By Stacey Ritzen, WCI Contributor
No one wants to think about the worst-case scenario, in the event that a traumatic illness or injury robs us of our ability to work and perform basic household duties. But all it takes is a car crash, a slip-and-fall accident, or a positive diagnosis to irrecoverably change the course of our daily lives. Since life comes at us fast and since we can’t predict when life will throw us unfortunate curveballs, all we can do is prepare for them. A disability insurance policy may allow you to buy a catastrophic disability rider that will pay you an additional benefit if you become “catastrophically disabled.”
But like the circumstances this insurance covers, it can also be an extreme measure. Ultimately, it’s up to you to decide whether you need catastrophic disability insurance, but let's learn a little more and weigh the pros and the cons.
What Constitutes a Catastrophic Disability?
A catastrophic disability occurs when a severely disabling injury, disorder, or disease permanently affects your ability to carry out essential daily activities. In insurance terms, it’s typically defined as not being able to perform at least two of the six activities of daily living (ADL)—which include bathing, dressing, eating, using the restroom, continence, and transferring.
In many instances, the disability must be severe enough that personal or mechanical assistance, such as home aides or a wheelchair, may be needed to leave the home or bed. In addition, some extreme cases may require constant supervision so that the disabled person cannot physically harm themselves or others.
What Is Catastrophic Disability Insurance?
In the event that an individual meets the above criteria, catastrophic disability insurance is a type of disability insurance that covers income replacement—up to 100%—for the duration that they are functionally or irrevocably impaired or disabled, or until they generally reach the age of retirement. Furthermore, if the disabled person requires additional medical care and services, such as in-home assistance or a certified nursing assistant, to help with daily activities, the insurance should cover that as well.
However, catastrophic disability insurance is not a stand-alone policy. Instead, it typically serves as a rider—or an à la carte add-on—to a standard physician’s disability insurance plan to provide additional funds beyond what your policy would typically pay out.
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What Does Catastrophic Disability Insurance Cover?
While blanket disability insurance covers a range of potential life- or career-altering disabilities, catastrophic disability insurance covers only the most severe conditions that leave the insured unable to perform basic tasks and activities. Though disability insurance policies vary in definition, a catastrophic disability is generally defined as the inability to perform two or more activities of daily living without the assistance of another person.
However, catastrophic disability may be caused by a number of conditions, including the following:
- Severe cognitive impairment, such as a severe deterioration or loss of cognitive capacity, due to injury or illness, as measured by medical evaluation
- A complete loss of at least one of the senses, including speech, hearing in both ears, or sight in both eyes
- A loss of use of both hands, both feet, or one hand and one foot, due to injury or illness.
How Does Catastrophic Disability Insurance Work?
Any disability benefits paid out to the beneficiary are contingent upon the insurance provider approving the claim. Once the claim has been approved, the catastrophic disability rider will pay a monthly benefit in addition to any individual disability coverage the policyholder may have. After that, the beneficiary will receive monthly benefits, similar to how unemployment or retirement payments function. Depending on the individual’s policy, these benefits may cover up to 100% of pre-disability earned income when combined with long-term disability coverage.
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Do I Need Catastrophic Disability Insurance?
Catastrophic disability is a bit of a debatable insurance rider in that the risk of a life-altering disability actually occurring is relatively low. As a result, many experts will tell you to opt for a larger primary disability benefit instead of tacking on the catastrophic disability rider. The exception, of course, is if you’re already up against the maximum amount of disability insurance you can purchase and if you would feel more comfortable with a wider safety net.
On the other hand, the crux of the argument for catastrophic disability riders is the same as those against them. Because the risk is so low, it’s also a relatively inexpensive rider that can yield greater benefits if you ever need it. For example, an added expense of around $1,000 per year could give you an extra $8,000-$10,000 per month in disability benefits.
But depending on your disability insurance plan, there could also be rider limitations—such as restricting applicants of a certain age, with 50 being the typical cut-off. Insurers also usually cap catastrophic disability benefits, and often, the policy will not allow catastrophic benefits to exceed three times the base monthly benefit.
Some limitations prevent you from collecting more benefits than what your income was before the disability. Say you made an annual salary of $180,000 before suffering a disability—or about $15,000 per month. If your base disability policy pays a $10,000 benefit per month, then your catastrophic benefit rider would only amount to $5,000 per month. Depending on how much that rider costs, it may simply not be worth it.
In either case, it’s a good idea to crunch the numbers to get some advice from a financial advisor if you’re stuck on whether to add on a disability rider. Remember that even the best insurance agents are getting paid more to sell you a policy with as many add-ons as possible, so they cannot provide a completely unbiased opinion.
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How Much Should I Pay for Physician’s Disability Insurance?
Disability insurance generally does not come cheap, as you’re protecting your livelihood in case you are ever unable to work. According to a 2018 CDC Morbidity and Mortality Weekly Report, one in four adults will suffer a disability that impacts major life activities at some point in their lives. So, the odds of needing disability insurance are greater than you might think.
Most experts agree that a typical individual disability insurance rate for those relatively early into their careers should be about 2%-6% of the desired monthly benefit. If you’re looking for a benefit of $10,000 per month, expect to pay $200-$600 per month for the policy—or about $120,000 per year for a total cost of $2,400-$7,200 per year.
As far as catastrophic disability riders go, how much you’re willing to spend should depend on how robust your base disability policy is. Most likely, if your policy skews toward that 6% figure, it’s unlikely you’ll need additional riders since the best and most expensive policies cover the broadest range of potential disabilities.
However, your policy is capped at the lower end of the spectrum; again, you might expect to pay about $1,000 per year—or just over $80 per month.
You may also be eligible for various features and pricing discounts, as the overwhelming majority of doctors qualify for anywhere from a 5%-30% association-based or employer-related discount. A top-notch insurance agent should be able to help you get the most bang for your buck on an insurance policy.
Who Should I Buy Disability Insurance from?
First, you will want to find a reputable, independent, and unbiased insurance agent. While these independent agents make their money off commission, there is more than enough business to go around within the industry. So, there is little incentive to sell you an inferior policy in exchange for earning a slightly higher commission.
Since they are making a commission off your policy, make sure to find an insurance agent who has the bandwidth to help you understand your options thoroughly. Your agent should quote physician disability policies from each of the “Big 6” insurance companies (including Mass Mutual, Ameritas, Guardian, Principal, The Standard, and Ohio National) and review the pros and cons of each.
If you’re unsure where to begin, The White Coat Investor curates a regularly updated list of insurance agents for all your needs, which is a great place to start looking.
Have you ever had to make use of catastrophic insurance? What was your experience like? If not, is this a rider worth purchasing? Comment below!