There are plenty of common misconceptions about disability insurance:
- “Disability insurance pays me if I can’t work, regardless.”
- “My group disability will take care of me.”
- “My business partner’s DI coverage will fund our Buy-Sell agreement.”
- “I can pay my staff out of my DI proceeds to keep the doors open.”
Pay Attention! Not All Contracts are Built the Same
Understanding the key contract features can help you avoid the very thing you are trying to insure — loss of income.
The definition of disability and the number of ways a DI policy pays a claim is most important if there comes a time when you need to use the coverage you purchased. A strong definition of disability is, “if you are unable to perform the material and substantial duties of your occupation.” That’s it. This allows you to go to work in any other occupation and you still receive your claim payments from your previous occupation you are no longer able to perform.
For example, Dr. Brown is a neurosurgeon. He’s in a skiing accident and has damage to his fingers on his left hand. Even with proper rehab, he sustains permanent nerve damage. A pure own-occupation definition allows him to continue in practice, earn a high salary and still collect on his DI policy because he can no longer operate as a surgeon.
The definition of residual/partial disability can also vary. The best contracts will consider a 20 percent loss to be residual and will pay from 20 to 80 percent losses. Anything below 20 percent loss is considered full disability.
In addition, if you go on claim for a period of time and then return, and incur an immediate reduction in income, the best contracts will pay the difference until you have regained your previous income level.
A great DI policy pays in four ways: total disability, partial disability, catastrophic disability (cannot do two of the six activities of daily living) and supplemental (six times monthly benefit lump sum for cancer, heart attack and stroke). In addition, the better contracts will pay a presumptive benefit in a lump sum, in addition to the monthly benefit for loss of limb(s), sight and hearing. A good advisor can help you navigate the key contract features.
Don’t Get Lost in the Herd
Most of you have a Group Disability plan. For many of you, it may be the only coverage you own. Don’t get lost in the convenience of these plans. Here are the obvious advantages and some of the disadvantages of a Group DI Plan:
- Minimal cost to the employee
- Coverage is available for all eligible employees
- Easy to administer
- May cover up to 60 percent of base pay
- Only covers base pay and no incentive comp or K1
- Benefits are taxable when employer-paid
- Monthly caps can reduce the percentage of income replacement well below 60 percent for high-income earners
- Two-year own occupation definition of disability
- Benefits are reduced by SSDI and workers comp
- Cost of the plan goes up each renewal and can be significant if there are claims in the group
The answer to a comprehensive personal disability plan is to supplement the group coverage with a quality individual plan. That way you cover all income, not just base salary. The benefits are received income tax-free, and the policy pays in four ways (discussed earlier) and includes own occupation definition to retirement age.
Benefits and premiums are both guaranteed to retirement age. Done properly, your guaranteed coverage increases overtime to keep up with inflation. Here’s a big one: the contract is guaranteed to be portable, and the discount follows you no matter where you work.
Don’t Just Take Our Word for It
Many professionals have been grateful they had income protection when facing difficult and unexpected illnesses and injuries:
Note: This is a sampling of all physician claims. The information above is for illustrative purposes only. It is not a complete representation of circumstances surrounding the claims, a representation of all claims or a promise to pay any specific claims.
This Isn’t Working; It’s You, Not Me
Disability Buyout Coverage is all too often either ignored or misunderstood. Many of you are likely in some form of partnership or ownership relationship and have executed a Buy-Sell Agreement.
All properly written agreements include a clause for this protection. The top three events that trigger the execution of a buy-sell agreement are death, disability and divorce. Yet only 2 percent of buy-sell agreements are funded with disability buyout insurance.
Typical buy-sell language states that after 365 days of disability the sale of that partner’s interest is triggered. A Disability Buy-Out policy would pay a tax-free lump sum after the 365 days to the other owner/owners to use for the buyout of the disabled owner’s interest.
This works very much like life insurance and provides a smooth buyout of a partner that can no longer work and contribute to the practice or business. The only real difference is the waiting period to allow the disabled partner time to recover and get back to work if that is still possible.
The risk of disability is far greater than the risk of death and yet the funding for this risk is seldom put in place. And as a function of the insurance budget, this is a very reasonable cost. Again, a professional advisor can walk you through the process and coverages quite easily.
Turn the Lights Back ON! My Staff Is in There!
Individual DI policies are used to protect your income for your personal fixed expenses (family, mortgage, food, bills, etc). Business Overhead Expense is used to protect the expenses of your business if you can’t work for a specified period of time.
If your business/practice does not have other employees/physicians capable of doing your duties, and contributing to the overhead costs, you need BOE. Most practices allocate a share of those costs equally among the staff physicians based on their percentage of ownership and cost commitment.
If you are expecting your personal DI coverage to pay for these costs you could be coming up woefully short on your personal living expenses.
BOE would pay up to $50,000 a month of overhead expenses:
- Staff salaries
- Utility bills
- Employee benefits
- Equipment loans
- Insurance premiums
- Leased equipment
- Office supplies
- Professional fees
In addition, if you are a high wage earner it is possible that domestic coverage will only be able to protect you for 50 percent loss or less. But you can also obtain additional monthly coverage through specialty programs. Again, your professional advisor can share that option with you.
Bottom line, have one of our professional advisors do a full review of your overall disability risks, and the most cost-effective ways to mitigate them.
Article contributed by Cobbs Allen. Cobbs Allen is an official partner with the Medical Association. For more information about disability insurance, contact Cobbs Allen at (800) 248-0189 or www.cobbsallen.com.