Insurance

Disability Insurance - not all plans created equal

May 12, 2016

Our research has indicated that physicians as a group typically understand the importance of disability insurance as well if not better than most professionals. But that same research also indicates that some of the finer points about disability insurance – points that can make a real difference in how well the coverage is actually protecting the physician’s income.

1. Tax-wise, All Plans Are Not Created Equal

First, and perhaps most important, are the facts about taxation of disability insurance benefits.

It’s important to understand that benefits you receive through disability insurance provided and paid for by your employer, with before-tax dollars, would be subject to both federal and state income taxes. So what you thought was a $12,500 a month benefit could turn out to be more like $8,000 or $9,000 a month, depending on your federal and state tax brackets.

In contrast, the benefits of coverage that you buy and pay for with your own, after-tax dollars are generally not considered taxable income.* This of course means there is a significant difference in the amount of protection actually provided by the two types of coverage.

* Consult your tax advisor.

The tax effect    When an employer pays premiums with before-tax dollars: You keep only a portion and lose the rest to income taxes.    Assuming 34% federal plus state income taxes, a $12,500 monthly benefit results in a net benefit of $8,250 a month.    When you pay premiums with after-tax dollars, you keep the full benefit of $12,500 a month.     Over the course of a year, this would be a difference of $51,000 in spendable income.

2. For Most Physicians, Only One Definition of Disability is Strong Enough

Another important factor is how disability is defined within the policy. For physicians, an “Own Occupation” definition of disability that provides benefits if you’re unable to perform the duties of your medical specialty is critical. Without the stipulation of “your medical specialty,” you could be forced to work at any job in the field of medicine you are physically capable of performing, or be denied benefits. 
 

3. It’s Not Really Yours Unless You Own It

Is your current policy portable? Can you take it with you, uninterrupted, if you leave your job? Often that’s not the case with employer-provided coverage.

Disability insurance you buy and pay for yourself will remain yours to keep without interruption, even if you change jobs or become self-employed. The coverage serves as an extra layer of protection that you control, and can move with you throughout your career. 
 

4. How Much Coverage Should You Have?

Several factors affect how much coverage you should have, but the key driver for most physicians is annual income. Insurers will typically cover up to 66-2/3% of your current pre-tax income. For example, if you’re earning $250,000 annually, you could apply for $166,650 worth of disability income insurance ($250,000 x .6666). Most carriers will talk in terms of monthly benefit, so the $166,650 would equate to $13,887.50 a month, pre-tax.

The other limiting factor is the maximum monthly benefit the insurance company will offer. Maximum benefits vary by carrier, but the typical range is somewhere between $12,000 and $17,000 a month, or a maximum annual benefit range of $144,000 to $204,000, pre-tax.  

Also keep in mind that it’s not uncommon for physicians to find themselves with a level of disability protection put in place years ago, which is often not enough to help cover today’s living expenses should they become disabled. Periodic increases in total coverage are generally needed to help avoid the risk of disability leading to depletion of savings and investments intended for other purposes, including retirement.

Disability Income Insurance protection should be upgraded as your income increases to keep you sufficiently protected.
 

Please contact AMA Insurance if you have any questions regarding your Disability Income Protection at 1-888-627-5883 or email us wecare@amainsure.com.

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