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Disability Insurance

Patrick Alguire, MD, FACP
Director, Education and Career Development

Disability insurance is a product that replaces up to 80% of your gross income on a tax-free basis should an illness or an injury prevent you from earning an income in your occupation. Products from different insurance brokers vary and each must be studied carefully in order to make the proper choice for your circumstances. Never buy a policy simply because it is the cheapest, because the cheapest product may not provide the protection that you need.

You do need disability income. Seventy percent of people between the ages of 35 and 65 will become disabled for three months or longer. You probably have a life-insurance policy, but in fact, the odds of becoming disabled between the ages of 30 to 40 years are significantly greater than the odds of dying.

Disability insurance pays an income as long as you cannot perform the duties of your own occupation. This means if you are a critical care specialist and suffer injuries or an illness that prevent you from performing that function, you can still collect disability payments even if you take a temporary position as an administrator. This is known as the "own occ" definition. There are many disability policies that will not pay benefits unless you are unable to work in any occupation, or that require you to be confined to a hospital or at home. Do not purchase this type of policy.

Disability policies come with different elimination periods. This is the number of days you must be disabled before benefits begin. The shorter the elimination period, the most costly is the policy. Consider creating an emergency savings account that can cover your expenses for 60 to 90 days to help you through the elimination period. Typical waiting periods are 60, 90, 180, 365, and 730 days.

The disability benefit period also varies from policy to policy. The period defines the amount of time you are eligible to receive benefits. The period can range from just a few months to your entire life. Typical benefit periods are 2 years, 5 years, or your normal retirement age. The shorter the benefit period, the less expensive is the premium, but most people will purchase a policy that will provide benefits until retirement age. At retirement age, social security and pension benefits can be collected.

The amount of monthly benefit is directly related to the cost of the policy. You can opt for a policy that pays for "income replacement" rather than a flat monthly benefit. Income replacement pays the balance between the total benefit of the policy minus what you are making at an alternative job. For example, if the total benefit of the policy is $2,000 monthly and you are earning $1,200 per month at an alternative job, the policy will pay you the difference, or $800 per month. Income replacement policies are cheaper than policies paying a flat monthly benefit.

Most experts recommend that you should purchase a policy that can replace at least 60% of your after-tax pay, or up to 80% if you can afford it. If you purchase an individual disability policy, the benefits are usually tax-free. However, be aware that benefits paid by group disability insurance policies paid for by an employer are usually taxable. Use the Disability Insurance Calculator to estimate your monthly benefit needs.

"Non-cancelable" contracts guarantees that a company cannot cancel a policy or change the rates as long as you continue to pay the premiums. On the other hand, a "guaranteed renewable" policy guarantees that the terms of the policy cannot be changed, however premiums can be changed after a certain period. Finally, an "optionally renewable" product is one that can be cancelled by the company for any cause at the time of renewal, and may require that you have periodic physical examinations in order to be eligible for a renewed policy. Of course, the policy that provides the most coverage (non-cancelable) is also the most expensive.

Pre-existing medical conditions may affect the cost and availability of disability insurance. Some conditions may result in a higher policy premium, and others may be accepted with an exclusion amendment added to the policy. For example, if there is a history of a previous knee injury, the payment of disability benefits related to knee problems may be denied or excluded.

Even if your practice group provides you with disability insurance, you may need to purchase your own individual policy. Some group policies provide coverage only if you are injured on the job, or only for a very short period of time, such as 3 months or a year. If your group does provide disability insurance, it is important to read the policy carefully and determine if it provides sufficient, long-term coverage that can provide for your needs. If it does not, purchase an individual policy to fill the gap in your coverage.

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