Close-Up: Disability Insurance

Physician's Money Digest, February28 2005, Volume 12, Issue 4

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Disability Insurance: An insurance product designed to replace anywhere from 45% to 60% of your gross income on a tax-free basis should a sickness or illness prevent you from earning a living.

Do you own a home? If you do, chances arethat you, like almost every other homeowner,have homeowner's insurance. Butas Ric Edelman, financial planner andauthor, asks in an online article, "How many homeson your block have ever burned down?" Chances arethat none have, because statistics show that the oddsof that happening are only 1 in 1200.

Now consider disability insurance. Edelman notesthat 48% of all mortgage foreclosures in this countryare caused by disability. Yet, only 15% of all workershave disability insurance coverage. And the odds ofexperiencing a disability are significantly greater thanyour home burning down. According to actuarial statistics,there is a 95% certainty that at least one of fivepeople age 45 will suffer a long-term disability beforereaching age 65. Are those the kind of odds you wantto gamble against?

Disability Insurance Necessity

As a physician, you're well aware of the advancesmodern medicine has made. People are living longer, butthat doesn't mean they're living injury free. Edelman'sarticle points out that a generation or two ago, a workerwho suffered a heart attack on a factory floor wouldlikely have died. Today, paramedics and emergencymedical technicians are on the scene in minutes, stabilizingand transporting the worker to the hospital.Sometimes these technicians even install pacemakers onthe scene. The worker lives, but is likely to miss sometime from work. Without disability insurance, howwould the family's bills be paid?

For many people, the reason cited for not purchasingdisability insurance is that it's too expensive. Intruth, disability coverage is expensive. Annual premiumscan cost 1% to 3% of your yearly salary. Butthere's good reason for that. Consider the followingexample from Edelman's article.

Imagine that a male nonsmoker age 35 purchased a$250,000 life insurance policy. If that individual died,the insurance company would pay his survivors$250,000. However, if that same individual purchased a$2000 disability income policy and suffered a disability,the insurance company could owe him $2000 eachmonth for up to 30 years. In other words, $720,000compared with the $250,000 if he died. That's part ofthe reason why disability insurance is so expensive, butit also highlights the importance of having it.

Policy Requirements

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It's easy to think that you should have enough disabilitycoverage to replace 100% of your income.However, not only will no insurer provide those benefits, it's not necessary. Writing in (Harper Business; 2000), Stephen Pollan pointsout that some of your expenses will decline if you'redisabled. You won't have the expense of commuting toand from work, and you'll likely spend less on diningout and entertainment. Also, if you're a physician payingyour own premium, the benefits are tax-free, animportant point to remember when calculating howmuch of a benefit you need.

Pollan also recommends that a disability insurancepolicy be guaranteed renewable, or guaranteedrenewable and noncancelable. In the first instance,your insurance cannot be discontinued as long as youpay your premiums. In the second, the policy cannotbe canceled and the premiums cannot be increased. Inaddition, avoid any policy that is labeled "class cancelable."That means the insurer can cancel all policiesthat fall into a particular category, such as allpolicies held by physicians.

Perhaps the most important element to a disabilityinsurance policy, particularly for physicians, is that thepolicy include "own occupation" coverage. This type ofcoverage provides full benefits if you are disabled to thepoint where you are unable to perform the same level ofwork you did before your injury. This type of coverageis expensive, but without it a surgeon who could nolonger navigate the intricacies of open-heart surgerycould still be sent back to work if they were able tosweep up the operating room floor.

Shopping for a Policy

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Not all disability insurance policies, or the companiesthat issue them, are created equal. A recent articlein magazine offers the following helpfulhints when purchasing a policy:

• Check the financial statement of the insurancecompany you're considering. Make sure that it'sfinancially sound and that the company should beable to continue paying out claims.

• Consider purchasing residual or partial disabilitycoverage. It might be that when you do return towork, you do so on a reduced schedule. Partial disabilitycoverage would pay a proportionate benefitbased on the time you are unable to work.

• Purchase appropriate riders that adjust yourpolicy for inflation. If you purchase the original policywhen you're in your 30s and don't need it untilyou're age 55, that $3000-a-month coverage benefitmight not go as far.

• A future-purchase option will allow you to buymore coverage as your salary rises or your businessexpands and grows.

Pop Quiz

1) How many people age 45 are likely to suffer a long-termdisability before age 65?

  1. One of five
  2. Two of five
  3. Three of five
  4. None

2) Annual disability insurance premiums can costbetween

  1. 4% and 5% of annual income
  2. 1% and 3% of annual income
  3. 5% and 10% of annual income
  4. 10% and 15% of annual income

3) Disability coverage should replace

  1. 100% of annual income
  2. 75% of annual income
  3. 60% of annual income
  4. 50% of annual income

4) It's very important that disability insurance policiescontain the following rider:

  1. Own occupation
  2. Residual coverage
  3. Inflation
  4. All of the above

5) Make sure the insurance carrier you're considering is

  1. Conveniently located
  2. Financially sound
  3. Competitively priced
  4. Recommended by a friend

Answers: 1) a; 2) b; 3)c; 4) d; 5) b.