A patient who cannot imagine becoming truly sick cannot commit to preventative measures. Unfortunately, the very same lack of imagination is all too common in the financial arena as well—and can affect even the most prudent investors. Have you, for example, taken steps to protect yourself (and your family) in case of a sudden disability that prevents you from working? Even if you’re young and careful, it could happen to you—through an accident… an injury… or a lengthy illness. And in fact it does happen—probably much more often than you might think.
According to a recent Gallup study conducted for the UNUM corporation — although most people believe they have only a 16% chance of becoming disabled during their working years — the startling reality is that:
- If you’re under age 35, chances are one in three that you will be disabled for at least six months during the course of your career.
- Men have a 43% chance of becoming seriously disabled during their working years.2 Women have a 54% chance.
- At age 42, it is four times more likely that you will become seriously disabled than that you will die during your working years.
Furthermore, it’s not safe to rely solely on a group policy your practice may have purchased. While group DI is often relatively inexpensive and easy to administer, it can also fall short just when you need it most—leaving you in for some unpleasant surprises when it’s too late to correct the situation. Want to be better prepared? Consider the following:
Learning to speak the lingo
The right disability income policy can help you keep your household going, even if you suffer a long-term disability. But before you go shopping for a DI policy, you need to know which features to look for—and the language the insurance industry uses to describe them. The following terms are part of the language describing high-quality policies, and are what you should look for to get coverage you can count on:
- Non-cancellable: To avoid the possibility of losing your coverage just when you need it most, choose a policy that’s non-cancellable and guaranteed renewable to age 65—with premiums also guaranteed until age 65. With group or association group coverage, you run the risk of being dropped and left unprotected at a time in your life when, due to your age or to a change in your health, it would be very difficult to qualify for coverage from another provider.
- Conditionally renewable for life: Although premiums may increase after age 65, your policy should be guaranteed renewable for life, as long as you are at work full time.
- Own-occupation coverage defines “totally disabled”—and their “Own-occupation”: before eligible for benefits—as being unable to perform the material and substantial duties of your own occupation even if you are working in a different occupation. As a highly skilled professional who has invested so much in education and training, you want to make sure you have genuine own-occupation coverage. Group coverage is rarely true own-occupation coverage.
- Residual Disability coverage: Through a rider, a good individual DI plan can provide you with protection against the income loss you may suffer as a result of partial (residual) disability—even if you have never suffered a period of total disability. This kind of residual coverage is not available with many group plans.
- A choice of “Riders”: Riders offer optional additional coverage such as Catastrophic Disability Benefit (CAT), annual Future Increase Options, Automatic Increase and Cost of Living Adjustments, or “COLA.”
Protect your practice and yourself
As a physician, you must also protect the source of your income: the practice you’ve worked so hard to establish and grow. Special policies, available from the same DI providers who offer high-quality individual coverage, offer your practice protection while you recover from a disability.
To help meet the expenses of running the office while you are disabled, consider a separate type of disability coverage known as Overhead Expense or OE. Benefits reimburse your practice for expenses such as rent for your office, electricity, heat, telephone and utilities and interest on business debts and lease payments on furniture and equipment.
Overhead expense insurance specifically designed for professionals pays some additional costs not included in regular business overhead expense policies—including the salaries of employees except those who are members of your profession. In a practice such as yours, for example, salaries for the receptionist and nurse would be covered, but not the salary of your physician partner or employee. However, high-quality professional overhead policies will cover at least part of the salary of a professional temporary replacement for you, such as a doctor retained to fill in during your total disability.
Physicians who are partners in a group practice may want to consider a policy known as a Disability Buy-out or DBO. In much the same way that life insurance benefits can be set aside to fund a buy-out by the remaining partner (or partners) if one partner dies, DBO is designed to fund the healthy partners’ purchase of the disabled partner’s share of the business. With the proper agreement in place before a disability occurs, hard feelings and the conflicts of interest that can result from a partner’s disability can be avoided. Furthermore, in combination with the disabled partner’s individual Disability Income coverage and OE, a DBO policy can allow the business to continue to generate an income for the healthy partner, while the disabled partner is supported by the benefits from his or her individual DI policy. Any continuing share of business expenses is reimbursed by the disabled partner’s OE policy until the buyout is effected.
Finally, reconsider how you pay for your disability premiums. Most physicians pay the premium out of their medical practice, which means any disability payments received will be taxable. It’s been my experience that when a physician becomes disabled, he or she will need every penny of those disability payments to help support the family. So consider paying your premiums out of your personal bank account to remove the tax burden.
So don’t let lack of imagination be your downfall. Look into or take another look at your current Disability Income protection to prevent financial troubles in the future. Do it NOW to protect one of your most valuable assets: your ability to earn an income.
Reed Tinsley, CPA is a Houston-based CPA, Certified Valuation Analyst, and certified healthcare consultant. He works closely with physicians, medical groups, and other healthcare entities with managed care contracting issues, operational and financial management, strategic planning, and growth strategies. His entire practice is concentrated in the health care industry. Please visit www.rtacpa.com
I’m currently trying to decide between different disability insurance policies, and found this article and the corresponding posts pretty helpful. I also was considering going with Northwestern Mutual, but I’m having a little trouble with the idea (as stated above) that I would lose my benefits proportionally if I decided to work in a different specialty. I’m doing GI, but, for instance, would like to know I could drop back to be a hospitalist and still claim my full benefits. However, what I’m having trouble getting my head around is that most of the other policies seem to say that being “disabled” requires that you cannot perform >80% of your duties. For example, if I couldn’t do endoscopy but still sit there and do clinic, I wouldn’t get any of my benefits, because I spend >20% of my time in clinic. I’m trying to figure out what would make me disabled enough that I couldn’t do more than 80% of my job, but could still function as a hospitalist. The reason it seems important is that with NML, they offer the option that if you can’t do 50% of your job (as opposed to 80%), you can walk away with full benefits. Does anyone have any advice about this?