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Disability Insurance

August 11, 2021

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Disability insurance offers financial protection for future income if you experience a disabling sickness or injury. This may be particularly important for physicians who are unable to work in their chosen specialty.

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What Is It?
Disability insurance provides a source of replacement income for the policy holder when unable to work due to a sickness or injury. Disability insurance can safeguard future career earnings and help provide financial security.

Why Is It Important?
Many medical students believe they will go to school, complete their residency, and then work until they are able to retire. However, if you become disabled, you may be unable to earn the income you were originally planning and since a physician’s career and income are dependent on their ability to provide a specialized service and perform specific duties, many insurance consultants believe that disability insurance is important coverage to have.

If you become disabled and are unable to work, you will likely still have monthly financial obligations such as rent or mortgage payments, car payments, credit card expenses, student loan debt, child care costs, utilities, or a host of other financial obligations. These expenses will not just disappear, so it’s essential to protect yourself, with the proper insurance, so that you will be able to continue paying your bills.

Short- vs. Long-term Disability Insurance
Short-term disability (STD) insurance is often provided by employers. Sometimes an employer will provide a base STD benefit and give the employee the option to pay for additional coverage. If STD insurance isn’t part of a benefits package, an employer may give the option to purchase STD coverage through payroll deduction. STD insurance provides coverage after a policy holder is unable to work and normally ends after a specified period. It can cover expenses for the short-term so that the policy holder won’t have to use their savings; however, it will not cover all lost wages. If an employee uses the coverage provided by the employer, then the replaced income will be taxable.

Some employers provide group long-term disability (GLTD) insurance without any cost to the employee, and coverage often starts when STD insurance ends. Long-term disability (LTD) insurance could cover an employee until they reach retirement age. If GLTD premium amounts are not added as taxable income then any benefits received would be taxable. However, if you purchase and use your own individual policy, benefits would be tax-free and between the combined GLTD and individual LTD, you would likely cover most of your net salary.

What’s Considered a Disability?
Insurance companies may have different disability definitions. You will likely want a policy that has a true “own occupation” definition because this will provide the most coverage, especially for a physician who specializes. For instance, if a surgeon becomes disabled and can no longer operate, with an “own occupation” disability definition, the policy would cover surgeon’s wages, and not have a reduction in benefits even if the surgeon could obtain a position in another specialty. Be sure to review your group LTD plan and all other plans you are considering for the definition of disability.

Terms to Know
It’s important to know some additional terms. For example, there’s an elimination period (waiting period) for a disability 
policy to provide benefits. Elimination periods can range from 60 to 365 days. Generally, the shorter the elimination period, the higher the cost. 

Most policies will either cover you for a certain number of years, or until you reach a certain age, this is known as the maximum benefit period. Generally, longer benefit periods will be more costly and most policy benefits will end at age 65 (when Social Security begins).

Pay attention to residual benefits. If the policy has a residual benefit, then the policy holder could return to work slowly, or on a part-time basis, whereas other policies may only provide benefits if the policy holder isn’t able to work at all.

Riders are optional “add on” benefits. Some rider examples include: student loan rider (extra benefits for those with student loan debt), future purchase option rider (allows for increased coverage without going through a new approval process), non-cancelable rider (prevents an increase in premiums), guaranteed renewable rider (prevents the policy from being changed or canceled).  Discuss all riders with your insurance consultant.

How Much Does It Cost?
Cost varies depending on the policy benefits, riders, income, benefit and elimination period, policy holder’s health, occupation, and more. Be sure to carefully evaluate the policy before making a decision; however, keep in mind, it’s often less expensive to obtain insurance coverage when you are younger and healthier. Often, people are surprised by how inexpensive coverage is and how valuable peace of mind can be.

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