Disability Insurance for Physicians: What You Need to Know
By Jared Andreoli, CFP®, CSLP®
If asked, “What is the average professional’s most valuable asset?” most might think of their house or their 401(k) retirement account. Either may be true, but in reality the answer is the ability to earn income. Physicians normally earn a higher-than-average income throughout their careers, so this ability to use their training to help their patients is a uniquely valuable asset. Just as a property or a business should be insured, so should this asset as part of their overall financial planning.
Those under age 35 have a 33% chance of incurring a partial disability of at least six months. By age 42, the average person is four times more likely to have a serious disability than dying during their working years. Further, at least 72% of long-term disabilities are caused by illness and not work-related. From a risk management viewpoint, this suggests disability insurance is at least as important as life insurance for physicians, if not more.
It’s a Matter of Time
Disability insurance is available for two time spans: short-term and long-term. Coverages vary, but generally, short-term insurance covers a 3- to 6-month period, whereas long-term disability coverage is measured in years, typically to 5, 10, 20, or until age 65.
Most often, there is an “elimination period” (no benefits paid) at the beginning of the disability, before benefits begin. For short-term coverage, this could be just a few weeks, but for long-term policies, the period could be as much as three months. In addition, short-term coverage may pay a larger percentage (perhaps up to 70%) of income, but for a shorter time. Lengthier coverage may cover less, perhaps as little as 40-50% of income.
Employer Coverage May Not Fill the Month’s Bills
Like many others who have group long-term disability plans through their employer, physicians often mistakenly believe their benefits will be enough to support them if they cannot work. Typically, benefits may only cover a base salary and no other aspects of a physician’s income, such as overtime, shift pay, or bonuses.
Plus, most group policies have a maximum “cap” on benefits paid monthly. If the physician earns significantly more than the benefit cap, their lifestyle and ability to meet normal expenses may be compromised. To complicate matters more, if the employer pays the premiums on the group policy, the benefits may be taxable to the physician-employee, reducing what’s available to meet their expenses. It’s important to understand what the net benefit would be and if it’s sufficient for your needs.
Understand the Terminology
A critical aspect of any disability coverage is understanding how “disability” is defined in both group coverage and any individual coverage obtained. The basic distinctions for general policies are own-occupation or any occupation. Physicians need own-occupation, but even this may have benefits limitations. For medical specialists, if they become disabled and later switch to another specialty with lesser income, their benefits for the disability may be potentially eliminated.
Group policies may have provisions that offset benefits if the employee receives Social Security Disability, worker’s compensation, or other supplementary benefits. Individual policies may not have such offsets. There’s also a criteria called “residual disability” where partial benefits may be paid for the inability to perform some duties, but part-time work is still possible. It’s critical to understand the criteria of both group and individual coverage to confirm you’re adequately insured.
How Much Is Enough?
Most disability policies (especially group disability) only cover 60% of income. From the insurer’s perspective, this makes sense; if you’re receiving 100% of your income, what’s the incentive to return to work? Everyone has their own needs, but ideally, 60-80% of your earned income is reasonable.
This suggests that having a supplemental individual policy would make sense. For newer physicians, this may be a sensible expense—since their incomes are generally lower and they are younger, premiums may be more affordable.
Determining the Premium
Insurance can be complex, and many factors go into determining the premiums, especially on disability policies. Obvious factors include age, gender, state of residence, health status, area of specialty, and coverage amount. It may be surprising to learn the differences between states on coverage and benefits paid. Oregon and New Hampshire are among the highest (over 85%) of total fully favorable decisions whereas Nevada and Utah rank the lowest with 80% or less approval.
Other benefit features (called “riders”) will likely also increase the premium, such as Future Increase Option (FIO), Benefit Increase rider (BIR), or Benefit Update Rider (BU). These riders are designed to provide the ability to increase your coverage without continually providing proof of good health as years pass and your income increases. Cost-of-living adjustments (COLAs) are another added rider to consider and will add to the premium cost.
Other Essentials
Insurance is highly regulated and many features are mandated by law; however, it’s important to verify your policy includes:
Non-Cancelable: As long as premiums are paid, the policy cannot be canceled.
Guaranteed Renewable: The provisions remain the same throughout the life of the policy term. If not also “non-cancelable,” guaranteed renewable does allow the insurance company to apply to the state insurance division for a class-rate increase; so obtain both essentials, not just one.
Get Help From Professionals
Like any aspect of financial planning, obtaining disability insurance coverage is a personal decision and should be based on your individual situation, goals, and objectives.
At Simplicity Financial, we specialize in providing comprehensive financial planning for physicians and take great pride in aligning our clients’ financial goals with their personal values. Do you have a fiduciary financial professional in your corner that specializes in serving physicians?
Get started by scheduling a free consultation, or reach out to us by emailing jared.andreoli@simplicityfinancialllc.com or calling 414-207-6473.
About Jared
Jared Andreoli, CFP®, CSLP®, is president and financial planner at Simplicity Financial, a fee-only RIA dedicated to helping early-career physicians conceptualize their financial picture and achieve their financial goals. Jared specializes in devising individualized financial road maps for clients, and he loves nothing more than a full day meeting with clients who value his partnership to solve problems—big and small.
After college, Jared spent six years working as a mutual fund administrator for a large company. While he learned an immense amount about the financial world, he was missing the personal connection of working with individual clients. Combining his passion for finance and personal connection, he established Simplicity Financial in 2017.
Jared has a degree in finance with a concentration in financial planning from Western Kentucky University, along with the CERTIFIED FINANCIAL PLANNER™ (CFP®) and a Certified Student Loan Planner (CSLP®) certifications. Outside of work Jared enjoys cooking and traveling. He played baseball in college and still coaches occasionally. He and his wife recently welcomed a daughter, who occupies most of their time. To learn more about Jared, connect with him on LinkedIn.