By Bob Bhayani, MBA, LUTCF, Managing Partner of DrDisabilityQuotes.com; A 2021 Platinum WCI Medical School Scholarship Sponsor
Becoming a physician is rewarding in time but is an ultimate investment that takes years of training and an abundance of student loan debt. If you develop an unexpected medical condition preventing you from working within your specialty, you will lose your income but not your financial responsibilities. You will still need to pay for your student loans, mortgage, support for the family, and normal lifestyle expenses—let alone any out-of-pocket medical expenses resulting from the injury or illness.
Disability insurance (DI) is income replacement insurance. If you were to become disabled for an extended period of time and unable to work within your specialty, disability insurance would provide a portion of your income that would help you pay your bills and provide for your family. Most people may think of a disability as an accident or injury, but disability is often caused by illness or disease that prevents the individual from performing their occupation or specialty. True Own Occupation disability insurance policies will include language that allows you to work in another occupation or specialty while collecting your claims—if you are still unable to perform the duties within your specialty.
As you research and shop for disability insurance, the first step is to understand the difference between the two sources of disability insurance: short- and long-term disability.
Timeline of Disability Insurance
- Benefit Period: The maximum amount of time the insurance policy pays out benefits
- Elimination Period: Period that begins on the date you become disabled and is the length of time you must wait while being disabled before you are eligible to receive benefits on the insurance policy
Short-Term vs Long-Term Disability Insurance?
As shown in the above disability timeline example, short-term disability insurance (STD) replaces a portion of your income sooner and for a short period of time compared to long-term disability insurance. It pays a weekly benefit to you that could provide critical financial support until you get back on your feet again. These policies will typically have an elimination period of 7 or 14 days with a benefit period of 90, 180, or 365 days. Purchasing STD coverage individually can be expensive, but many employers offer this as an employee or employer-paid benefit. Typically, short-term disability policies would insure up to 50-60% of your earnings.
Overview of Long-Term Disability Insurance
A fully underwritten long-term disability (LTD) policy will require medical underwriting at the time of application. These policies are often purchased from an independent agent or broker. Independent agents are not employed directly with any insurance carrier and could provide you with various options for comparison. At the time of application, the insurance carrier will need to assess your medical history, including prescriptions, diagnosis, ongoing treatment, etc. The carrier may request medical records from any physicians to confirm the disclosed condition and will conclude with an offer for coverage.
The offer may include exclusions, modifications in the benefits of the policy, or even a decline. This will all be determined based on the severity and type of pre-existing condition. For example, fully underwritten LTD will not be able to offer any coverage to Type 1 diabetes simply due to the risk of becoming disabled. If you have lower back pain, the policy will likely exclude the lumbar spine from coverage. If you have a history of obstructive sleep apnea with CPAP treatment, the offer will depend on the recency of the diagnosis, the AHI within the sleep study of diagnosis, and compliance with treatment.
Long-term disability insurance benefits may also be offered as an employer benefit. However, group plans are inferior compared to individual, fully underwritten policies. Here are some of the differences between individual plans and group plans.
- Weaker definition of disability—Group disability insurance typically gives you a Modified Own Occupation, or Own Occupation and Not Working, definition. Employer policies will not allow you to be gainfully employed in another occupation or specialty while disabled and will offset payouts based on other income received such as Workers’ Compensation and Social Security. Some group policies may state this is the definition for 24 months, but to continue collecting, you must not be able to perform in any gainful occupation. Individual policies are True Own Occupation. See below.
- Not portable—Group policies are not portable and cannot be transferred from one employer to the next. Individual plans are completely portable and not based on your employer.
- Cancellable—You are not the policyholder of employer policies. This means the employer can cancel the plan, change definitions and provisions, or increase costs at any time. You are simply the insured under this benefit. Individual policies are Guaranteed Renewable and Non-Cancellable.
- Taxable—Benefits paid out on group policies will be taxable. Individual plans are tax-free.
Riders Within Long-Term Disability Insurance
When shopping for long-term disability insurance, you will receive various quotes from different insurance carriers. Quotes can be customized to your needs, but we recommend considering the following.
True Own Occupation
“True Own Occupation” is the definition of total disability within your long-term disability insurance. This is the most important definition a physician should obtain within a policy. If you are unable to perform the substantial and material duties of Your Occupation, you are considered to be totally disabled. If you’re a medical professional, Your Occupation will be considered to be your specialty. Also, this will allow you to be gainfully employed in another occupation or specialty and still collect the full claims as long as you are still unable to perform your substantial duties within your specialty.
For example, an anesthesiologist who develops hand tremors and can no longer perform procedures would lose their income due to the inability to work in their specialty. True Own Occupation would allow this anesthesiologist to collect total disability claims, and they could now work as a consultant, in telemedicine, academics, research, or any other occupation or specialty.
Residual (Partial) Disability Benefits
The residual disability benefit rider is also an important rider on a policy. A partial, also known as Residual, disability rider would allow you receive partial benefits if you endure a 15-20% loss of earnings. To collect on this benefit, you must still be working within your specialty, and the loss of earnings must be due to an injury or illness.
For example, a car accident prevents an orthopedic surgeon from performing procedures for two years, so he collects total disability claims during that time frame. After two years, the surgeon returns to performing his procedures but still has a 30% loss of income compared to his pre-disability earnings. Total Disability Benefits would end once he returns back to his specialty, but the residual disability benefit rider would allow him to collect partial disability claims until he is within the 15%-20% loss of income threshold.
