A prevalent topic of conversation when discussing disability insurance with any new client who is a physician or dentist is cost. “Why does an individual policy cost so much more than what I pay (or paid) for with my work plan or an association?” Well, simply put, you are comparing two policies that are completely different from one another. Each policy brings a variety of differences that may appeal differently to each person but you must understand some of these key variations in order to properly assess which plan may provide the most protection for your income. Consequently, we have outlined five areas in which group and individual disability insurance policies differ.
1) Definition of Disability Provision – How are you deemed disabled? How does it pay you a benefit?
A reputable individual disability insurance contract will generally provide a definition of disability called true own occupation. This means you will be protected in the event an illness or injury prevents you from working in your own occupation. Moreover, if you choose to earn income in another occupation, your disability insurance plan will continue to pay you as long as you do not return to your original occupational duties. Certain carriers even provide contract language that recognizes and protects your medical or dental specialty as your own occupation.
Group disability insurance plans vary but more often than not, they will offer a modified own occupation definition of disability. This provides protection in the event an illness or injury prevents you from working in your own occupation. Unlike the individual plan noted above though, you cannot be gainfully employed while receiving benefits. In other words, if you earn any additional earned income working in any capacity while on claim, your disability benefit will no longer be paid to you.
Advantage: Individual Plan.
2) Plan Approval – How Do I Qualify for Coverage?
To obtain an individual contract, you must first complete an application from the insurance company, asking questions about your occupation, medical history, and recent financial information. A paramedical examination is usually ordered for and paid by the insurance company to have an examiner visit you to complete a blood sample and urinalysis. Questions are also asked about your medical history as well as any recent or current prescription medication use. Your medical records from your physician(s) are usually ordered by the insurance company underwriter to review. The approval process from start to finish usually takes about 4-6 weeks. Any pre-existing health conditions may be excluded from coverage and/or may result in higher premiums.
Group plans are generally guaranteed standard issue for all participants. This means that there is no individual underwriting for each person – everyone receives the same plan regardless of their current health status. The enrollment period usually occurs once a year and participants usually have to accrue a certain number of full-time hours to qualify for the plan. Always check with the benefits manager in Human Resources to seek out this specific information. Participants will have no health exclusions for their coverage. Association plans typically require individuals to be medically underwritten just like an individual plan above, with an application and medical exam.
Advantage: Group Plan
3) Portability and Renewability Provisions – What can change? Who can change it?
Individual disability insurance plans should always be selected with two imperative contract provisions – Non-Cancelable & Guaranteed Renewable – this does not mean you, as the policyholder, cannot cancel the policy. It means the insurance company cannot alter the terms of the contract or the price. This is important since cost always increases with age and the disability insurance market is rationally volatile, with many plans changing options and terms every few years. Additionally, you own the contract personally so it will travel with you regardless of where you work or if you change occupations. This means the policy is portable. Getting individual coverage at a younger age is always a wise financial decision since premiums are generally lower when you are younger. If you are a young physician or dentist, another very important option is a future purchase or increase option. This will provide an additional pool of insurance protection available to add without any future medical underwriting.
Group plans are conditionally renewable and subject to premium change at any time by either the employer or insurance carrier. Terms of the contract can be changed at anytime without participant input as well as canceled. If the participant leaves that employer their coverage does not go with them (is not portable). This road generally leads to that person calling to get an individual plan at the age of 45-55 and the premium rates at a much higher rate. Association plans are also conditionally renewable and subject to premium changes with age increases. The member also has to pay their annual premium to ensure the coverage remains active.
Advantage: Individual Plan
4) Benefits and your taxes – will my disability benefit be taxed or not?
A strong advantage of owning an individual disability insurance plan is the non-taxable nature of its benefits. As long as the premiums are paid by the policy owner with after tax dollars and not deducted as a business expense – all benefits received for a claim will be tax-free. This can have a significant effect on lifestyle protection and limit any unnecessary tax exposure while on claim.
Group plans are treated as tax deductions by the company or are offered to participants as a pre-tax withdrawal from their paycheck. Since the taxes have not been paid – they get picked up when participants file a claim. A typical employee will receive 60% of their salary for a disability claim. That’s not their net pay though once their benefits are taxed at their federal and state tax ordinary income rates. In some cases with highly compensated executives who are in a high tax bracket, this can have a significant effect on their take home benefit
Advantage: Individual Plan
5) Coverage Options and Plan Design – Each person is different – should they control their plan structure?
All individual disability insurance plans provide the client complete flexibility and choice when determining what they want in coverage amounts. Some older people may not want to be fully insured due to cost or because they have other assets to use while younger people may want full coverage along with optional riders to fight against the eroding factors of inflation or purchase more coverage without more medical underwriting in the future.
Group plans do not allow the client the ability to adjust coverage amounts or add on any additional riders. This lack of flexibility may create problems for differences in protection between high level company executives, especially since most group long term disability plans have a monthly benefit cap. For example, the plan may offer 60% coverage but have a total plan cap of $8,000.00 a month. That is not a problem for someone making under $100,000.00 a year but does present an issue for someone earning $300,000.00 a year.
Advantage: Individual Plan
These are just some of the differences that create such a wide chasm in price. Understanding these differences and deciding how they can affect your income, if you need to use this coverage, should be just as important as cost consideration. Individual plans typically cost more but they provide a much stronger, overall level of income protection then group or association plans and are portable. As a physician, you have worked tremendously hard to achieve your career goals through extensive training and education. Properly protecting that asset for your entire career should be achieved with a proper plan. Disability insurance plans are seen as a luxury commodity by many until someone actually needs to use it.
Thomas Lloyd is a Registered Representative of Park Avenue Securities LLC (PAS). Anthony Delvecchio is a Financial Representative for The Guardian Life Insurance Company of America. They can be reached by calling 866.680.8779. Neither Guardian, nor its subsidiaries, agents or employees provide tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.