Disability Insurance – What Do You Look For?

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Not all disability insurance is the same. I feel like I am stating the obvious but there are good and not-so-good disability insurances. I should know – I bought a bad one and had to go through the process of canceling it, after having paid expensive premiums for over a year. Not good.

So here are some of the features that a good disability insurance coverage should have. In fact, I probably wouldn’t buy any disability insurance without all these elements. I’ll explain the insurance-speak jargons along the way.

  1. “True Own Occupation” – This is probably the most important feature of a good disability insurance.  True own-occupation coverage makes you eligible for benefits if you cannot perform the material and substantial duties of your specific medical specialty even when working in a different occupation. Say what? The insurance company will pay you benefits if your disability precludes your working as whatever specialist you trained to be.  Ok.  Let’s say you injured your hands and can’t work as an anesthesiologist, and then you decide to be a venture capitalist.  With a true own occupation policy, the insurance company would still have to pay you benefits as long as you cannot work as an anesthesiologist. The word “true” means that you can write-in your specific medical specialty into the policy.  This type of policy is the most expensive because there’s a greater chance that the insurance company has to pay you.  However, because you’re in a future high-income, specialized occupation, this expense is worth it because if you were to get disabled, you’d most likely have to take a significant pay cut to do something else.
  2. Non-cancellable & Guaranteed Renewable – Like the name suggests, a non-cancellable and guaranteed renewable policy makes it so that the insurance company can’t drop you at times when your age or health conditions can make it hard to qualify for other coverage.  It’s important to note that a policy can just be guranteed renewable in which case the insurance company agrees to keep covering you as long as premiums continue to be paid on time, but the company can increase premiums with prior notification.  Not good.  However, when the term non-cancellable is added to guranteed renewable, the insurance company cannot increase the premiums, and it cannot change any policy provisions.  Obviously, you want to own a policy that has both.
  3. Waiting Period – Also known as elimination period, this is how long you have to be continuously disabled before benefit checks start arriving. A typical disability insurance for physicians will have an elimination period of three months.  What do I mean by continuously disabled?  If you get disabled for a month and then get well and then two months later, you get disabled again, you have to wait three months from that second point on, not the first.  One more point about elimination periods.  You’ve probably seen those Aflac commercials with the duck where somebody says she got paid four days after she was hurt – very short waiting period.  The problem with shorter waiting period is that it increases the cost of insurance and therefore drives up the premium.  If you have an emergency cash reserve of, say, three months, you can afford to have a waiting period that long and pay less in premiums.
  4. Residual coverage – Residual disability is the same as partial disability. A policy with residual disability rider will protect you against income loss against partial disability even if you have never suffered a period of total disability. For example, one of my policy states “Residually disabled means that you are gainfully employed and are not totally disabled under the terms of the policy but, solely because of sickness or injury, your loss of income is at least 15% of your prior income.” Say what? Let’s say you develop a back condition that allows you to work not as much as you did before, and you make less money. Then the residual disability would pay you partial benefit for the partial loss of income.
  5. Portability – A portable coverage would follow you even if you switched jobs. Group disability insurance that you might get from your place of employment usually don’t have this feature.
  6. Does Not Integrate with other forms of disability compensation. Say what? In the event of a disability, your monthly benefit is paid in addition to any other benefits you may receive in a plan that integrates. Group plans generally “integrate” which means they subtract other incomes you might be eligible for (worker’s compensation, social security benefits, etc) from the benefit amount.  You want to get a policy that does not integrate.
  7. A choice of “riders” – Riders basically offer optional additional coverage. Ones worth looking into are Future Increase or Insurability Option (FIO) and Cost of Living Adjustments (COLA). FIO allows you to secure future coverage based on your current health. This is good for residents because you can start off with a lower monthly benefit as a resident and then expand the coverage in the future – when you have a higher income – without any health questions or exams. COLA (around 3% usually) increases your benefit amount according to inflation.
  8. Also a good insurance policy should suspend your premium payments once you start receiving benefits.

In addition to these features, you should also ask about the following when purchasing disability insurance:

  1. How is disability defined?  According to my disability policy contract, total disability is defined as follows – “because of sickness or injury, you are not able to perform the major duties of your occupation.  Your occupation means the regular occupation in which you are engaged at the time you become disabled.  You will be totally disabled even if you are at work in some other capacity so long as you are not able to work in your occupation.  If your occupation is limited to a single medical specialty certified by the American Board of Medical Specialties, we will deem your specialty to be your occupation.”  For me, the paragraph is another way of saying that my coverage has “own occupation” definition of disability.
  2. Besides pre-existing conditions, what other exclusions from coverage exist?  For example, my disability coverage gets suspended if i go on active duty in the military service of any country or international authority.  Although I’m not in the military, it’s good to know that there are certain exclusion criteria.
  3. How are disagreements resolved, such as a dispute between the insured’s physician and the physician for the insurance company?

If you have any questions, you should ask the insurance company or your insurance agent before you purchase.  Remember disability premiums are expensive; you want to make sure you understand what you’re paying for so that you will have the expected coverage when you need it.

As I said before, the decision to buy disability insurance is up to you. I’ve known older physicians who’ve gone through their entire professional careers without disability insurance.  I’ve also known physicians who became disabled and paid for his kids’ college education from his disability insurance benefits.  Think carefully about what kind of risk you’re willing to take and make the right decision for yourself. And if you decide to get disability coverage, consider paying the premiums with post tax dollars – otherwise you will be taxed on the benefits as income.

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