Demystifying Disability Insurance for Physicians

Insurances can be difficult to dissect and long-term disability is no different. Yet, it’s extremely important to understand and a vital piece to many physicians’ risk management planning.

Why Purchase Disability Insurance?

Income is an essential ongoing resource and disability insurance helps to protect it. In the unfortunate event that you were to become injured and experience a loss of earnings due to your inability to work, this type of plan could kick in and provide a critical level of income replacement.

When to Purchase Disability Insurance?

Short answer: when you have an income to protect, especially if others rely on it. If the premiums can reasonably fit into your budget during residency, strongly consider building some coverage in then. Conduct a thorough cost-benefit analysis to be sure it makes sense. Then, once you determine to secure a policy, take the time to make sure it’s tailored to your specific needs.

General Policy Characteristics

Benefit Amount: the monthly dollar amount that the policy would pay out once you meet its definition of disability. An insurance company will generally be willing to cover about 60% of earned income, up to certain limits. For personal policies where you pay the premiums with “after tax” dollars, the benefit amount will be tax free.

Benefit Period: the amount of time a benefit would pay out (assuming disability under the policy). Common examples are 3 years, 5 years, or to certain ages, such as 65 or 67. As you might imagine, a longer selected benefit period will result in a higher premium.

Elimination Period: the amount of time you would have to wait between becoming disabled and starting to receive a monthly benefit. For example, 90 days. A longer elimination period will lead to a lower premium.

Important Features Physicians Should Consider

Disability policies are customizable by way of additional features called riders. Depending on your situation, some will make more sense to include than others. Keep in mind that riders come with extra costs, but the value they add can be more than worth it if structured properly. Here’s a handful that doctors should be especially familiar with.

Own Occupation

This feature is the most important by far. Some insurance companies will already include it as part of the base policy, while a few others let you add it on as a rider. Know that there are only a handful of carriers out there that even provide it in one of the two forms, so physicians should stick to that short list.

With an Own Occupation policy, the definition of disability is specific to your area of training and expertise, meaning it will pay out even if you could earn income doing some other type occupation. After all those years of school, residency, and fellowship in pursuit of a specialty, this carries a lot of weight.

Future Increase Option

This rider grants you the privilege to increase your policy’s disability benefit as your income grows through the years – without having to go through the full application process. This is especially helpful for those who are earlier in their careers, such as residents. The company will likely ask for some type of verification that your income has actually increased, but there will be no medical requirements or lengthy paperwork. The other piece to this is that your lifestyle may grow with your income or you may have more family as time goes by, and you’ll want to protect them accordingly.

Partial/Residual Disability

Including this option allows for the policy to pay a benefit in the event you become disabled but are still able to perform only some aspects of your job. In the event you suffer a loss of income above an established percentage, the policy kicks in to pay a proportional benefit. In this way, you could work parttime, but still receive a disability income to help fill in the gap.

COLA (Cost of Living Adjustment)

The COLA rider helps your disability payout keep up with inflation over time. The adjustment will increase the benefit on an annual basis, depending on how the COLA rider is set up. Carriers have slightly different ways of offering this, but it might look like a fixed 3% increase, or an increase that follows the Consumer Price Index. Beyond that, you may be able to choose between simple or compound interest, with the compound option growing the benefit to a greater extent. Generally speaking, the younger you are, the more you should consider a COLA rider because of the increased chance that the benefit would pay out over a longer period of time.

Employer Coverage vs. Personal Coverage

Oftentimes, employers will include disability insurance as part of their group benefits package. In some instances, they’ll cover the cost altogether or it will be provided at a relatively cheap rate. It’s a good idea to take advantage of whatever is offered to you, but be sure to understand exactly how it works. Workplace coverage usually comes with a weaker definition of disability and lower benefit amounts compared to what a personal policy offers. Personal coverage will almost always come with a higher price, but the benefits and customization with riders create a more robust income protection.

The Application Process

The process can vary between different companies, but expect a handful of steps no matter what. A disability carrier will generally require an application, health questionnaire, medical exam, financial records (such as tax returns), and medical records from your physician in some cases. They certainly want to do their due diligence and it can be weeks before you have an offer for coverage.

Don’t let all the variables and involved process deter you from adding this necessary protection to your financial plan. Again, the options can really work to your benefit if you take the time to understand them. And, of course, enlist the help of a trusted planner to help you make the most sense of everything.

Edward F. Jurgielewicz III


SMRU #1876989