Disability Insurance Planning for the Healthcare Team

June 2015, Vol 3, No 6 - Inside Money
Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF

Whether you are a physician assistant, medical director, nurse practitioner, pharmacist, executive, or working in another capacity, protecting one’s own income in the event of a disability is one of the core elements of financial planning.

This article briefly describes the steps necessary to begin shopping for individual disability insurance coverage, which features you should include in your policy, as well as a few areas where one carrier may differ from another.

Disability Insurance

Disability insurance can be purchased on an individual or group basis. Group insurance is usually provided by an employer, or purchased individually from a sponsoring association. Although they are initially low in cost, group policies have several limitations. They can be canceled by the sponsoring association or insurance company, rates increase as you grow older, and premiums are subject to adjustments based on the claims filed by the group. In addition, group and association contracts often contain restrictive definitions of disability, as well as less generous contract provisions.

Disability Insurance Limits

Insurance companies don’t want you to earn a higher income when you are disabled compared with when you were working. For this reason, most insurance companies will limit the amount of disability insurance available.

In the event of a disability, you would ideally have 60% to 80% of your earned income replaced. However, when you have a group insurance plan in place, this will limit the amount of individual coverage available, even if you are willing to pay for a larger amount of coverage. For this reason, when shopping for an individual disability insurance policy, it is best to provide your insurance agent or financial advisor with a copy of your employer-provided long-term disability insurance plan, if any, for review, along with your annual income, a description of your job duties, and whether you have any health issues and/or are taking any prescription medications. Then he or she can present you with descriptions of coverage from several insurance companies, and help you compare the pros and cons of each option in terms of costs versus benefits.

The Cost of Disability Insurance

Premium rates are based on several factors, including your age, sex, available monthly benefit, and optional riders—which offer added coverage and protection to a basic policy for an additional charge—selected. The younger you are when the purchase is made, the lower the cost of the insurance. Therefore, you should purchase a policy as early in your career as possible to lock in lower premium rates.

Although women are considered better risks for life insurance, this is not the case with disability insurance. Rates for women are substantially higher, and their policies generally cost 50% to 60% more than rates for men. Fortunately, many disability insurance carriers offer a “multilife” discount when several employees working for the same employer purchase individual policies at the same time. Although these programs typically produce a savings of 10% to 15% for men, this strategy allows women to save ≤60% on the cost of their disability insurance. Another option is to secure a discount through a professional association of which you are a member, or eligible to join.

What to Look for in an Individual Disability Insurance Policy

  1. Noncancelable and Guaranteed Renewable
    If you purchase a policy that is noncancelable and guaranteed renewable, you are assured that the premium rates and policy provisions will not be changed or canceled. This combination provides the greatest degree of consumer protection.
  2. Definition of Total Disability
    Look for a policy that contains a true, “own-occupation” definition of total disability. If you become totally disabled from your regular occupation and choose to work in another occupation, you will receive full benefits, regardless of the income you earn from the other occupation.
  3. Residual Disability Rider
    Although “own-occupation” provides the most liberal definition of disability, it is not the end-all. What happens if your physician states that you can still work in your occupation, but that he or she requires you work fewer days per week or hours per day? The residual disability rider protects your income by providing benefits, proportional to your loss of income, in the event that you are not completely disabled. To qualify for residual disability benefits, you generally must experience an income loss of 15% to 20% or more compared with your predisability earnings. In addition, if your loss of earnings is greater than 75% to 80%, then you would be paid 100% of your monthly disability benefit.

    This rider is also extremely important if you start off completely disabled and then return to your occupation with a limited schedule as you recover, or if you experience a continued loss of income because you were previously disabled, even if you are back to working full-time.

    Finally, it is imperative that you do not purchase a policy that requires you to be completely disabled first in order to collect benefits under the residual disability rider. Although this is not the case with individual policies, it is very common among group policies offered by professional associations.
  4. Cost-of-Living Adjustment (COLA) Rider
    A COLA rider is designed to help your benefits keep pace with inflation after you have been disabled for 12 months. This adjustment can be a fixed percentage or tied to the Consumer Price index. Ideally, you want a COLA that is adjusted annually on a compound interest basis, with no cap on the monthly benefit. Although expensive, the COLA rider can provide significant increases to your monthly benefit if you are disabled young. However, if cutting the cost of coverage is an issue, consider excluding the COLA rider from your policy, or using the additional premium associated with this rider to purchase a larger monthly benefit—if you are not already contemplating the purchase of the maximum monthly benefit for which you qualify—based upon your earned income and other disability insurance in force, if any.
  5. Future Increase Option Rider
    This rider is a must-have for young professionals. It gives you the ability to increase your disability coverage as your income rises, without providing evidence of good health. This guarantees that any medical conditions that develop after the purchase of your original policy would be fully covered, and not subject to new medical underwriting (eg, medical examination, blood and urine tests, or answering any medical questions). It is important to know when, and by what increments, you can increase your coverage on any given option date. Some companies may allow you to use the entire increased option amount in any given 1 year, as long as your then current income warrants the increase; others, however, may limit the amount you can purchase in any given year.
  6. Catastrophic Disability Benefit (CAT) Rider
    If you become catastrophically disabled under the terms of the CAT policy and lose the ability to perform ≥2 activities of daily living without assistance, become cognitively impaired, or become presumptively disabled, you would receive a monthly benefit in addition to the base monthly benefit purchased.

Comparing Policies When Shopping for Coverage

Other than cost, the following provisions may help you decide which disability insurance policy (or policies) to purchase:

  1. Occupational Classification and Pricing
    Proper classification of occupations is a primary factor in establishing the premium rate that you will be charged by the insurance company. In general, the higher the occupational classification assigned to your profession, the lower your premium rate. It is also important to note that different insurance companies may assign a different occupational class to the same occupation, and, as a result, the premium rates may vary greatly from one company to another. Therefore, it is important to shop for the coverage that you will be purchasing, or to employ the services of an insurance agent or financial planner who specializes in this type of coverage, and represents several companies.
  2. Foreign Residence and Travel
    Some carriers allow insured people to receive coverage while traveling to or residing in countries outside of the United States, the District of Columbia, or Canada, but the majority of carriers will limit payments for this type of claim. Therefore, if you consider working outside of the United States in the future, or choose to leave the United States in the event that you became disabled, you should make sure that any disability insurance policy you purchase does not contain a limitation for this type of claim.
  3. Mental, Nervous, and/or Substance Abuse Disorders
    Some carriers will treat claims for mental, nervous, and/or substance abuse disorders in the same way as any other accident or illness, but the majority of companies limit these claims to a lifetime maximum of 24 months if the primary cause of disability is solely a psychiatric or substance abuse disorder or diagnosis (eg, posttraumatic stress disorder, anxiety, depression, and/or alcohol abuse/addiction). Although many insured persons would opt to purchase the disability coverage with the least amount of restrictions, some willingly accept a policy with this limitation to take advantage of the cost-savings associated with it.

Summary

Protecting one’s income in the event of a disability is a core element of financial planning. This article briefly describes what to look for when shopping for individual disability insurance coverage, riders you should and shouldn’t include in your policy, as well as a few areas that may differ from one carrier to another.

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