This is a post co-written with Stephanie Pearson, MD, FACOG, an ob-gyn turned disability insurance broker. How? After sustaining a career changing injury during a difficult patient delivery, Stephanie became quite passionate about physician disability insurance and risk management planning.
In this post, we hope to demystify disability insurance and convince you why you need it!
Your ability to make a great income is one of your greatest assets. Have you considered how a serious illness or accident could jeopardize your financial security? As a physician, I definitely have seen things change in a blink of an eye – a new cancer diagnosis, a car accident, or a fall to name a few. You’re much more likely to use disability insurance than life insurance and you know I always recommend insuring against the 4 financial catastrophes: Death, disability, liability and divorce. Why would you not want to protect that asset with disability insurance?
Here are the top causes of disability, in descending order:
- Mental disorders
The issue with disability insurance is that disability is very gray and subjective. With life insurance, you’re either dead or alive. There is no “time of disability” like there is a “time of death.”
The three things Stephanie Pearson hears most as reasons not to obtain private disability insurance:
- “It won’t happen to me.”
- “I am healthy. I have no family history.”
- “I have coverage through work.”
It happens, and it happens a lot. According to the Labor of Statistics, one in seven people will suffer a disability requiring time off from work during their working years. The average disability lasts from 3-5 years. Can you afford to have no income for that long especially if you are the breadwinner for your family?
Many illnesses are NOT genetic. Many cancers and other illnesses do not discriminate. Accidents are called accidents for a reason. Stephanie certainly never thought a patient kick would end her clinical career.
Coverage through work is often not as much as one believes. When Stephanie asks clients if they know what the coverage through their employer truly is, she is met with blank stares or silence (on the phone). Group benefits are certainly better than nothing; however, there are typically many shortcomings or holes. Stephanie’s did not cover work related injuries – so she was denied benefits.
Often, group benefits are paid for by the employer, which makes the benefit taxable income. There is often a maximum benefit (i.e. 50% to 15K). Many employees are unaware of the max, and falsely believe that more of their income is covered. Also, it is often only the base salary that is covered, not bonuses, teaching stipends, etc. which DO count as part of your compensation package. Group policies are typically “Own Occupation” (see below for definition) for 2-3 years, and then switch to “Any Occupation.” You do not want to be told that you can teach, consult, or answer phones. There are often many exclusions and stipulations to group benefits that make them far inferior to private individual plans.
Most importantly, most group plans are not portable. Very few physicians start and end their careers in one place. Many find themselves unable to secure good coverage if they leave one job only to find out the next one does not offer benefits. They are now older and potentially have more morbidities.
Ok, so now you may be convinced that you need to look into getting some. Let’s go over how to buy a disability insurance policy.
- Determine how much disability insurance you need
When you buy a policy, the policy amount is by monthly income replacement. This monthly income benefit is tax-free provided you pay for it with after-tax dollars (vs. deducting from your taxes – generally not recommended). You won’t be able to recover 100% of your income (the underwriting company doesn’t want you to be more valuable disabled than working). Each carrier has a participation limit usually around $17,000/month. For the really high earners, you may need to have more than one policy with more than one carrier.
How much do you need? That answer is very person specific. Are you the sole provider, primary or secondary provider, or do you have an equal double income household? What are your fixed expenses? What could you live without? All carriers have an algorithm to determine your qualifying benefit. The factors that go into this number are your salary, other earned income, and other group or personal benefits currently owned. The magic number for what you need, usually falls somewhere in the 60-80% of your pre-tax income. Remember, your private benefits are tax-free income. I always tell people, just because you qualify for “X” does not mean you have to purchase “X.” You need to figure out what your family would need if you were not bringing in a paycheck in order to maintain your quality of living. Keep in mind that even if your spouse makes enough for both of you, there may be extra costs associated with your disability like medications and care.
- Determine what riders you need
Almost everyone will need more than the barebones policy. Unfortunately, there is no standardization of language in the insurance industry. Carriers have similar riders with very different definitions, or the same concept called by different names. It is important to understand the definitions in each illustration that you review. The riders you should seriously consider (really, in my opinion, are “necessary”):
- Specialty specific or True Own Occupation – True own occupation stipulates that you are disabled if you can no longer perform “the material and substantial duties of your job”, regardless if you are gainfully employed. Some carriers will state that you can NOT be gainfully employed. This is a huge difference.
