How Disability Insurance Policies are Built and What You Should look for when comparing options
Disability Insurance is intended to replace the income of an insured individual who, as a result of an accident or an illness is unable to work or is limited in their ability to work in their occupation. This insurance policy typically pays a monthly income until the insured is deemed by a physician to be healthy enough to return to work full time, and the amount payable depends not only on the income of the insured, but also on the type of disability coverage he or she owns. The process of obtaining the right kind of disability coverage and collecting benefits is somewhat more convoluted than most types of insurance, so it is important to have a good working knowledge of disability insurance at the outset.
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Definitions of Disability
The definition of “disability” is one of the most important parts of a disability insurance contract as it is the primary basis for determining if benefits will be paid when totally disabled. For people that are looking for disability insurance policy, it is important to understand that there are numerous basic definitions of disability commonly in policies that are issued today.
Regular Occupation (also referred to as “True own occupation”) with medical/dental specialty wording
Under the “regular occupation” definition of disability with specialty language, an individual is considered totally disabled if they are unable to perform the essential duties of their regular occupation; that is the occupation in which they were engaged at the time of disability. The “specialty” clause states that “if you have limited your occupation to the practice of a specific medical or dental specialty, your specialty will be deemed to by your occupation.” They must be under the care of a physician and not otherwise gainfully employed in order to receive benefits.
For example, if an orthopedic surgeon has an accident and loses a finger which will prevent her from performing her specific duties, she will still receive a full income replacement, even if she is able to work as a hospitalist or teach at a medical college.
Regular Occupation (also referred to as “True own occupation”)
This definition of total disability is the same as the prior version other than the fact that it does not have language in the policy that clarifies medical or dental specialties. The definition reads:
“Total disability means that due solely due to impairment caused by injury or sickness, you are unable to perform the material and substantial duties of your regular occupation and you are under the regular appropriate care of a physician.”
The definition stops short of adding the specialty clause that we see in the first definition of total disability. If you are not a physician or dentist, then this second version of the definition of total disability is the same as the first (with specialty language).
Transitional Your Occupation
Under a Transitional Your Occupation (TYO) definition, the insured would receive a total benefit if they are unable to work in their occupation. The full benefit payment is made until the combination of the monthly benefit and any income that is earned in another occupation is equal or greater than the monthly income that they were earning prior to becoming disabled.
Example: an Attorney is earning $300,000 per year, or $25,000 per month. While healthy, working as an attorney, they increase their disability insurance policy such that they would receive a maximum of $12,500 from their policy if they were to become totally disabled as an attorney. A back injury from a car crash prevents them from working as an attorney. After satisfying the 90 day elimination period, the doctor begins to receive $12,500. After a year, the lawyer decided that he could not “do nothing”. He went to business school. 4 years later, he got a new job as a business executive earning $180,000 per year ($15,000 per month). To determine how the TYO policy pays, we add the $15,000 of earned income to the monthly disability benefit of $12,500. Total is $27,500. Since this is less than the $30,000 monthly income that they were earning as an attorney, the insured continues to receive the $12,500 per month. After getting promoted as an executive in the corporation, he is now earning $240,000 per year ($20,000 per month). At this point, the monthly disability benefit is reduced from $12,500 to $10,000. Once income reaches $300,000 in the corporation (as a business exec), the disability benefit is reduced to $0. The “transition” to a new occupation has been completed and benefits stop. If he had a “true own occupation” policy, he would be able to earn the $300,000 at the new company and would receive the $12,500. The total benefit would be paid until reaching the end of the benefit period or when the Business exec could return to being an attorney.
Modified Own Occupation
A modified own occupation definition will require that the insured is unable to do the duties of their occupation in addition to NOT working in any job. If they are working, earning anything greater than 25% of the income from the prior job, they are not totally disabled.
