pay benefits for limited times (i.e. two years); COLA riders may be absent or insufficient; You don't have control over the selection of the insurance company and their financial strength. Most, if not all, of these limitations are eliminated by working with an insurance broker (especially one who is familiar with your profession, as a retired physician) who can help you select and purchase the right individual policy for you.

Mistake #11: Not Paying Attention To Company Financial Strength

When you purchase a disability policy, it is a long term commitment. For that reason, it is imperative that you select a company with sound financial strength. For example, I only quote policies from companies with an A or A+ financial strength. My goal is to ensure that the company is there for you ... when you need it.

Bonus Mistake #12: Not Working With An Agent That Understands YOUR Profession.

Physicians are different than other people. Using an insurance agent that is a retired physician provides you with the benefit of someone who can help navigate your selection and purchase of the right policy with the right provisions. Who better understands a physician's needs...than another physician?

Why do I know this? It's because I AM a retired physician, now representing your interests. Helping you understand disability insurance as it applies to physicians and other professionals, is my goal. Protection of your financial future using insurance vehicles is a wise goal, but one that can only be done ahead of time. Let's talk and help you create that protection foundation.

You now have a physician friend in the insurance business...

Are you are ready to protect your financial future with Physician Disability Insurance? Don't make any of these 12 mistakes! Contact WhiteCoat Risk Management, LLC for your insurance needs.

Stephen G. Ruby, MD, MBA, FCAP Licensed Insurance Producer

1-833-362-7475 (1-833-DOC-RISK) or email me at [email protected]

Note: All information provided herein is felt to be accurate as of the date of publication.  WCRM or its agents are not responsible for errors for any reason.  This article is intended as a general introduction to disability insurance and not as an authoritative guide to these policies. You alone are responsible for actions you take, or fail to take, regarding disability insurance. We are happy to provide individual insurance guidance on a personal level through one-to-one communication.  Feel free to contact us.