Insurance

What Every Resident Should Know About Disability Insurance

February 24, 2017

As a busy resident with limited income and mounting personal and professional responsibilities, evaluating and purchasing disability insurance may be far down on your list of priorities. But it shouldn’t be. 

Securing sufficient disability insurance protects your ability to earn an income as a physician and is one of the most important things you can do for your personal financial future. According to a national report from AMA Insurance, 77 percent of U.S. physicians say disability insurance is “essential” vs. “nice to have” or “optional,” and 60 percent of physicians reported knowing of a physician who suffered a disabling accident or injury.

Why your employer’s disability insurance may not be enough

Many residents have disability insurance as employees of the medical center where they are completing their training. This is an important benefit, but that coverage on its own may be insufficient for you. Here’s why:

  • The monthly disability benefit amount is minimal. Most employer disability insurance policies will cover roughly 60 percent of your current income. That equates to an annual benefit of $36,000 for a resident earning $60,000 a year. Chances are the monthly benefit amount (about $3,000 per month) would be well below the amount needed to cover your living expenses (not to mention med school loan payments and other obligations).
  • The disability benefit may be taxable. If your employer pays the disability insurance premium for you, your benefit amount will be even less since it would be subject to income taxes. If they take the premium out of your payroll, if means you are paying the premium with after-tax dollars, so it would not be taxable.
  • The coverage ends with residency. An important issue with employer-provided insurance plans is that the coverage isn’t portable. Once you end your affiliation with the medical center, your disability coverage and benefits likely end with it.

So what would happen if you were to become disabled for a period? The Council for Disability Awareness reports that the average disability claim lasts nearly three years. 

That’s a long time not to receive your usual income, particularly if your family was counting on your earning potential.  And you may also have the burden of paying back your education debt as well.

Purchasing a sufficient personal disability insurance policy may help alleviate some of these concerns. That plan can be “layered” with your employer’s plan to give you greater coverage to meet your overall financial needs, should you experience a disability. 

Know the different kinds of personal disability policies
When you are evaluating your options for adding a personal disability insurance policy, be aware that there are two kinds of personal policies traditionally available. 

The first kind is typically offered through an association or affinity group, such as the AMA or other specialty or state associations that offer group plans. And while this is considered a group plan, it has distinct advantages that make it worthwhile to layer over your employer-offered insurance. 

The association or affinity organization represents the “group” of individuals the plan was designed to serve.  And it may offer insurance that is specific to your occupation, or even your specific specialty, and is typically available at an affordable rate, thanks to the buying power of the group. As your personal policy—unlike an employer-group plan—this kind of policy is portable, so the coverage is yours no matter how often you change employers, from residency to your first job and to any subsequent employers or private practice. 

Also, very importantly, this kind of plan generally offers you a higher amount for disability benefits compared to the coverage you can obtain from your employer, and your disability payout likely isn’t taxed. This kind of plan also is renewable as long as the association through which you purchase your coverage is in existence and you continue to pay your premiums when they are due. It is possible that premium rates could go up from time to time.

An individual disability insurance plan (IDI) may also be an option, especially for those who want a lot of protection or are pursuing a highly specialized field. These kinds of policies are tailored to have own-specialty coverage specific to your career, and they provide the highest possible benefit amounts. Like a personal policy purchased through an association, these IDI policies belong to you and are portable from employer to employer. Any benefit you receive would be non-taxable so long as premiums are paid with your after-tax dollars. You should consult your tax advisor about your specific situation. 

A few key differences you need to understand when making your choice are that IDI policies are, in effect, a contract between you and an insurance company. As a result, it can never be canceled, and the insurance company cannot change anything about your contract—including the premium rates, the benefit amount and the qualifications for you to receive those benefits. 

These policies also allow you to customize your policy to best fit your needs. But keep in mind, all these added features come at a price. So, IDI policies are generally the most expensive policies, and premium rates can be higher with increased customization. To secure this type of policy, you will need to work with an insurance agent or your professional financial advisor.

Regardless of the route you choose, disability insurance rates are the least expensive when you’re young and healthy, so residency is an excellent time to put this protection in place.

What to look for in a disability policy
Much like car or health insurance, disability insurance policies vary widely in cost, coverage and benefits. That’s why you need to research your options and understand what to look for in a policy. Here are a few of the most important features you need:

  • Own specialty coverage. As you consider disability insurance, you may hear terms such as “any occupation,” “own occupation” and “own specialty.” Don’t settle for the cheapest insurance—it also provides the least coverage. 

    “Any occupation” insurance usually only pays you a disability benefit if you are unable to work at a job in any field. But chances are that working in a position outside the medical field isn’t what you had in mind as you embarked on your medical training.

    “Own occupation” insurance is better, but it doesn’t take into consideration the differences among specialties. For instance, if you are training as a neurosurgeon and become unable to practice in that specialty as the result of a disability, you may still be able to teach at a medical school. In such circumstances, you might not be eligible for a full disability benefit, despite the various requirements you would have to complete to change practice and a potentially substantial income adjustment.

    “Own specialty” insurance, meanwhile, is intended to provide for disabilities that prevent you from practicing in your field of expertise. This coverage can give you peace of mind as you labor through your years of training and beyond.

  • Medical school loan payment. As a young physician, one of your biggest financial responsibilities will be repaying your education loans. Having a medical school loan repayment benefit of $200,000, for example, in addition to your monthly disability benefit payment could make a dramatic difference for you and your family, should you experience a permanent disability.

  • A waiting period that meets your needs. You’ll have to choose a waiting period before you get a quote. Waiting periods are generally 30, 60, 90 or 180 days based on your preference.  In order to satisfy the waiting period, some plans may require you not work in any occupation even if the definition of disability covers own occupation or own specialty.  Not surprisingly, policies with the shortest waiting periods tend to be more expensive.

  • Future benefit increase option. Disability insurance generally only protects the income that you make at the time you take out your policy. As a resident, that is substantially lower than your future earning potential as a practicing physician. A future increase option allows you to increase your benefit amount as your income level increases, regardless of changes to your health that could negatively impact your ability to be approved for new coverage.

    While it is a good practice to reevaluate your disability insurance after major career changes (such as the transition from residency to practice), make sure the coverage you purchase as a resident can grow with you. 

  • Benefit amounts higher than your current salary. Certain insurance programs will offer a higher benefit amount from the outset, despite your current salary as a resident. These are typically offered by medical association group plans, since they know how physician careers and earnings change as you move through residency and into practice. 

The bottom line
When it comes to disability insurance, you need to have coverage that fits your specific short- and long-term needs. There are many different policies available, but it’s essential to have coverage that will fully cover your family’s financial obligations and goals in the event of a disability.

Residency is the critical time to secure the coverage you need, while you’re healthy and your rates are low. Don’t delay. Make sure you understand your current coverage, have fully evaluated your financial needs and goals, and are confident that your disability insurance will protect your income now and in the years ahead.

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