Covering Your Bases – Understanding the Many Nuances of Disability Coverage

Nobody likes to think about the possibility of becoming disabled and no longer being able to perform their job. Yet, prudent medical professionals need to consider such possibilities and ensure they have adequate disability insurance to protect the investment they have made in themselves.

 In this article, we look at some issues that doctors and dentists grapple with when they are considering disability coverage.

It is estimated by the Social Security Administration that the average person has a 25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} chance of being disabled for some period before they retire.  Since the skills of a surgeon or other specialist are not transferable to other jobs with similar income potential, your disability-insurance policies need to cover you for full or partial disability if you are unable to continue working in your specialty.

There are a wide range of disability policies and pricing available, and benefits will typically start after 90 or 180 days of disability and last up to age 65 or 67.

To calculate how much disability insurance is adequate, some people might reply, “as much as you can get.” In reality, you want enough disability insurance to maintain your current standard of living, pay off medical-school debt, put your children through college, and live comfortably in retirement.

To start, you want to calculate your annual expenses, then add college and retirement savings. Once you come up with that figure, you can subtract out income that may be earned by a spouse to determine your income needs, if you’re comfortable with the assumption that you both would not be disabled at the same time.

It is easy to underestimate how much disability insurance you need by focusing only on your current, ongoing expenses. Since disability insurance benefits typically stop at age 65 or 67, you need to take into account the amount you need to save for life after that age. It’s also easy to forget those large, one-time expenses, such as cars and home repairs. In addition, employer-subsidized health insurance may no longer be available, so the full cost of health insurance may need to be considered in your calculations. Some disability policies will now pay off medical-school loans if you are permanently disabled.

Here are some other types of disability coverage that individual and group practices might consider:

• Business overhead protection that reimburses for the ongoing expenses of the practice, such as rent and employee salaries when the doctor is disabled for a short period of time;

• Disability buyout coverage to help fund the buy-sell agreements of physicians in partnerships in the event of a permanent disability; and

• ‘Key-person’ coverage to protect the practice in the event a key employee is disabled.

It is best to pay for disability insurance with after-tax dollars rather than have your employer pay for it with pre-tax income. Paying with after-tax dollars ensures your disability benefits will not be taxed as income should you need to start collecting benefits.

It is crucial to understand the definition of disability in each of your disability insurance policies, because it may determine your ability to collect benefits. The two general types of disability insurance are ‘any occupation’ and ‘own occupation.’ You will want an ‘own occupation’ policy, preferably a ‘specialty own occupation’ policy, to provide you with coverage in situations where you may no longer be able to perform your specialty, but you could potentially do another job.

Make sure to check the specific language in the policy, since some own occupation policies may indicate ‘physician’ rather than specialties such as ‘ophthalmologist.’ If you are an ophthalmologist and can no longer perform surgeries because of a tremor but can perform other functions of a doctor, you may not be able to collect disability insurance unless your policy indicates your specialty.

Some group policies are ‘limited own occupation’ policies. In a limited policy, you may be covered in your own occupation for two years, but in the subsequent period, to continue receiving coverage, you must be unable to work in any occupation to which you are ‘reasonably suited.’  If you are covered by such a group policy, you will likely want to have supplemental coverage as well.

There are two types of disability-income insurance policies: group and individual. Group policies are usually available to practices with two or more employees; however, some insurance companies require more people. The practice is the owner of the policies, and the physicians and employees are participants. Group plans are usually less expensive per unit of coverage than individual policies, and they are often issued without health questions.

However, coverage is not portable, and the contract language is often more restrictive in group contracts, with the possible exception of a few insurance carriers that specialize in medical practices.

Individual policies are individually owned and portable between employers, and the contract language can be very strong. The application process usually includes a series of health questions and a limited-scope examination. Applicants may be offered modified coverage or denied outright based on a health condition. In addition, the cost per unit of coverage is typically higher than group insurance.

Today, there are a couple of individual disability-insurance companies offering individual policies to groups of physicians on a ‘guaranteed standard issue’ basis. These polices combine the better contract language of an individual policy with relaxed underwriting and sometimes a substantial discount.

In general, disability insurance is limited to about 60{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} to 66{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of your monthly income, to deter people from falsely claiming a disability. With that in mind, many disability-insurance policies are written so that benefits are calculated in combination with other policies you may have. The result is that benefits from one policy may offset the benefits of other policies.

The classic situation is with Social Security Disability Insurance (SSDI). Everyone paying into Social Security is covered by its ‘any occupation’ disability benefits if they meet certain requirements. Group-disability-insurance companies will generally require you apply for SSDI and reduce the amount they will pay you based on an estimated SSDI benefit.

If you have a group disability policy from work and another group disability policy from another source, such as a professional society, you may want to review whether the two policies provide complementary benefits or the benefits cancel each other out.

Many physicians worry that, if they become disabled, they will need to fight with an insurance company to collect benefits. However, the vast majority of benefit claims are paid as long as there is proper documentation of both your income and your disability.  Most companies have a two- or three-part claim form. One section of the form is completed by the claimant, another is completed by the claimant’s doctor, and if the plan is group coverage, the third part is completed by the employer. Claims determinations are made by the insurance company, and they often have medical professionals on staff to help evaluate more challenging claims. An appeals process is available if the claimant and his doctor disagree with the claims decision.

Some policies have limited payment periods for specific types of disability. A common example is mental-health-related claims, which are often limited to two years of benefits unless the patient is hospitalized. Such limitations are optional in some contracts, and it might be worth considering the additional cost of full coverage if it’s available.

Your biggest asset is your ability to earn a high wage through your specific education and training. Disability insurance protects your income-generating ability against catastrophe the same way homeowners insurance protects your home. It is prudent to make sure you are adequately protected. v

Doug Wheat is a financial planner with Family Wealth Management Inc.; www.fwmgt.com. Peter Miller is managing partner with Millbrook Benefits and Insurance Services, LLC; www.millbrookbenefits.com