- Future Purchase Option – This allows you to purchase more insurance as your income grows.
- Non-Cancelable/Guaranteed Renewable – This means the company cannot cancel the policy on you and must guarantee that it can be renewed every year.
- Residual Disability – Aka partial disability. The policy will pay you a portion of your monthly benefit if you’re partially disabled. Each carrier has a different definition. Again, the devil is in the details. An important note: there are more claims paid for residual/partial disabilities a year than total disability.
- Cost of Living Adjustment – This adjusts your payout to index for inflation. I would get this early in your career and cancel it about 10-15 years later.
- Catastrophic Coverage – This rider pays you an additional benefit in the event your disability leaves you unable to perform two of your activities of daily living (ADLs) without assistance or you are severely cognitively impaired. There are a few nuanced differences amongst the different carriers.
- Talk to an independent agent – someone who can broker from one of these companies: Guardian (Berkshire), Mass Mutual, Ameritas, Principal, Ohio National and Standard.
Met Life no longer issues new policies. I (Miss Bonnie MD) recommend you avoid any policy from Northwestern Mutual. They have an inferior definition of “Own Occupation” among other shortcomings. I recommend talking to at least two independent agents.
- Since women are more likely to be disabled than men (pregnancy related claims are on the rise) our premiums are higher than men. At least we get a break on life insurance !
Unfortunately, disability insurance is more expensive for women than men. Women are more likely than men to leave the workforce secondary to illness and injury, some in part to our ability to make babies. Men tend to die younger and more often at their own hands. Carriers are moving away from covering pregnancy at an alarming rate. Things that are not viewed as an abnormal outcome of pregnancy by ob-gyns, are viewed that way by insurance carriers! Please secure coverage before your first attempted pregnancy. Recurrent miscarriages, infertility treatments, cesarean sections are all viewed as abnormal outcomes (!). Gestational diabetes, pre-eclampsia, post-partum hemorrhage, are as well.
You also may have heard that it’s “cheaper” to purchase DI as a resident. This is only “true” because you’ll be buying a smaller policy since you’re not making attending income, as a resident you’re part of a large hospital system offering institutional/group discount, and you’re younger. Women, look for a unisex policy to save on premiums. Principal offers one.
- Seriously consider purchasing life insurance if you don’t have it already to save you another work-up.
You will likely need medical underwriting to determine your eligibility for DI. This involves blood work and a physical exam. These can also be used for life insurance so that you don’t need to repeat this again if you apply for it within a year (generally speaking).
- If you’re a woman, I strongly recommend purchasing this before you have children. If you wait until you’re pregnant you may get dinged with an exclusion that any pregnancy related disability won’t be covered, or you may develop a pregnancy related condition such as gestational diabetes that will ding your eligibility.
- The state you purchase DI matters. Everything is different in CA and FL. Texas also has some differences. Not only is coverage more expensive, but certain riders offered elsewhere are not offered there. CA has the highest premiums. If you are doing residency there, and staying there, then you have no choice. One way to get around this is to purchase disability insurance before moving to CA if your medical school is another state. Also, if you’re doing residency in CA but know that you’re moving to another state, you may want to wait until you move to the new state – or better yet, purchase a policy now in CA then get a new one when you move (then cancel the CA policy). Conversely, if you’re training in one state and moving back to CA, definitely purchase a policy before moving!
- Disability insurance generally pays out after 90 days of disability (“elimination or waiting period”) and until age 65, so you’ll need enough income replacement to save for retirement.
- Once you reach financial independence, you can cancel disability insurance.
- If you’re really trying to save on the premium cost two riders you can consider forgoing are: COLA and CAT. You can also extend the elimination period to 6 months or a year as well.
- Guardian is considered the “best” insurance carrier and the premiums reflect that. They have unlimited coverage for mental/addiction disorders. If this is not a deal-breaker for you (i.e. no personal or family history of mental disorders or substance abuse) then consider another carrier. Most other carriers have a two year limit.
My current job’s long term disability insurance provides 100% of my base salary for up to 6 months. If I am still disabled, they will pay 50% of my base salary after (all taxable). Of course, I have private true own occupation disability insurance with Principal. It is a unisex policy purchased at age 38 for a monthly benefit of $6,500 (tax-free) after a 3 month waiting period. The annual premium is $2900. I was unable to purchase more due my job’s mandatory group long term disability insurance.
What do you think? Do you have private disability insurance? Why or why not? Comment below.