Disability Insurance Part 6 – Other types of disability insurance
This is part 6 in a series of posts on disability insurance. Here we'll cover some various types of disability including group disability policies, key-man policies, retirement protection policies, and business overhead policies. Parts 1-5 can be found here.
Group disability policies
Residents and fellows (and sometimes even students and attendings) are often provided with a group disability policy as a benefit. There are three issues with group disability policies. First, their definition of disability is nearly always much weaker than you get with a good individual policy. The employer knows few doctors (much less residents) know much of anything about disability policies, and look at this as a “free” benefit. So they want to spend as little on it as possible. If you're in this situation, read the group policy and compare it to a similar policy for a good individual policy. In disability insurance, you generally get what you pay for, and your employer's motivation is to pay as little as possible. In most cases, you'd probably be better off if the employer would just give you the money it is spending on the policy in your salary. I cannot imagine the disappointment associated with finding out that your disability policy doesn't cover the disability keeping you from working. The second issue with group policies is that they limit your ability to get an individual policy. An insurance company doesn't want you to make more disabled than you did working, so they take your current policies into account before deciding how much more to sell you. If you are already covered by a group policy, they may not sell you an individual policy at all, and if they do, it will only be for a small percentage of your income. You could opt out of your “free” disability insurance at work, but your employer is unlikely to add the cost of the premiums to your salary. The last problem with group policies is that like other benefits, they are pre-tax. The employer gets a tax deduction for it, so the benefits to you are fully taxable. It doesn't take a rocket scientist to realize that $5K pre-tax is not the same as $5K post-tax. In general, assuming you qualify, I recommend everyone own an individual disability policy.
Key Man Disability Insurance
These are specialized policies sold to businesses (such as a medical practice) that pay the business in the event that a financially valuable employee becomes disabled. The employee ought to be covered by his own policy that will pay for his personal needs during the disability, but this policy covers the business losses as a result of the disability. Consider a practice of three physicians. What would happen if one of them became disabled? Consider that normally 1/2 of the income generated by each physician goes to overhead, paying nurses's salaries, rent, malpractice insurance, billing staff etc. If one doctor can't work, the overhead, at least in the short term, is the same. Now the other two physicians are paying 3/4 of the income generated in overhead. This, obviously, cuts their take-home pay in half. The alternatives, rapid lay-offs and restructuring of the business, or outright failure of the practice, are just as unappetizing. Key-man insurance generally pays either a lump sum or payments for 6-24 months. It is anticipated that within that time another “key-man” can be trained or hired and the business can continue on without major financial catastrophe. There are limited options out there for these policies, and you'll need an experienced agent to help analyze the value of a particular person and select an appropriate policy. Many doctors don't need a policy like this, but there are many who do and never even considered what might happen to their business if one of their partners became suddenly disabled.
Business Overhead Insurance
This is a similar type of policy bought by a business. Consider a one-physician practice where the doctor has a year long disability. Without a policy like this, the practice will go out of business, all of the staff will be laid off, and the patients will have to rapidly and unexpectedly find a new physician. If a business overhead disability insurance policy is in place, then the staff can continue to be paid, the utilities and rent can continue to be paid, and even a locums physician can be hired to cover the practice. Again, benefit periods usually don't exceed 24 months, and they are deductible as a business expense (with the benefits being fully taxable, of course.)
Disability Buy-Out Insurance
This type of policy is designed to be used in the event of long-term disability of one of the partners. If one partner becomes disabled, the policy pays out money that is used by the remaining partners to buy out the disabled partner's equity in the business at an agreeable price. This benefits everyone. The disabled owner is guaranteed a willing buyer at a good price. The remaining owners don't have to come up with the cash to do the buy out, nor relinquish control to an outside investor. These policies generally have a lump sum payment made after an elimination period of 1-2 years, to ensure the partner really does have a long-term disability and won't be coming back.
Retirement Protection Disability Insurance
If you are unable to buy enough personal disability insurance to both pay your living expenses AND to save for retirement, you might be able to increase the amount of coverage you have by buying one of these policies. Basically, if you become disabled the policy pays a certain amount each month (up to ~ $4K a month) into a special trust where you invest the money. At age 65, the money is distributed to you to help supplement your retirement income. In general, I suggest you steer away from these plans UNLESS you are unable to purchase enough disability insurance in a typical policy. Mixing insurance and investing is generally a poor idea.
I don't own any of the policies noted above. But I am also a member of a larger group, where the loss of a single partner would not have an overwhelming financial effect on the other partners or on the business. Doctors in a single-physician or single-dentist practice or a small partnership would be wise to discuss each of these options with an experienced disability insurance agent.
