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It is all too common in the emergency departement: a 25-year-old sustains multiple fractures from a motorcycle accident; a 40-year-old with no cardiac risk factors who has an acute MI. Every day, average people suffer unexpected injury or illness which requires them to miss work and substantially reduces their income. So why is it that as physicians our mentality is one of invincibility, that somehow we can escape the same common ailments that plague our patients? Missing work just isn’t part of our psyche. When was the last time you thought about the chances of a major disability destroying your career and your future income stream? The truth is, it’s all too common; according to the U.S. Census Bureau, nearly one in five Americans will become disabled for a year or more before the age of 65. To protect your number one asset, your ability to earn a living, you need to know the facts (and the myths) about disability insurance.

Myth #1 It’s too expensive

If we assume that the average emergency medicine physician makes $175,000 in annual income, a disability income insurance policy with the essential elements would cost less than 2% of annual income for a healthy 30 year old. While this is more expensive than term life insurance, it accounts for the greater likelihood of disability over death (according to the National Association of Insurance Commissioners, people in their 30’s are three times more likely to become disabled than die). The price must also be compared to the future income you are protecting. A 35-year-old EP with a permanent long term disability would lose over $5 million in future income not accounting for inflation or lost investment income.

Myth #2 My spouse’s income will suffice

If you have the enviable position of having a spouse with a significant income, disability income insurance may not seem to make sense, since any potential disability may be overcome by a second income. While this would certainly soften the blow, in general it’s a truism that with increased income comes higher expenses. Unless you have a significant amount of savings (well into the seven figures), the second income source most likely will not cover the added medical expenses and loss of income. Furthermore, it’s likely that you will stop contributing to your retirement funds, and at worst may have to liquidate those funds to cover needed expenses.

Myth #3 I’ll just get disability from Social Security or my group policy

Don’t count on Social Security or your group disability insurance policy (if you are an employee of a hospital or group) to bail you out. According to Social Security you are disabled if “you cannot do work that you did before and we decide that you cannot adjust to other work because of your medical condition(s). Your disability must also last or be expected to last for at least one year or to result in death.” This is the strictest definition of disability and essentially precludes you from working in any capacity. Group insurance policies also have stricter definitions of disability than individual policies. While group policies may seem cheaper, the biggest drawback to them is the fact that benefits from a group policy are taxable whereas benefits from an individual policy are not.

What to buy: “Own occupation” policy

When you purchase individual disability income insurance, the most crucial decision is to define what constitutes a disability. Always buy disability insurance which has a very liberal definition of disability, commonly referred to as an “own occupation” policy. Essentially, this means that if you are unable to work as an emergency medicine physician, you can still work in some other occupation, whether it’s family practice or even some nonmedical career, and still collect disability benefits. These policies are much less common than they used to be and now insurance companies will modify this definition to mean own occupation for a limited amount of time, after which point the definition of disability changes to any occupation, meaning that you cannot receive benefits if employed in any other occupation.

How much coverage do you need?

Insurance companies limit the amount of coverage to roughly two-thirds of your monthly income to a maximum of about $10,000 for EPs. So an EP making the average $15,000 in monthly income would be able to qualify for the maximum disability benefit. However, one of the greatest benefits of individual policies is that benefits are received income tax free as long as you don’t deduct your premiums as an expense.

It’s been shown in several studies that over the past decade physician income does not keep pace with inflation, so it’s vital that you purchase a policy with a cost of living adjustment. Essentially, this feature increases your monthly benefit every year you are disabled to adjust for loss of purchasing power due to inflation.

A renewable resource

A policy which is noncancelable and guaranteed renewable is a must for physicians. This means that the insured physician can automatically renew the policy every year and that the insurance company cannot change the monthly benefit or the premium.

Partial coverage

Finally, in the event that you can still work part time but with a reduced income, a policy which pays residual disability benefits will pay you a benefit equal to the lost income. So, for example an EP normally making $10,000 per month who becomes disabled but later can work part time making $ 5,000 per month would receive a residual disability benefit of $ 5,000 per month.

Setu Mazumdar, MD, practices emergency medicine in Atlanta, GA and is a member of the National Association for Personal Financial Advisors (NAPFA).
 

Comments   

# Bill Rice 2008-01-21 20:50
Dr. Mazumdar,
There are several companies currently in the market of providing disability coverage to physicians. Do you have any advise on which companies have the best policies?
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# Setu Mazumdar 2008-01-22 14:12
Probably the best way to find an appropriate disability policy is to work with an independent insurance agent who has experience with several different insurance companies. That way he can shop around for the best rates and is not tied specifically to one company. Keep in mind that the cheapest policy is not always the best policy. You should make sure the insurance company is highly rated by at least two ratings companies--that way there is less chance (though not zero) of the company going out of business. MetLife and Guardian are two excellent companies for physicians, but own occ policies have become more restricted over the years. Make sure you have quotes from several carriers and read the specifics of each policy to make appropriate comparisons. Thanks.
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