Disability Income Insurance: Frequently Asked Questions
What would you do if you were injured in an accident or became ill and couldn't work? How would you and your family pay your bills and daily living expenses? As a medical professional or business owner, what would happen to your practice or business? If you are asking yourself these questions, the purpose of this guide is to provide you with information to make a reasonable choice in acquiring disability insurance coverage.
1. Why do I need Disability Insurance?
2. I want to provide coverage for myself as well as some key employees. Do I have to provide coverage to everyone?
3. I have Group Disability Insurance. Why do I need Individual Disability Insurance?
4.I have coverage through my specialty association or business trade group. Is this sufficient?
5. How does the carrier determine if you are disabled?
6. What happens to my practice or business if I become disabled?
7. What affects the price of disability insurance?
8. How are the disability benefits taxed?
9. What should I look for in the carrier besides how well the policy is written?
10. Who should I buy coverage from?
11. Can I rely on Social Security or Workers’ Compensation?
12. How much coverage can I receive?
13. I am a Resident (or Fellow). What should I consider?
Why do I need Disability Insurance?
A 30-year-old female has a 56.6% chance of becoming disabled before 65 and a 30-year-old male has a 33.1% chance of having a disability before age 65. Most would not go without home or life insurance, but odds are greater that you will experience a loss due to disability than many other types of incidence. Additionally, losses incurred during disability can easily run into the hundreds of thousands, if not millions of dollars. It could very well be your most substantial exposure
A long-term disability is one that lasts 90 days or more. Based on a 30-day elimination period for top class: 1985 CIDA and 1980 CSO. Numbers vary by occupation and elimination period.
I want to provide coverage for myself as well as some key employees. Do I have to provide coverage to everyone?
No, disability is not like health insurance. You do not have to provide disability insurance to every employee. Through a Qualified Sick Pay Plan (QSPP), or Section 105 plan, you can establish a plan to provide coverage for whomever you wish. A QSPP is a simple arrangement that allows a business to continue paying some portion of an employee's wages during disability--and deduct the payments as usual. Any entity (corporation, partnership, professional corporation or sole proprietorship) can establish such a plan; but if you wait until the key employee becomes disabled to do so, it will be too late. For the benefits to be considered wages, the IRC says the company must establish the plan before an employee becomes disabled [see E. W. Chism Estate v. Commissioner, 322F. 2nd 956 (9th Cir. 1963)].
I have Group Disability Insurance. Why do I need Individual Disability Insurance?
There are three very important reasons that you should consider an individual policy if you have group coverage. The company more than likely owns the policy, which means if you leave you cannot take it with you. There is no Cobra for disability insurance, so if you leave your current place of work and you have a preexisting condition (such as skin cancer or angina) it would be very difficult if not impossible to replace the group coverage.
Second, if the company is paying for your coverage, more than likely you are not claiming the benefit as income. As a result, your benefit would be taxed, effectively giving you a 30-40% paycut from your current earnings. Could you and your family survive on a 40% pay cut?
Lastly, if you are a highly compensated individual, most group benefits are capped between $6,000 and $10,000, leaving you with an additional shortage on top of the haircut that you will take on income tax.
I have coverage through my specialty association or business trade group. Is this sufficient?
It may be, but check to make sure of a few things. Does the policy cover your “own occupation” specialty? Is the policy non-cancelable? Is it guaranteed renewal? Is the policy portable? If the answer to any of these is no, you should seriously consider other options. Most association policies are dependant upon the association and the state that they are written. In most instances, the premiums can be raised and the policy cancelled with little notice.
How does the carrier determine if you are disabled?
Carriers have varying definitions of disability. All policies are not equal. They can vary from defining disability conservatively as not being able to perform “any occupation” to the most stringent definition, “own-occupation” in your own specialty.
What happens to my practice or business if I become disabled?
There is coverage referred to as “Professional or Business Overhead” coverage that enables you to pay the expenses of your practice or business, such as employees, electricity, rent, while you are disabled. This keeps you, the business owner, from having to start from scratch when you return from disability leave, or gives you an opportunity to sell the business if you are unable to return to work.
What affects the price of disability insurance?
Generally speaking, increases in age, benefit amount, benefit period, or optional riders (such as an inflation adjustment or part time income riders) will lead to higher premiums. Shorter waiting periods carry higher premiums. Females usually also pay higher premiums as do tobacco users. A more liberal definition of disability will also cause an increase in the premiums. There are discounts for multiple lives and associations. These discounts can be substantial, particularly for women.
How are the disability benefits taxed?
It depends on whether the premiums are paid before taxes or after taxes. Generally speaking, if your practice or business pays the premium “pre-tax” your benefits will be taxed. If you pay the premiums “after-tax,” your benefits will be tax-free.
What should I look for in the carrier besides how well the policy is written?
You should look for a strong carrier to cover your income. Rating agencies such as AM Best and Standard and Poors can be used to judge financial health.
Who should I buy coverage from?
You should look for an independent, general insurance agent that can offer you multiple lines. You do not pay more purchasing a policy through a general agent and using a general agent can in all probability help you find the best value in the market that best suits your needs and specific occupation.
Disability is NOT A COMMODITY. Agents that work for one carrier usually have only one solution that may or may not fit your needs.
Death vs. Disability between
the Age shown and Age 65 |
Age |
Death |
Disability |
25 |
24.1% |
34.8% |
30 |
23.5% |
33.1% |
35 |
22.8% |
31.3% |
40 |
21.8% |
29.1% |
45 |
20.4% |
26.3% |
50 |
18.3% |
22.6% |
55 |
14.9% |
17.6% |
60 |
9.3% |
10.6% |
1985 CIDTA, male, 30 day elimination
period, top occupational class,
and the 1980 CSO. |
Can I rely on Social Security or Workers’ Compensation?
Qualifying for Social Security benefits is very difficult because the disability must prevent you from doing any kind of work - not just your usual job. Even if you did qualify, 57% of Social Security disability applications are denied at the first decision level.
The maximum payment in 1998 for an eligible 30-year-old earning $68,400 or more is barely $1,568 a month.
Worker's Compensation only covers job-related sickness or injury. It will not help you if you become ill or injure yourself off worksite. In addition, these benefits are limited.
How much coverage can I receive?
As a general rule, carriers will give you up to 60% of your salary, capped at $10,000. There are, however, methods of procuring higher amounts if your income if you are a highly compensated individual.
I am a Resident (or Fellow). What should I consider?
You are starting at the right time. The younger you are, the less expensive the coverage is. There are many carriers that are willing to insure you now and give you a level of coverage based on your future earnings. Policies can be structured in many ways to make sure that it is affordable for you. It is critical that you consider coverage early because you have just made one of the largest investments of your life in your medical education and you should protect that investment from a disability that could strip you of your ability to earn an income.
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