Physicians Are Prone to Gaps in Disability Coverage

January 5, 2011
Setu Mazumdar, MD

In the third in a series of posts on the special considerations physicians have when choosing disability insurance, we'll look at three areas that insurance salesmen tend to overlook: Whether the policy is renewable, whether there are cost-of-living adjustments; and whether there is residual disability coverage.

If you’ve read my two previous articles on the special considerations physicians have when choosing disability insurance -- the first here and the second here -- you know that having a broad definition of disability (defined as not being able to work in your own occupation), an adequate benefit amount to match your personal expenses, and as long of an elimination period as you can get by with are all essential features of a physician’s disability insurance policy.

Once you’ve got those in place, you need to turn to these other important areas of your policy:

Renewability. This feature seems basic, but did you know that an insurance company can potentially cancel your disability insurance coverage if certain conditions are met? Or that it can increase your premiums? Imagine if this happened to you at the worst possible time -- right before you became disabled. To make sure this doesn’t happen, purchase a policy which does not allow the insurance company to cancel your policy nor allow them to increase your premium. Those policies are called “noncancelable” and “guaranteed renewable” policies.

Inflation Protection. Financial advisors and the media tout the benefits of stocks and real estate in protecting against inflation or hedging inflation. Most insurance agents have no clue about investing and they also don’t know that inflation protection is critical during a disability. Consider this: When is inflation protection in your life absolutely critical? I’d say during retirement. And one form of “retirement’” is a permanent disability. Since you won’t have a regular source of income, it’s arguable that disability is THE most important time when you need inflation protection. So make sure you add a cost-of-living adjustment (COLA) rider to your policy. While this can be expensive, it’s absolutely worth it. I even question why this is optional in disability policies -- it should be part of the standard policy.

COLA riders in disability policies will increase your monthly benefit amount while you are disabled, usually annually, based upon either a set inflation adjusted percentage increase or tied to the Consumer Price Index. Again, don’t insure without a COLA rider.

Residual Disability. Here’s another provision that should be standard in every disability policy, but isn’t. A residual disability is essential to have on any physician’s policy, but particularly for higher-earning physicians. With a residual disability rider, after a period of total disability (when you receive full monthly disability benefits), if you’re able to go back to work -- but not in the capacity you did before the disability and you make less income than you did before -- you will still get some disability benefits. It essentially protects against the possibility that you could go back to work but have a lower income, and can partially make up for the reduced income you have as a result of a recent total disability.

So there you have it. The essential features of a disability policy for physicians are:

• “Own occupation” coverage;

• Adequate monthly benefit amount;

• A reasonable elimination period;

• Noncancelable and guaranteed renewable policies;

• COLA rider; and

• Residual disability protection.

A lot of disability-insurance specialists get this wrong for physicians. If you’ve got a policy already, review it to make sure you’re adequately covered and approach your insurance agent about the gaps.

In future posts, I’ll update other features of disability insurance you need to know, but this is a solid start and should cover most of the things you need to have in your policy.

This week’s financial prescription: Protect yourself from gaps in your disability coverage.