Any Occupation
This definition can be found in some group plans. It requires that an individual is unable to work in their occupation, in addition to NOT being able to work in any occupation, based on education, experience, and work history. Some group plans have definitions of total disability that change MID claim. You get hurt and cannot work at all. The first 24 months of that claim could be “True own occ”….once you cross the 24 month threshold on that claim, you could need to satisfy the more restrictive “any occ” clause. A surgeon with a hand tremor that was approved for total disability would likely see their monthly benefit changed
The Elimination Period
The “elimination period” is the period of time between the onset of a disability and the time you become eligible to receive benefits. The elimination period can vary, with choices ranging from 30 to 365 days. With a longer elimination period, the premium cost of the policy is reduced. Commonly, younger professionals tell us that they would like to consider longer benefit periods (180 days as an example). We generally recommend that a younger worker that does not have adequate savings start with a 90 day elimination period. It is important to note that the first disability check is received at the end of the first accrued month. When you factor in the delivery of the physical check taking a day or two, you might not receive the first check until day 122 or 123 after suffering a disability. Insurance companies allow the policy holder to modify the plan in a way that reduces risk to the insurance company without requiring any further medical underwriting. With that being the case, a younger physician or dentist could purchase a policy that has a 90 day elimination period with the intent to modify to a 180 day elimination period when there is enough savings to justify this change.
The premiums on policies with a 30 day elimination period are the highest so the cost savings realized by choosing a 90 day elimination period are significant. With elimination periods longer that 90 days, the cost savings are fairly negligible.
The best way to approach the elimination period is to calculate the cost saving of a longer elimination period, and then evaluate the ability to divert those cost savings into building a side fund that can be used self-insure for short-term disability.
The Benefit Period
The benefit period is the length of time a disability insurance contract will pay a monthly benefit. Off-the-shelf disability policies typically have an option of a 2 year benefit period, a 5 year benefit period, a 10 year benefit period, or benefits paid until age 65 or 67. With people increasingly working after age 65 or 67, newer disability policies might have the option to purchase a “To age 70” benefit period. Some policies include options that allow the insured to receive a “lump sum disability insurance benefit” when they reach the end of the regular benefit period.
The Occupational Classification
The occupational classification is one of primary determinants of the price of a disability policy. Insurance companies classify each occupation and it is that occupation class that determined pricing and policy language. A general cardiologist that does a lot of consults with patients that are complaining of chest pain is seen as a lower risk than some of the very particular surgical specialties, as an example. If that surgeon loses a finger, they are likely to be totally disabled. The cardiologist is of course going to have issues with practicing, but they might not be totally disabled. They could continue to do patient consults.
With there being thousand of different occupations, and with the typical insurance company only using 5, 6, or 7 different rate classes, we commonly find situations where it is more advantageous to use one carrier over another carrier. This example is seen when working with dental hygienists, union workers, sales reps, teachers, prison workers, cardiologists, ophthalmologists, radiologists, psychiatrists, OB/GYNs, and Pediatricians, amongst others. Today, an insurance company could issue a policy for an occuapation that is more expensive then the next occupation….Due to actuarial experience, we could see the “riskier” occupation bumped up to be the same occupational class than what was assumed to be “lower risk” in the prior year.
Insurance companies have differing experiences with the various occupations, so premium prices can vary considerably. Some insurance companies may look at a surgeon who performs invasive surgery as a higher risk, whereas another insurance company may consider the same specialty under a different set of criteria. Insurers will also consider hobbies and leisure sports in their underwriting. If you like to skydive on weekends, you may have to promise to give it up or be denied coverage.
Partial Disability
If you become disabled but are still able to work in a reduced capacity (less hours or limited duties) in your original occupation (specialty), you are considered to be residually disabled. Disability policies that include a residual benefit will pay a partial monthly benefit proportionate to your lost income or based on a specific clause in the contract. Policies without a residual benefit would require that you be totally disabled and unable to before you can receive any benefits.
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Statistically, you are more likely to become partially disabled than totally disabled. Keep in mind that many illnesses that lead to someone being totally disabled could take years to progress to the point of total disability. If a disability policy did not include the right clauses for residual, someone could be go through a period where their income is collapsing, while also still needing to make premium payments as they receive zero from the insurance company. It is very important for a policy to include residual so take a moment to review your existing policy if you have one. The good news is that most of the top insurers offer a residual or partial disability benefit.
Not all Residual clauses are created equal
Like total disability, there are numerous versions of residual disability that are offered in today’s marketplace.
The key to all clauses is that there is a percentage loss of income that is required to receive residual benefits. You find policies that require a loss of income of at least 15% . Other residual definitions require a minimum of a 20% loss of income.
