Healthcare Practice Strategies - Winter 2015 - Disability Insurance: Are You as Covered as You Think You Are?
The statistics are sobering: You're much more likely to become disabled than to die during your practice years. This includes everything from a diagnosis of Parkinson's to a bad back or heart attack.
The good news is that, as a group, physicians seem to take these statistics to heart. Most have at least some form of disability coverage in place.
However, many physicians are dangerously underinsured when it comes to disability coverage. They may be relying on a low-cost policy acquired through a professional association or a bare-bones policy they picked up during residency.
Even a generous employer-sponsored plan can come with some serious drawbacks. Unlike group and individual disability policies, employer-sponsored policies fall under the Employee Retirement Income Security Act (ERISA), which significantly affects the administration and litigation of disability insurance claims — often to the detriment of the insured.
Closing the Gaps
No doubt, the cost of disability insurance can be daunting — anywhere from 2 percent to 4 percent of the income you are trying to replace. Still, few physicians are prepared to rely solely on their personal savings during an ex-tended period of disability. With that in mind, consider these four steps for ensuring you'll still have a source of income should you ever become disabled.
1) Purchase sufficient coverage. Disability insurance is designed to insure against financial catastrophe. Yet, a typical individual disability policy covers just 60 percent of net income and caps monthly benefits. For physicians in certain surgical specialties, even $10,000 a month doesn't come close to replacing 60 percent of their net income.
Several insurance companies have developed high-limit policies designed to bridge the gap with up to $15,000 extra a month in disability benefits. High-limit policies generally only pay benefits for a maximum of five years. While high-limit supplemental coverage is offered in most states, it doesn't come cheap. And it must be renewed every three or five years, typically at rising premium rates.
2) Add riders as needed. Beefing up coverage with policy riders can help ensure that you obtain benefits specific to your needs and for as long as possible. Common riders include:
- Non-Cancelable and Guaranteed Renewable – This means the insurance company cannot raise rates, reduce benefits, add exclusions or cancel your policy at any time. The policy is portable and coverage follows wherever you go. By contrast, "conditionally renewable" gives the insurance company the right to decide the price conditions for renewing. "Guaranteed renewable" means the company must renew the policy, but can change your premium.
- Own-Occupation – This protects you if you are unable to perform the duties of "your own medical specialty" and continues to pay benefits if you are forced to practice a new specialty or even a new occupation because of disability. Note, however, that own-occupation riders are generally not available to neurosurgeons, orthopedic surgeons, anesthesiologists, emergency medicine physicians and thoracic surgeons.
- Residual Disability – With this feature, your policy will pay benefits even if you are not deemed to be totally disabled. For example, most insurers would classify you as completely disabled if you were only able to earn up to 20 percent of your income. If you were able to earn 80 percent or more of your income, you would be classified as completely well. Partial or residual disability provides benefits when you fall in the gray area between 20 percent and 80 percent.
- Future Purchase Option – This provision gives you the right to purchase a pre-determined amount of coverage in the future. In particular, it allows residents and early-career physicians to increase coverage as their income grows without having to go through additional medical underwriting.
3) Work with a pro. Disability insurance coverage cannot be purchased directly from an insurance carrier. Instead, you'll need to work with an agent who specializes in disability insurance planning for physicians. Consider working with an independent agent who can shop your coverage with the "big six" disability insurance companies: Guardian (Berkshire), Standard, Metlife, Ameritas, Principal and MassMutual. These companies each look at your location, gender and medical specialty a little differently, so it's critical to look at a variety of quotes.
4) Salt away some savings. Long-term disability insurance typically kicks in only after 90 or 180 days, so it is important to have some savings on hand (at least three months of living expenses) to cover expenses until your benefits start.
Ultimately, the best disability policy is one that is tailored to your specific income replacement needs and specialty.
For the Sake of the Practice…
If you have an individual disability policy, your income is protected. But what about the income of the practice? For example, if you are a sole practitioner and a disability keeps you from generating revenue for any length of time, you might not have a practice to return to.
Consider these additional forms of disability coverage that can help preserve your practice in the event of a debilitating injury or illness:
- Business Overhead Expense Policy – This helps keep the practice afloat by covering ongoing operational expenses while you recover — everything from rent or mortgage payments to employee salaries and even maintenance and janitorial services. Ultimately, this coverage helps ensure that you don't have to use personal assets to keep the practice open. Note that premiums are deductible by the practice, regardless of whether you are structured as a sole proprietorship, partnership or corporation.
- Key Man Disability Policy – For partnerships, key man coverage may be the better choice. Key man coverage is designed to pay the practice in the event that a financially valuable employee becomes disabled.
Since overhead remains the same (at least in the short term), if one doctor can't work, the remaining partners must shoulder more of the overhead, with a resulting cut to their take-home pay. This can get tricky, as each "key man" in the business may require a separate policy, depending on what his or her role is in the practice.
Healthcare Practice Strategies - Winter 2015