What is the difference between disability offered by AMA insurance compared to the standard ones offered by Berkshire etc.. The comparable premiums are much less if you are an AMA member. I heard that the rates are not guaranteed and it can go up, but they have been good at holding the rates pretty steady over many years. Also AMA is more like a group insurance policy, the implication of which I dont clearly understand..
The main difference between a group policy such as the one offered through AMA and a good individual disability policy such as that offered through Berkshire is the definition of disability. Simply put, the Berkshire one is more likely to actually pay you. I suggest you pull out your AMA policy and compare it to a similar Berkshire one side by side. In disability insurance, you generally get what you pay for. I’m not saying the AMA policy isn’t right for you, but you ought to make an informed decision when you go with it and realize that you are less likely to collect as much money on it in the event of disability. Here is a great summary of the differences between the AMA policy and a good individual one. Keep in mind it is put together by someone with a financial conflict of interest (a firm that sells individual policies) but it looks pretty accurate to me:
http://www.disabilityinsurance.net/american-medical-association.php
Thanks a bunch.I will stick with the Berkshire one. Your site is awesome for newly employed physicians like me..Will spread the word among my friends …
Thank you for the great disability ins review, very helpful.
In your opinion, whuch insurance companies are best to work with while looking for an individual disability insurance policy?
The field is always changing players. A few years ago there were only 2 or 3 players in many states. Now there may be as many as 5 or 6. I’d consider Berkshire, Standard, Guardian, Principal, Metlife etc. Best to consult with a disability insurance specialist; you have to buy the policy from an agent anyway, might as well benefit from his knowledge and experience. Remember that in disability insurance (unlike investing) you generally get what you pay for.
Thanks a lot! Love your blog!
Currently, depending upon medical specialty and state of residence, the “players” are: Berkshire (Guardian), MetLife, Union Central (First Ameritas in New York), Standard, Principal and MassMutual.
The rates can vary greatly from one company to another so it is best to do your homework (or have an independent agent do it for you).
There are also many disadvantages of the AMA (U.S. Life) in addition to the defintion of disability. One very big difference is that in order to collect benefits for Residual Disability (loss of income) one must be TOTALLY disabled first. Since most disabilities are not totally (at least initially), this is a huge hurdle to climb and one of the reasons that the initial cost of the insurance is substantially less compared to an individual policy.
I have a group policy through HARTFORD which is speciality and occupation specific through my employer ( A university). The policy does cover 60% of my salary inc ase of disability after 90 day window. It states “Disability means You are prevented from performing one or more of the Essential Duties of Your Occupation during the Elimination Period; and Your Occupation following the Elimination Period, and as a result Your Current Monthly Earnings are less than 80% of Your Pre-disability Earnings.
Your Occupation means Your Occupation as it is recognized in the general workplace, that You were routinely performing prior to becoming Disabled. Your Occupation does not mean the specific job You are performing for a specific employer or at a specific location.
If You are a Physician, Your Occupation means the general or sub-specialty in which You are practicing for which a specialty or sub-specialty is recognized by the American Board of Medical Specialties. If the sub-specialty in which You are practicing is not recognized by the American Board of Medical Specialties, You will be considered practicing in the general specialty category.”
Do I pay premium for this post tax which is taken out from my paycheck.
Should I still consider adding personal insurance? Advantage could be if I leave the employer. Would it be possible to have additional insurance say by looking for 75% income benefit post disability instead of 60%.
I would truly appreciate any help.
That seems to me like a pretty strong specialty-specific definition of disability, which as I understand it (again I don’t sell these things), is pretty rare for a group policy. I wonder if there are other weaknesses of the policy? I’d probably take that policy in and see an independent disability agent and compare the wording of the policy to some good individual policies such as Standard, Berkshire etc. Assuming the rest of the policy is just as good (it probably isn’t), the only benefits of your own policy would be its portability, which in this day and age, isn’t insignificant and the post-tax nature of the benefits.
Perhaps a small individual policy in addition to your group policy would be wise (especially with a future purchase option rider in case you change jobs).
Re: group disability insurance.
If you own your own individual policy (purchased while as a resident) can group disability plans deny you based on the fact that you already have a $7500 benefit?
Thanks for your information.
They don’t ask in my experience, nor care.
I have been looking into individual policies and have a couple of questions. First, I have a group policy through my employer that will cover 60% of my income if I am disabled. The agent I sought individual quotes through said having that actually will limit my potential individual policy coverage to about 3-4 grand/month. Is that pretty standard? Also I wear hearing aids and he said the policies would likely write an exclusion to deny disability coverage if in the event i become totally deaf. Are you aware if any of the companies listed above would not exclude in the event of deafness later just because I wear hearing aids now? I can’t imagine policies would deny someone coverage if they developed blindness later based on that they were wearing glasses when they got the policy?
