Over the last few columns we’ve talked about long-term disability and its importance to physicians. After all, the practice of medicine is a personal service profession. Lose the ability to perform your job and you’ve lost most of your value to your firm — whether you’re an associate, or an equity owner.
We initially discussed the importance of the definition of disability and described the “Own Occupation” definition. Under that, an employee, physician or otherwise, is generally defined as being disabled so long as he or she is unable to do the job he or she was doing on the date of her disability. We talked about the importance of evaluating plans in which the “Own Occupation Period,” the period of time that definition was applicable, was longer for the physicians in the firm that it was for the non-physicians.
In the second article we talked about how some carriers use the traditional definition (“is unable to perform each of the Main Duties of his or her Own Occupation”) as a potential way to avoid paying a claim. We suggested that an alternative exists: a contract that says “is unable to perform one of the Main Duties of his or her Own Occupation,” will assure more likely payment of benefits.
But what happens when, as the old saying goes, you’re “a little bit pregnant?” That is, when you’re partially disabled. You can do some of the job or you can do it some of the time, but you can’t do all the duties you used to do. In fact, that’s a consideration for physicians in particular because there really are a lot more partial disabilities than there are total disabilities.
Here’s how it usually works. If you are partially disabled (whether you’ve first had a period of total disability or not), for the first 12 months of that partial disability most carriers will add enough disability benefit to your regular pay so that — between earned income and benefits — you end up receiving 100% or even 105% of what your pay was before you were disabled. You don’t have to see any real reduction in family income.
Some carriers extend that to two years, and one even pays you up to 100% of your income forever. (That sounds good, but the 100% they’re referring to is the income you earned before you were disabled — that cap on benefits is never adjusted for inflation.)
After that initial period of one or two years (usually called a “work incentive” period or something like that), you revert to the more traditional way of collecting disability: your benefit, as a percentage of the maximum you can receive, is proportionate to your salary loss as a percentage. That is, if you lose 30% of your income you get 30% of the disability benefit you would have received for total disability. Lose 50%; get 50%, and so forth.
Remember, you won’t get 100% of your income if you’re totally disabled — it’s more like 60%, so we’re talking about a fraction of a fraction. So you will see an erosion of income of some sort, but you’re not likely to be totally destitute.
For example, with a 60% replacement of income for a disability, a young internist who makes $120,000 would get $72,000 if totally disabled. If he loses half his income he gets half the benefit he would have gotten if he had lost all his income. So when half of his salary ($60,000) is added to half of his 60% disability benefit (50% of $72,000 is $36,000) he’ll still make $96,000 — 80% of what he was making before becoming disabled. A loss but not a tragedy.
But what about the highly paid professional? Assuming the maximum monthly disability benefit is $10,000, if a $300,000 per-year surgeon returns to work at 50% of earnings ($150,000), he’ll get 50% of what he would have gotten if totally disabled. Since the maximum benefit is $10,000 a month, he’ll get half that, $5,000 a month, $60,000 per year. That plus his $150,000 earnings brings him to $210,000 — 70% of pre-disability income.
But wait! That’s a lower percentage benefit than the $120,000 employee received. That lower paid employee got 80% of pre-disability income, but the arguably more valuable employee gets 70%. Do you really want a young generalist getting better relative benefits than a senior specialist?
At least one carrier has creatively solved this by focusing not on the percentage loss of income but on the amount of lost income. This carrier pays the lesser of the maximum benefit or 70% of lost income (assuming no other offsets).
So the $300,000 employee earning half of his income has lost $150,000 of income; forget that it’s 50% of anything — it’s $150,000 of cash. He then would receive 70% of that amount, or $105,000. Not $60,000 as under the proportionate income formula, but $105,000, which is $45,000 more than traditional plans. Add in the remaining $150,000 of income, and his total is $255,000, or 85%.
Not only does this formula work for the highly paid, upper-income wage earner, it also is generally better for middle-income workers, too.
Remember what we said at the beginning of this series of articles: unlike health insurance or life insurance or dental insurance, disability is the only employee benefit coverage that’s “open to interpretation.”
The decision you make today when purchasing your coverage can come back to haunt you in the future when a senior physician suffers a stroke, so think long and hard before signing that contract.
Jim Edholm is president and founder of BBI Benefits of Andover, Mass. BBI has been guiding Massachusetts employers to cost-effective benefit selection and design for more than a quarter century. More information is available by emailing Jim at JimEd@bbibenefits.com or calling (978) 474-4730.