Disability Insurance and You, Part 2

Written by Tareq Azad, MD

Editors: Smruti Desai, DO, Noah Berland, MD, Robby Allen, MD

Faculty Reviewer: Eden Kim, DO

In my last post, we discussed what disability insurance is, why physicians need it, and why you should consider buying it sooner rather than later. Today we will discuss specifics that you should look for in a plan.

How much disability insurance do I need?

The most common question about disability insurance also happens to be one of the more difficult questions to answer: how much disability insurance do I need? As a resident, this answer is easy -most policies will only provide you with about $5000 per month of benefits, and many will accept this amount. While attendings in specific fields (orthopedic surgery, plastic surgery, etc) will often have expensive premiums on their policies, residents usually have lower premiums on average. This is because insurance companies typically lump residents together into one category regardless of specialty, because their salaries are comparable despite differences in future earning potential. As an attending, however, the answer to the above question is complicated. Many agents are happy to sell you the biggest policy that you can afford, usually about 60% of your gross income. To estimate how much disability insurance you need, without accounting for taxes, determine your monthly living expenses and retirement savings if you were to work until age 65 (most disability insurance payouts are tax-free). This will represent the monthly benefit your policy needs to cover. Notice that this recommendation is based on costs, not income. This means that despite two physicians with the same income of $300,000, the physician with higher monthly expenditures (due to different standards of living, more expensive housing, larger family, etc) will need a more expensive plan than the one with fewer monthly costs. Most policies cap out at about $15-20K monthly benefit maximums (without accounting for expensive add-on riders). A typical policy bought by a young doctor will cost between 2% to 6% of the monthly benefit. Therefore, for a theoretical policy providing a $10k monthly payout in the event of disability, expect to pay monthly premiums of $200-$600. Many agents will provide a “price per $100” when showing different policies between companies which allows you to quickly compare how much per month you would need to pay in order to get an equivalent $100 in payout (this should fall usually between $2-6 depending on the specifics of your policy).

Own occupation versus any-occupation

The second most important part of a policy is whether it covers “own-occupation” or “any-occupation”. This distinction determines whether or not you are able to collect payouts if you are a) unable to work only in your specific occupation, or 2) unable to work in any occupation. Simply stated, you should never choose a policy that is NOT own-occupation. An own-occupation policy defines disability by your inability to perform your specific occupation, and so regardless of your ability to work other occupations, you can still collect a payout. An any-occupation policy, however, defines disability by your inability to work any occupation at all; if you can work a different occupation, you cannot collect payouts. Consider the physician in our prior example, Jill, who becomes disabled and is unable to perform the procedures needed for EM (ex. intubation, chest tube, central line). If her policy is own-occupation, she can collect insurance payouts even if she decides to work in an urgent care setting, consult for a pharmaceutical company, serve as an expert witness, or even pursue their lifelong passion of becoming a chef – while still being able to earn income in her current endeavors. The combination of income may approach or exceed their previous income. On the other hand, if her policy is any-occupation, she cannot collect insurance payouts despite having paid the premium for it, because she can still pursue another occupation and is not disabled per the definition of the policy.

Exclusions

The first thing we will discuss are “Exclusions”. Exclusions are specific conditions (typically medical conditions) that, if present at the time of applying for a policy,will prevent you from being able to receive payouts. For example, having pre-existing heart disease while applying for a policy and subsequently becoming disabled from a heart attack may be a specific exclusion from receiving payouts, so be sure to carefully read the details. This reiterates the importance of getting a policy when you are young and healthy. Further, you should pick a policy that prevents the insurance company from adding a health condition to the exclusion list that you acquired after already being insured.[1]

Mental health

Another area of major variability across plans is coverage for “Mental health” related conditions and problems. Many policies have a clause that gives a time period, typically 24 months, that they will provide payouts should you become disabled due to a mental health condition. Mental illness is not covered in all policies and it will be up to you to determine based on your risk factors (personal history, family history, age, smoking/alcohol/drug use) whether you will pay the cost to have this covered in your policy.

Premiums

It is also important to understand how your premium will change over time, look out for “Graded Premium” and “Level Premium”. A graded premium is a premium (or monthly cost to be insured) that changes (with age or medical condition) for a specific level of coverage over time. This is in contrast to a level premium, which retains the same monthly cost over the lifetime of the policy. Only two scenarios exist in which physicians will choose a graded premium: 1) if the cost of coverage is too high to afford (i.e. residents or new attendings), or 2) if a policyholder anticipates early financial independence, and can therefore cancel their disability insurance before the cost of the cumulative graded premiums exceeds that of a level premium. Consider a physician who had a prior career in business and therefore already has significant investments before finishing residency . With enough passive income through their investments , they may need only a few years of (cheaper) graded premium coverage until they are able to support themselves from their investments in the event that they become disabled. By the time you reach a certain age, however, the money you saved by paying less for a graded premium earlier in life will be exceeded by the increasing cost of the graded premium later on. This age is your break-even point; depending on how many years you are from that specified age, you may be better off either using a graded premium for a shorter duration or sticking with a level premium. You would need salary projections as well as quotes for both options to calculate your break-even point.[2,3]

Guaranteed policies

You should understand whether or not your policy is “Non-cancelable” and “Guaranteed Renewable”. In a guaranteed-renewable policy, the insurance company must renew the policy if you so desire, but they may change your premiums. In a non-cancelable policy, as long as you continue to pay your premiums and don’t fulfill exclusion criteria, the insurance company cannot strip you of your coverage. Even if the insurance company becomes bankrupt or is bought by another company, the new company would still be legally obligated to continue providing you with coverage. When a policy is non-cancelable and guaranteed-renewable, the company cannot change any details (premiums, monthly benefits, policy benefits) until the age of 65.[4]

Future purchase option

Will you be able to expand your coverage in the future, look for a “Future Purchase Option”. A “Future Purchase Option” clause allows you to buy more of a monthly benefit in the future if you decide that your agreed-upon monthly benefit is no longer adequate. If you are a resident, an attending with temporarily reduced hours, or anyone who expects their income to increase in the future, you will want this option.[5]

Adjustment for inflation

Is there any adjustment for your benefit based on inflation? This is a form of inflation adjustment. Your $10k in 2020 will not have the same purchasing power in 2055 when you retire. This rider usually states that once you begin receiving benefits, the amount will adjust for inflation year-after-year for a given amount detailed in the clause. It is more useful if you are a young physician looking for a policy than for a physician closer to retirement age, as the money you receive will be closer in purchasing power by the time you start collecting it.[6]

Residual disability

This clause states that the policyholder will receive supplemental income in the event of a disability that is only partially disabling. Essentially, if a partial disability reduces your income beyond a determined threshold from its baseline, you will receive monthly benefits to offset this loss.[7]

Summary

Hopefully, after reading this post, you will have a greater understanding of the importance of disability insurance in protecting a physician’s earning potential. These points should provide a starting point in your conversation with agents in choosing a policy that meets your financial goals.