Yes, that’s standard.
Yes, an individual policy will likely exclude deafness as a disability. Pretty much from any company I believe (and someone will be along to correct me if I’m wrong.) The group policy, however, likely does not.
You’re right that it seems a bit discriminatory. Perhaps the reason is that someone wearing a hearing aid is more likely to become deaf than someone who wears glasses is likely to become blind.
This post explains why I use both types of policies.
https://www.whitecoatinvestor.com/why-i-bought-a-group-disability-insurance-policy/
Anyone with experience related to increasing annual premiums for a policy?
The agent we are working with offered a plan through Northwestern Mutual (a multi-life plan through where I finished my residency that is available to all who completed residency). It has an initial premium of around $1000 annually (at age 30) for 72k/year benefit. Plan includes many benefits like COLA, partial disability, and presumptive plus benefit. This increases annually about 5% until age 45 where it jumps to $2,300 and to $4,300 by age 55. Even for the last 10 years of the policy, it would cost only around $450/month of 6k in coverage (7.5%).
They are even offering yearly dividends that would decrease the premium, projected at 10-20% savings. Even if I see $0 in dividends through the life of the policy, the numbers seem to work out well. Reduced premiums earlier give me more money to pay down loans, mortgage, and invest. Plus, if I am doing well in my 50’s when the rates spike, I can always cancel..right?
What am I missing? One thing that has me wondering..the policy is guaranteed but not nonrenewable. The agent said that with all other policies he would include a non-renewable claus, but they don’t with this as the premiums are highly unlikely to change and they haven’t changed. Is this piece a gamble?
Oh, and they are also offering another policy that would include another 36k benefit with the same benefits, and a traditional premium structure for around $75/month.
You’re missing lots of things, but what you really need to understand them is to sit down with an independent insurance agent and compare the NML policy with policies from the Big 6 that have true own-occ coverage.
You should read these posts too:
https://www.whitecoatinvestor.com/why-not-northwestern-mutual-physician-disability-insurance-friday-qa-series/
https://www.whitecoatinvestor.com/is-noncancelable-really-worth-it/
Thanks, WC. Great information that helped point me in the right direction, as always.
Has anyone written here or elsewhere regarding Level vs ARDI Premiums with these policies in general? I’ve done some of the simple calculations, but when I begin to consider things such as the age when policy will be cancelled and increased risk for disability later in life, I have a bit of a harder time drawing conclusions.
This may help: https://www.whitecoatinvestor.com/graded-versus-level-premiums-for-disability-insurance/
I am still debating when/if to get disability insurance. When I was a resident, I almost jumped on that train from one of the salespeople that come to talk to you in the beginning. I held off as it felt like a lot of money to pay in the beginning for a resident combined with paying back student loans. Now I am a fellow and this question still comes up and I am reconsidering getting disability insurance. I would be doing pain procedures and becoming disabled would limit my ability to do so. However, my wife is also a primary physician and I feel we could live off her salary if needed or mine alone so we opted not to get disability insurance for her. When I try to get advice from other physicians, most of them get it because that’s what they thought they were supposed to do. However, I don’t know of any other occupations that make >$100,00 that are sold disability insurance the same way doctors are. What am I missing? Also would it hurt me to wait a couple years until I am an attending to get disability insurance? I am also disappointed that certain “risky” activities aren’t covered which makes me feel less inclined to get the insurance. Thank you. It always feels like I am being sold a product that I’m not sure I necessarily need but maybe I’m not seeing the bigger picture.
It’s fine not to have it as long as you don’t get disabled.
Seriously though, if your disability plan is to live on the other spouse’s income, then you don’t need disability insurance except in the unlikely event you both get disabled.
Thanks for the quick reply! I remember that one of the reasons they came to you as a resident to get disability insurance was that you could “lock in” lower premiums as a resident. Would waiting 1-2 years as an attending significantly increase my premiums because I am an attending or because I am slightly older.
Now you sound like you’re trying to game the system. Either your disability plan is to live on the other spouse’s income or it isn’t. If it is, then you don’t need disability insurance now or later. If it isn’t, then you need disability insurance now even more than later and not getting it is the equivalent of “going bare” for malpractice.
Younger people always get lower premiums all else being the same. Sometimes a resident in a specialty is in a different/lower/cheaper specialty class than an attending in that same category. So if you wait, your premiums will increase. Whether that is significant or not is in the eye of the beholder. The bigger issue with waiting isn’t the increased premium, it’s the risk of being disabled (or becoming less healthy) in the interim.