Future Increase Rider
This rider allows a physician to increase their disability policy up to the stated maximum without having their health re-examined by the Insurance Carrier on the anniversary date. This is an extremely important rider for newer physicians wanting to protect a projected higher income since their health status could change, making them ineligible for increased coverage in the future without this rider. When requesting an increase, you would still provide proof of income to qualify for an increased monthly benefit—such as a signed contract, W-2, pay stubs, or tax returns. Residents typically begin with a $5,000 monthly benefit, and most would increase this amount, using an increase rider, to cover more of their attending signed contracts. Insurance carriers will typically have an option between two different increase riders.
Future Increase Option (FIO):
This rider is considered to be the most flexible, as it will allow you to increase the benefit at any policy anniversary date. You will have the option of increasing your plan, and you would need to request this within a two-month window at each anniversary date.
Benefit Purchase Rider (BPR), Benefit Update (BU), etc.
Companies will typically use different terminology for this increase rider. However, they work the same way and are no additional cost on the policy. These riders offer one increase at the end of each third year. You would need to provide income documentation to determine the amount you can increase by. If you qualify for an increase, you’ll have to increase by at least 50% of the qualified increase amount in order to keep the rider for another three years. This is a continuous three-year cycle. If at any third year, you do not request to increase or you do qualify for an increase but decide not to increase your policy, the rider will drop off for the remainder of the policy.
Cost of Living Adjustment Rider (COLA)
The purpose of the COLA rider is to help benefits keep pace with inflation in the event of a disability lasting longer than 12 months. Increases in monthly benefits start to accrue after a year of disability, and this rider will increase the monthly benefit annually, only while totally disabled. This rider is typically recommended for newer physicians, residents, fellows, or anyone under the age of 40 with no other means to self-insure against inflation. Keep in mind, this rider can be removed at a later date. There are many different COLA rider options from insurance carriers. A 3% COLA rider is the most common.
Do You Need Both Short-Term and Long-Term Disability Insurance?
Emergency savings are the best alternative to short-term disability insurance to self-insure. Most financial advisors would suggest having emergency savings of 3-6 months. If you combine the emergency savings and/or short-term disability insurance with long-term disability insurance, you will have adequate disability coverage. Even if you do have emergency savings, short-term disability will still provide financial safety instead of depleting your savings. You can then use your emergency funds to cover medical emergencies or expenses.
Long-term disability insurance is key for financial safety in case of a permanent or more severe injury or illness. There are no better alternatives for long-term disability insurance since emergency savings will typically only be for a few months.
How Much Disability Insurance Should You Buy?
Disability insurance is meant to provide financial support to meet your financial obligations. The amount of coverage you should obtain depends on a variety of factors including how much you earn, your liabilities, and your living expenses. Typically, disability insurance should be approximately 60% of your gross pay, approximately your after-tax paycheck. Your amount of coverage should be high enough to cover all your expenditures.
[Editor's Note: We're less than two weeks away from announcing the winners of the 2021 WCI Medical School Scholarship Contest! Many thanks to Bob Bhayani and DrDisabilityQuotes.com, one of our Platinum Level (contributing $7,500+) Sponsors, and their long-time relationship with WCI supporting the scholarship and helping physicians secure the best DI policies. Bob is a long-time advertiser and on our list of Recommended Insurance Agents. Thank you for supporting those who support this site and especially the scholarship. 100% of proceeds go to the scholarship winners.]
Could you give your opinion as to whether “true own occupation” rider is important? The term seems misunderstood/misleading from what I can tell.
In a previous post, we learned that the with a personal policy from one of the leading insurance companies… that a standard policy (“own occupation no engaged”??) will cover you the same way if not working due to disability. And that the “true own occupation” rider simply adds the option to get another career post-disability. Without the rider, then the disability payout would be decrease if you choose (and are able) to get a post-disability career.
Is that correct?
That’s my understanding.
For someone that owns his or her own medical practice (PCP) and has a very variable revenue stream what type of disability insurance makes sense? Income could realistically range from $100,000 to several million
It’s more related to what you spend than what you earn. You may also want insurance on the practice to pay overhead if something happens to you.
That makes sense, thank you. So I would be most likely to get insurance on something like a percentage of my base salary rather than the revenue of the business?
My family’s househould expenditures are in the ballpark of my base salary. The income of my practice is much more volatile and tends to go towards savings.
Jim is right, think about this product as to “how much you need to pay your expenses” rather than how much you qualify for. My theory is buy what you need, have options for what you might want.
Something about the insurance pricing in this doesn’t make sense to me– https://thephysicianphilosopher.com/disability-insurance-the-cost-of-waiting/
That if you wait to purchase disability insurance you pay more for less coverage … I feel like the insurance companies wouldn’t be pricing the product that inefficiently. Unless they need to control for adverse selection?
I think that’s part of it. But you’re right, it doesn’t seem right. Remember many (most?) who get disabled aren’t permanently disabled. Maybe that’s another part of it. Without the data the companies guard very jealously, it’s impossible for us to know.
The reason the cost goes up is there are considerably more illness that happen to those that are in their 40’s and 50’s than in their 20’s and 30’s. It is interesting because the longer you wait the more it costs not only in the monthly/annual cost but the total one would pay to age 65. If a person took out a policy at age 30 and kept until age 65 it will typically cost less or right at the same total as if one took out the policy at age 50 and kept to age 65. One would naturally think they are saving all of this money because they are not paying any premium but they really are not and they did not have coverage for those 20 years. Of course there are different dates one might need more or want to decrease benefit and even some drop it so there are a number of variables that could come into play but I was just illustrating that to buy it sooner rather than later because it does not save any money to wait.