Disability insurance: Consider these factors

August 19, 2014

When considering purchase of a disability insurance policy, it’s important to have an exact understanding of the language being used in the policy.

 

I’m confused by the different types of disability insurance policies that are available to physicians. Where do I begin?

Start with an exact understanding of the language being used in the policy you’re considering for purchase. The term “disability” can be defined in very different ways by the disability insurance company insuring the plan. Unfortunately, many plans may offer benefits that provide substantially less than you would expect.

Insurance carriers may have two definitions of disability. The first provides benefits if you are “unable to perform the important duties of your profession and specialty.” This definition implies that if your occupation is limited to a recognized specialty, you will receive disability benefits even if you can continue working in another aspect of the medical profession. But you must read the fine print, and in this case, read the sentence that may follow the first definition. Often, it may state: “After 2 years (or 5 years in some policies), you must not be able to perform the duties of any occupation.” So, if you can work in any job at all, after 2 years, medically based or not, you will not be considered “disabled,” and your benefit payments will be discontinued.

It should now be obvious to you why policies with this type of definition are less costly than those that provide monthly benefits for as long as you are unable to work in your chosen field or specialty; the insurance company is assuming less risk. But are these policies really less expensive? If you continually pay your premiums but are denied benefits due to the limited definition of “disability” in the policy, it can ultimately cost you and your family significantly more.

Another important provision deals with the ability to cancel and renew the policy. Non-cancelable generally means that the insurance company cannot cancel the policy, change the policy provisions, or increase the premiums after the policy is issued if the premiums are made on time. Guaranteed renewable is similar in all aspects, except that the insurance company has the ability to increase the premium amount. Another provision, typically added as an additional cost rider, is the cost of living adjustment. This rider provides the benefit of an inflation-adjusted monthly benefit in the event of a disability claim.

Of course, the more guaranteed provisions included in the policy, as part of the original policy or as a rider, the higher the premium cost. Fortunately, there are a variety of ways to construct a policy so that you have greater control over the ultimate premium amount. The first is the monthly amount of the benefit. Unfortunately, you are not able to replicate your income via a disability insurance policy. Generally, you can purchase between 60% and 66% of your current income with a set dollar amount maximum, as the insurance companies do not want to give you an incentive to make a claim.

Next: Waiting or elimination period

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Next is the waiting or elimination period, which controls how long you must be disabled prior to receiving benefits-similar to a deductible, but based on time, not dollars. Typical periods include 30, 60, 90, 180, and 360 days. Naturally, the longer the elimination period selected, the lower the premium payment amount will be. The key determinant for this provision is the insured’s cash needs based on the amount of cash reserves being maintained and any other income sources available, such as a spouse’s income, as well as the benefit period of any short-term disability program under which the physician may be covered.

The other major cost factor is the benefit period. This decision will determine how long the benefits will be paid after the waiting or elimination period has been satisfied and the disability continues. Many companies offer lifetime benefits (the highest cost), benefits payable to age 65, benefits payable for 5 years, and shorter time frames of 24 months (the lowest cost).

We have finally scheduled an appointment with our attorney to prepare an estate plan. What should we do in preparation for the meeting?

Estate planning can range from simple and straightforward to sophisticated and complex. The starting point prior to meeting with the attorney would be to prepare a list of assets, including investments, retirement accounts, insurance policies (death benefit as well as any cash value), real estate, and any business/practice interests.

Next, decide what you want to do with those assets: who should inherit them, who should manage your estate, and who should make significant decisions if you become incapacitated. This will provide a nice framework for the attorney to begin the process.UT

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