2018 Guide to Disability Insurance for Doctors
Disability insurance is the most complicated financial product most doctors will encounter and likely the most important. On average, one in three physicians will experience a period of disability at some point in their careers while there is a 40% chance that the disability will last seven years or more. Since disability insurance is protection against a physician’s loss of income, doctors at all career stages—residents and attending physicians—need to have a basic understanding of these policies since they form the foundation of a plan for financial security.
7 Things Doctors Need to Know About Physician Disability Insurance
1. “Own-Occupation” is the Strongest Definition of Disability
Disability insurance contracts contain language that defines what will trigger a benefit under the policy. This language, known as the “definition of disability”, is really what physicians are buying when they pay insurance premiums.
Own-Occupation is a definition of total disability, which specifically states that a doctor will be considered totally disabled if he or she is unable to perform the “material and substantial duties of your occupation.” This definition allows a physician to work in another occupation or medical specialty and receive full benefits, regardless of the income earned from the other occupation or medical specialty. Some companies will even go so far as to state that, if a doctor has limited their practice to a professionally recognized specialty in medicine, that specialty will be deemed to be “your occupation.” The “own occupation” or “your occupation” (also known as own-occ) definition of disability is the strongest language available to describe a physician’s total disability.
Modified “Own-Occupation” or “Loss of Earnings” is a weaker definition of disability which specifically states that a doctor will be considered totally disabled if he or she is unable to perform the “material and substantial duties of their occupation and they are not engaged in any occupation for wage or profit.” This means that a disabled physician who transitions into a new occupation or medical specialty will either receive proportionately reduced disability insurance benefits or no benefit at all.
Any Occupation is the most restrictive and weakest definition of disability doctors will find, usually in group disability insurance contracts. Under this definition, a physician is considered disabled if he or she is unable to engage in any gainful occupation that they are reasonably suited for based on education, training, work experience or other factors. “Any-occ” policies should be seen by physicians as a last resort and otherwise avoided.
2. Physician Disability Insurance Should Cover Partial Disability
There is a substantial risk that a practicing physician will be only partially disabled, resulting in a “residual” or partial disability. In this case, there may be a partial loss of income. Doctors who are shopping for disability insurance should make sure that the policy contains a rider or other language that causes the policy to pay benefits in the event of a partial loss of income. Most policies will consider a physician to be partially disabled when their income declines by 15-20 percent or more compared to pre-disability earnings and may pay 100% of the benefit if earnings decline by more than 75-80 percent.
3. Disability Insurance for Young Doctors Should Include a Future Purchase Option
Young physicians usually experience an increase in earnings during the first five years of their careers but disability insurance companies base coverage amounts on current earnings. In order to preserve their ability to protect these future earnings, yound doctors should consider disability policies that include a future purchase option, also known as a “future increase option.” It allows physicians to apply for additional disability insurance coverage, regardless of health, as their income rises. With an FPO, physicians can buy themselves the right to increase their policy’s monthly benefit without undergoing another exam, blood test, urine test, or answering any medical questions. This guarantees that any medical conditions that develop after the original policy’s purchase will be fully covered and not subject to new medical underwriting.
Doctors who buy the future purchase option need to be aware that they will receive an annual offer by the insurance company to increase their coverage. This offer looks much like a sales pitch, so many physicians will ignore the offer, meaning they will not benefit from the premiums they paid for the FPO. On some policies, ignoring this future purchase option a certain number of times will cause the option to expire.
4. Group Disability Insurance Offers Limited Income Protection for Most Physicians
While a group disability insurance policy may be cheaper and easier for doctors to get than a private disability policy, physicians should be aware that this coverage offers limited protection that weaken it. The benefits paid by most group policies will be automatically reduced for any amounts received under the Social Security Disability Income (SSDI) program and other government benefits and may be reduced by benefits payable under other policies. These benefits generally lack a cost of living adjustment (COLA) so inflation will erode the value of benefits paid over time. Group coverage usually limits the payment of benefits for mental and nervous claims to two years and pays nothing thereafter. Claims for other disabilities may be based on a liberal definition of disability for the first two years but the definition of disability may change to the “any occupation” definition after two years, which can derail a claim.
Except in rare cases, group disability insurance policies are not portable, which means they terminate when a physician leaves his or her employer. If a doctor has suffered an event that makes him or her uninsurable, it may be difficult or impossible to buy coverage in the open market once they leave the employer.
Premiums on group disability insurance policies are not guaranteed so they go up every year or every five years, depending on how the policy is written, whereas private policies with a guaranteed premium will remain level for the life of the policy.
5. Disability Insurance Benefits May (Not) Be Taxable to Physicians
Generally, disability insurance benefits are received free of income taxes by doctors if the policy premiums were made with after-tax dollars. Since many group insurance policy premiums are paid by a physician’s employer and may be paid on a pre-tax basis, the benefits from the policy will also be paid on a pre-tax basis, effectively reducing the amount of the benefit by the taxes due. Often a physician employer will allow the premiums to be taxed as ordinary income which makes the benefits once again free from income taxes. To make this election, physicians should ask their HR or benefits person for a form to opt in to taxation of group disability insurance premiums. Physicians who pay for their own private disability insurance coverage should avoid deducting premiums as a general business expense and should instead pay those premiums with after-tax dollars.
6. Medical Exclusions Need Not Reduce Disability Benefits Indefinitely
When a doctor first receives his or her disability insurance policy, it may come with certain exclusions for medical conditions (such as a bad back), mental conditions (like an exclusion based on mental health counseling for a recent divorce), or lifestyle-based exclusions for disabilities arising from risky activities, like rock climbing, mountaineering or scuba diving.
Physicians need to know that these exclusions may be lifted after a number of years by contacting the insurance company with a request to remove the exclusion. This strengthens the coverage at no added cost.
7. Choosing the Right Insurance Agent Makes It Easy for Physicians to Choose the Right Disability Policy
Prices for disability insurance policies are regulated by each state’s insurance commissioner so all agents will offer the same price on the same disability insurance policy for any doctor for a given set of underwriting results. Since prices are all the same, physicians should choose a disability insurance agent based on factors such as product knowledge and awareness of the physician’s insurance objectives and financial situation. Disability insurance agents who routinely sell policies in the physician market will have access to discounts that other agents may not be able to offer or may be unaware of, so it pays to select the agent carefully.
Disability Insurance Agents Who Serve Doctors
Physician Family does not sell financial products but we can recommend an agent who has demonstrated experience serving physicians.
Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF — Dozens of our clients have worked with Larry to get disability insurance. He's an honest person who really knows the product. His access to group discounts has helped our clients save thousands. You can reach Larry at firstname.lastname@example.org, call him at (516) 677-6211 or visit PhysicianFinancialServices.com. He's based in New York.