Physician Disability Insurance


Last posted by Larry Laskin |

What You Should Look For

Are you a physician looking for disability insurance? If so, are you confused yet? If you have done any research you probably are.

How do you know which company to work with? How long of a waiting and benefit period should you choose? What optional riders do and don’t you need? How much does disability insurance cost? These are all things to consider, but with all of the companies out there, it can be a little stressful. I will help make the decision as simple for you as possible.

What are the main points to look at when picking a policy?


1. What is the strength of the company?

After all, the policy is only as good as the company’s ability to pay claims. But how do you compare companies ratings? There are four major ratings agencies; A.M. Best, S&P, Moody’s and Fitch. The problem is that they all use different letters in regards to how each insurance company is rated. For example, the top rating for S&P is AAA and for A.M. Best it is A++. This can make comparing somewhat confusing.

2. I prefer to use what is called a Comdex ranking.

This looks at the ratings from all four major ratings agencies and compares the insurance companies to one another in terms of financial strength. It uses a score of 1-100 with one being the lowest and 100 being the highest. If an insurance company has a Comdex score of 90, that means that they have better ratings than 90% of all rated carriers. I recommend that you go with a company that not only has very high ratings, but also offers an excellent quality product.


3. How much coverage do you need?

I usually recommend that a person get as much disability insurance coverage that they qualify for based on their income. After all, for most people, their biggest asset by far is their ability to work and earn a living. No insurance carrier will replace 100% of your income anyway, so no matter what, you will not be able to replace all of your income.

Many doctors, especially those just starting out in practice will tell me that they don’t need the entire amount that they are eligible for. They may have been used to living on very little income during residency and could go back to eating Ramen Noodles if they need to. While this may seem logical, who potentially would really want to live like that for the rest of their lives.

Another factor to consider is that while a small dollar amount might be sufficient now, what happens as their careers grow and they are earning more money. Most people, as their incomes rise, tend to increase their lifestyles as well. Bigger houses, new cars, more vacations, etc.

What about when you start a family? You now have two mouths to feed, then the children come along and you have even higher expenses. Saving for retirement, college funding, etc. For many people, expenses tend to increase as they get older, then decrease some after the kids are grown and out of the house.

These are all factors to consider when determining how much coverage you need. Remember that you can always decrease the benefit in the future without penalty if you want to.


4. How long of an elimination (waiting) period should I consider?

While most people purchase a policy with a 90 day elimination period, there are other choices. Some carriers offer a 60 day waiting period, but the premiums are typically much higher. Sometimes almost double the cost of a 90 day waiting period! Alternatively, you can go with a higher waiting period such as 180 or 360 days, but the savings are not that drastic. Obviously, looking at the premiums for all of the options will help you make that determination, but for most, the 90 days elimination period makes the most sense. For the majority of people, they could get through the first 90 days of a disability without too much of a dent to their finances, even if that had to borrow money. It is the long term disabilities that can really be financially devastating.


5. What benefit period should I choose?

5 years, 10 years, to age 65, 67, 70 or lifetime? The age 65 benefit period is the most common, although many younger people are choosing the age 67 period as they will not qualify for Social Security benefits until then. There is also the lifetime option. This one is a little tricky and the premiums are usually much higher than the age 65 benefit period.

With most carriers that even offer the lifetime option, you must purchase this rider before age 45. After that, it will not be available. The way this works is that if you become totally and permanently disabled before age 45, you will get the entire monthly benefit for as long as you live. If you become disabled after age 45, you will collect your entire monthly benefit until age 65, then a lower monthly benefit after age 65 for as long as you live. How much you would collect after age 65 would depend on when you became disabled. For example, if you had a $10,000 monthly benefit and became permanently disabled at age 55, you would collect $10,000 until age 65, then $5,000 for the rest of your life.


6. What riders should you choose?

There are many options available to pick from. Some are more important than others, depending on when you purchase the policy. Here are the most common:


Residual Rider

The residual rider does two things. First, it pays you part of your monthly benefit if you are partially disabled. How much you collect depends on the carrier’s residual disability definition. For example, with Guardian’s Provider Plus contract, if you were disabled and had a partial loss of income, for the first year, they would pay you a dollar for dollar loss. After that, it would be based on the percentage loss of income that you incurred (that is the way most carriers pay from the beginning of the disability). This difference could potentially mean the difference in payment of thousands of dollars during the first year of a partial disability.

The second thing that the residual rider includes (with some carriers only), is what they call a recovery benefit. Some companies have an unlimited recovery benefit, some limited and some do not include it at all. What does this mean for you? It means that if you were disabled, then recovered and went back to work full time, but are earning less than you were before you were disabled, you would continue to collect part of your monthly benefit. For example, let’s say you are making $200,000 annually, you get disabled and are out of work for two years. You recover and return to work full time, but now you are only earning $150,000. In this circumstance, you would continue to collect 25% of your monthly benefit, even though you are back to work on a full time basis. This is especially important to owners or partial owners of a practice.


Cost Of Living Rider

This rider helps your benefits keep up with inflation if you were to become disabled. On each anniversary of a disability, the benefits would increase by some percentage, depending on the carrier and option you chose at the time you purchase your policy. Some carriers have a flat 3% increase, others an increase up to 3% based on the Consumer price Index (CPI), and others have an increase up to 6%. Another major difference to consider is whether it is a simple or compound inflation protection. It might not seem like it would be a big deal, but it could mean the difference of hundreds of thousands of dollars for a long term disability. For example, let’s say you are a 35 year old with a $10,000 monthly benefit, benefit period to age 65 and the 3% COLA rider. You become permanently disabled. With the 3% compound COLA rider, you would have collected $5,679,000 by age 65. If it was a simple inflation rider, like some companies offer, the total payout would have only been $3,704,000! All because of one simple word in the contract (no pun intended).


Catastrophic Disability Rider

On the surface, this rider seems like a great deal. An extra monthly benefit on top of the base benefit for very little cost. But is it really that great of a deal? Let’s take a look. The definition of total disability on most good disability insurance policies is the inability to perform the substantial and material duties of your occupation. Some carriers, such as Guardian, go a step further for medical and dental specialties. With medical specialty language, a doctor or dentist can collect their benefits even if they are working in another medical specialty, as long as they are unable to work in their specialty. With the catastrophic rider, the definition of total disability is drastically different. The definition is due to sickness or injury you are not able to perform the substantial and material duties of your occupation but only if due to the loss of two out of six activities of daily living (eating, bathing, dressing, toileting, transferring or continence), or a severe cognitive impairment.

When I was disabled in 2003 with incredible back pains, although it was very difficult to sit down, I could still do all of the activities of daily living. There are plenty of situations though that could allow you to collect under this rider. For example, a bad car accident or a severe illness.

Disability insurance is probably the most important insurance you will ever own. Make sure that you have the proper coverage. If you shop by price alone, you will more than likely be disappointed when it comes time for a claim.

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