Most physicians do not create a large amount of tangible wealth until their 40s and 50s. Before then, their greatest asset is the immense amount of education, medical knowledge and training in their specialties and the earning ability this enables.
A physician coming out of her residency/fellowship with roughly 30 working years ahead of her and a potential salary of $250,000 a year (not factoring in cost of living raises, potential increases in production, partnership track, etc.) has $7.5 million-plus in earning potential.
Aside from sentimental value, when you think about all of the things we insure in life (cars, homes, jewelry, boats), it would not be a catastrophic setback in the grand scheme of things if you had to replace a car out of pocket. But if a physician were unable to work in his specialty, it would be quite a different scenario to replace his $7.5 million in another occupation (if he were able to work at all).
The best way to protect your greatest asset of income potential is with true, own-occupation, specialty-specific disability insurance. There is not a “one size fits all” company or policy for physicians in the current marketplace, but there is a top tier of about a half-dozen companies that tailor their policies for physicians.
Look Closely at the Language
A disability insurance policy is built from the ground up, depending on what each particular physician wants to cover.
Protecting you in your exact job and duties within your specialty is a a huge part of a physician’s disability income protection plan. Be sure to reference the legal definition page of your disability insurance policies to review when exactly you would qualify for a claim. There are some companies that market medical occupation-specific coverage, but when you dive into the legal pages, it does not guard your greatest asset nearly as much as you would hope. When reviewing how a particular company defines the qualifications for “total disability,” the shorter the definition, the better. The fewer the loopholes and “outs” the company gives itself, the better. A close-to-perfect definition for a physician would be something like this: “If you cannot do the material and substantial duties of your own occupation due to any sickness or injury, you qualify for claim.” It’s when extra clauses are added on that coverage can be drastically reduced, such as “... and you cannot be gainfully employed or receiving income from another source” or “... and you cannot be employed in something for which you are reasonably educated.”
Other riders and language that should be strongly considered on a disability plan:
• Future insurability options. A medical specialist looking to protect her income but presently unwilling or unable to afford a large disability premium could purchase a disability policy that protects her current income with a future purchase option or future insurability agreement (different companies use different names). This gives her the guaranteed ability to increase coverage in the future. Once you have your initial policy locked in, you will never have to undergo health underwriting to be able to increase your coverage, which in most cases can be up to $15,000 a month in net income coverage.
• Residual/partial disability benefits. Many disabilities are not total and complete. The residual disability benefit feature would pay a monthly benefit should you suffer a partial loss of income. There are very few, if any, group long-term disability plans that have such a feature. Under most group plans, you must be completely and totally disabled and under the constant care of a physician in order to receive a disability benefit. Most policies begin to cover you starting at just a 15 to 20 percent loss of income.
• Non-cancelable/guaranteed renewable. I recommend securing this type of policy. This means as long as you pay your premium on time, the company cannot cancel your coverage or raise your rates. Given the importance of disability coverage and knowing that you will own the policy for many years, locking in your premium cost and coverage can provide real peace of mind and should always be a feature of your disability plan.
• Cost of living adjustment. This feature becomes extremely beneficial for disabilities that are longer than a year. It protects the benefit’s net purchasing power against inflation once you qualify for a claim. A common COLA on a physician’s disability policy is 3 percent.
• Exclusions. Ideally, insurance policies would not have loopholes, exclusions or preexisting exclusion riders. Coverage would be guaranteed under any and all circumstances. This is not always the case. If there are any issues in your health history, they may be excluded or given limited benefit options. Be sure to find out the extent to which the coverage is limited, as well as whether and when the limitations are reviewable if no further issues arise.
• Picking up where group coverage leaves off. A common mistake is assuming that your group or employer-provided coverage is enough. Group coverage typically covers emergency medicine physicians, for example, for a percentage of their income and then that is taxable when received. The typical group benefit is 60 percent of their income up to $10,000 a month. There are several issues with this. The first issue is the 60 percent income coverage; the second is that this income would be taxable when received because the employer was deducting the premiums on their behalf as a business expense. In reality, net-income wise, they are only covered for a smaller fraction of that percentage.
Another issue with group coverage is that it typically does not offer many of the other important riders that were previously mentioned. So it you are fortunate enough to have some group coverage, you should work with a financial professional to help calculate how much of a gap in your net income is left exposed.
With many physicians doing work at multiple clinics or practices under different employment situations (salaried/production, per diem, independent contracting), it is important to customize a plan for your pattern.
• Company selection. Go with a company that is highly rated by the major rating agencies (Standard & Poor’s, Moody’s, A.M. Best). This is a good predictor of a company’s longevity and ability to pay in the event of a claim.
Disability insurance rates are based on a number of factors: the quality of the definition of disability; the insured’s health, gender, age, state of residence, specialty and subspecialty; and what riders are added to strengthen the coverage. Ophthalmologists are considered a higher risk statistically than most other positions, even other physicians, due to the physically and mentally demanding nature of their work. They are usually put into a lower “medical occupation class,” which increases their rates. It is important to pursue coverage with a company that is competitive within ophthalmology.
It is best to use an insurance agent or financial advisor who is product- and company-neutral, who can represent your best interests in the marketplace and help you shop around without bias towards a particular company.
In the last decade, change has been the one constant in the disability insurance market. The top tier of companies are constantly jockeying for position to compete with one another. The main players in the industry are currently Guardian, Met Life, Principal, the Standard, Union Central/Ameritas and Mass Mutual. It’s impossible to say from year to year which company might be the best for a certain specialty or individual in terms of affordability and suitability.
Quality disability coverage typically costs 1 to 2 percent of your income to cover the other 98 to 99 percent of take-home pay. That’s a reasonable concession for the assurance and peace of mind that your greatest asset and millions of dollars of earning potential are protected. REVIEW
Mr. Ylinen is a financial professional with North Star Resource Group. The information provided here is general in nature and is not intended as specific recommendations. Please consult a financial professional for specific advice in relation to your individual circumstances.