To understand how and when a residual disability payment is made, we use the following example:
A general dentist runs a busy practice. She sees an average of 20 patients per day and has done so for 10 years. One day when out running errands, she slips and falls. After going through physical therapy, she realizes that she has a bulging disc in her back, but it is not something that prevents her from working as a general dentist. Her income was $350,000. Now, due to the fact that she can only see 12-14 patients per day as a result of the pain she feels as she works through a day. Her income has dropped from $350,000 to $230,000. This is a reduction of approximately 34%. Under a residual clause that only requires a loss of income, she could receive a residual benefit. The specific dollar amount that is received during the initial period under residual is usually greater than the amount that will be receiving over the remainder of a residual claim. After the initial phase, which is typically 6 months or 12 months, most policies would pay a proportion of the total disability benefit. If she owned a policy that had a $10,000 monthly benefit, she could in theory receive $3400 of monthly benefit (34% of $10,000).
Some policies require an additional clause to be met, in addition to the 15% or 20% loss of income.
The requirement is that there is either a “loss of time” or some type of “loss of duties”.
You used to perform a specific procedure and now you cannot, but you are able to do the remainder of the job.
The loss of time requirement is seen most typically as one of three different clauses:
1 ) you are able to perform all of the material and substantial duties of your
occupation but not for the length of time they normally require.
2 ) Able to perform all the duties of your regular occupation but not able to perform them for more than 80% of the time
3 ) you are unable to work full time in your occupation
Thankfully, there are many great options for finding a policy that provides a strong definition of residual. This does not mean that all options are great. Keep an eye out for residual clauses that require an INITIAL period of total disability PRIOR TO receiving a residual claim. In this case, many illnesses and injuries that cause people to work part time would not qualify for a residual claim.
Guaranteed Future Insurability
A physician income can increase more than 500 percent on day one of their first job after training, at which point an initial disability insurance policy may not provide the coverage needed to replace the increased earnings. Disability policies with a Future Insurability Option (FIO) provide the opportunity to increase your monthly benefit without any evidence of insurability. Without the FIO, you would be forced to purchase additional disability insurance policies with the risk that a medical condition might disqualify you from obtaining the coverage or doing so at a very high cost.
Future increase options can be obtained in a policy where there is an annual option to exercise benefit or where there is a 3 year period that will pass between each option to increase coverage. The plans that give the right to increase in 3 year increments, there is also a requirement that a minimum of an allowable increase be purchased if the insured intends to have the right to increase without proof of medical insurability at the next 3 year interval. Since a resident or fellow could be forced to go 2+ years without being able to increase their monthly benefit to keep pace with the growing income after graduating, look for a clause that allows an exception to increase the monthly benefit prematurely, as long as income has increased by 50% or more.
Future increase options typically expire if not used prior to the age of 55. The rate at which the future options can be exercised have age restrictions. As an example, from age 45 to age 55, only 1/3rd of the available pool can be exercised in any policy year. Each company has different rules but the premise is the same: Protect a growing income without having to go through medical underwriting. If a medical event pops up after the policy is purchased, the insurance company cannot add a medical exclusion or decline the increase.
Inflation Protection
Most disability insurance policies offer a Cost-of-Living-Adjustment (COLA) as an option which adjusts the monthly benefit based on an inflation index, a fixed percentage, or a fixed dollar amount. Of course, a COLA would be essential to preserving your purchasing power throughout an extended disability. Whether the insured is able to keep the cost of living increase for future claims (when coming off of the claim that the COLA increased from), and whether or not the added benefit will have cost or if it will be added at no cost, depends on the specific contract that you own.
Policy Renewal
Most individual disability insurance polices are non-cancellable and guaranteed renewable, which means they must be renewed automatically by the insurer without any changes regardless of your health. That includes your premium rate which cannot be increased as long as your policy remains in force or until the end of the regular benefit period (to 65, to 67, etc).
If a doctor would like to keep their policy in place beyond age 65 or 67, they can do so. A letter will be sent to the insured annually where they must validate that they are working 30 hours or more and that they are not currently disabled. Premiums will increase at these ages and the maximum benefit period ranges from 12 months – 24 months for disabilities occurring after the end of the regular benefit period.
Insurance Company Financial Strength Ratings
A disability could strike at any time – now, or 20 years from now – so it is important that your disability insurer have the financial strength and stability to weather the worst of economic storms. At its core, a disability insurance policy is a promise to pay benefits at the time they are needed. That promise is backed by the financial strength of the insurance company from which you purchase the policy. The financial strength and stability of insurance companies is monitored and measured by third party rating agencies such as AM Best, Standard & Poor’s and Moody’s which produce a letter rating as a way of scoring and comparing of all insurers. The top rating by AM Best is A++ and the top score from Moody’s and Standard & Poor’s is AAA.
Discounts and Favorable Pricing
There are discounts that are commonly available. The best way to ensure that you have the best possible price is to work with someone that can explain all of the possible discounts.
Some discounts are offered through brokers that have worked to put a discount in place with a specific hospital or school. Discounts are either applied on a male/female (sex specific) basis or on a Unisex basis. Since women pay more for disability insurance than men do, a unisex discount can add up to be a larger percentage discount than it is for men. On the other hand, a sex specific discount can be more beneficial for men as it is applied to the male rate (rather than a unisex rate).
Inquire about discounts whether you are in training or in practice. They could save you a lot of money over the life of the plan.
Group Disability Insurance
Although most residency programs and medical trade associations do offer group plans, residents and new physicians who opt in are in danger of being lulled into a false sense of security. Commonly, the wording in these plans is not as strong as what is found in a non-cancelable, guaranteed renewable plan. Also, these plans are not permanent. They can be altered or cancelled with only a few months notice. The problem with a plan that changes is that someone may have felt that they secured the policy that they could have for the remainder of their working life. When they go to find a replacement, it could be unavailable or limited due to medical events that occurred AFTER securing the association plan (but while still working and not on disability). Once they leave training, young physicians and dentists must either find employment where a group plan is offered or buy individual disability insurance. By not purchasing individual coverage at a younger age, new physicians will end up paying a higher premium for the life of the policy.
But, the larger concern is if, during the time residents are covered under a group plan, they develop and illness or are injured, it could make it difficult to obtain individual coverage after leaving residency. Buying individual disability coverage at the earliest possible age will save a substantial amount of money over time, and, more importantly, it will lock in insurability for as long as disability coverage is needed.
Advantages of Group Plans
- Group plans offer less expensive coverage than individual plans.
- Group insurance is guaranteed issue which means you can’t be denied coverage for a pre-existing condition.
- Some plans offer an ability to convert to an individually owned policy when leaving the employer.
- Group plans are not guaranteed renewable or non-cancellable and can be changed at any time.
- Group coverage tends not to provide the level of protection and benefits found in individual plans.
- Group plan coverage does not extend beyond leaving the employer. If there is a right to convert, it is generally not as comprehensive of a plan as might be available in a medically underwritten individual policy.
Disadvantages of Group Plans
Working with a Disability Insurance Specialist
Disability insurance has become somewhat of a specialty over the years. Fewer insurance companies offer the coverage, and even fewer offer physician or dentists specific disability insurance. Because it is a more complicated product than life insurance, and it protects such a vital part of your financial life, it is recommended that you seek the guidance of an insurance professional who specializes in disability insurance and who is experienced in working with the unique needs of physicians and dentists.
Key Takeaways
- Because the earnings of physicians increase markedly in the first stage of their careers, their disability income protection often does not keep up. Physician disability insurance needs to be reviewed frequently to ensure their protection keeps up with their income need.
- The definition of “disability” is one of the most important parts of a disability insurance contract as it is the primary basis for determining if benefits will be paid. As important as the definition of total disability is, you do not want to forget about the residual definition. Someone could become partially disabled without ever becoming totally disabled.
- Physicians should consider a “true” own occupation disability policy which defines “total disability” as the inability to perform the material and substantial duties of their specific specialty.
- The Future Increase Option is critical for physicians who expect their incomes to increase over time.
- Group disability plans are fine for a temporary solution or to augment the coverage of an individual disability policy, but their limitations and more restrictive definition of total disability can’t provide the maximum protection physicians need.
- Physician-specific disability insurance is a complex product with a lot of moving parts that all need to be tailored to your unique needs. Only a disability insurance specialist with access to the top specialty disability insurance carriers, along with access to discounts, has the resources and the expertise to match your specific needs to the right disability insurance policy.