Is My Group Disability Insurance Coverage Enough?

Your employer may have group disability insurance (sometimes called  business disability insurance) available. As a physician or dentist, you need to determine if that coverage is sufficient to protect your finances and your family if you suffer an illness or injury that prevents you from working.

Your ability to earn an income is your most significant financial asset. Not having the proper protection in place if you become disabled can jeopardize this asset.

Think about this:

If you were to lose your primary source of income, what would happen? Are your financial plans around mortgage payments, debt management, retirement planning, and education savings going to fall by the wayside? Do you have a plan ready in case this happens to you?

If you cannot work due to an accident, injury, or sickness for an extended period of time, disability insurance can replace a portion (typically 60% to 65%) of your income. Keep in mind that the types of coverage and the length of time you’re unable to work impact this amount.

What is Group Disability Insurance?

Let's start at the beginning. Group disability insurance is typically covered by a company as an added benefit.

Group disability benefit plans are guaranteed issue, meaning if you apply for coverage, you will be automatically enrolled. There is little to no medical underwriting.

On the surface, your group disability insurance coverage can seem like a good benefit. However, group disability plans are generally not sufficient for most physicians.

A Cautionary Tale – Group Disability Insurance Doesn't Always Give You the Protection You Need

A client of ours asked if we would help one of his co-workers by reviewing and determining what his disability benefit would pay as his friend was now disabled.

One day his friend woke up and was blind in one eye and was experiencing issues in his other eye. It was evident his work would be affected, and he may be unable to return to work for the foreseeable future. He tried to decipher the policy details but admitted the wording was very confusing. He knew he needed to wait 180 days before being able to collect on a claim, but beyond that, he was unclear how much he should expect to receive and at what cadence.

After we reviewed his policy, it looked like the first 12 months he would receive disability benefits  based on a loss of earnings calculation. His benefit would pay him 60% of his income with a maximum monthly amount of $10,000.

Following 12 months of payment, his policy changed from a loss of earnings contract to a reduction in benefit definition. Without going through all the calculations, his monthly benefit would default to the "policy minimum" payout of $100 per month.

Do you think this client would have planned differently if he knew this before becoming disabled? Unfortunately for him, it was too late to do anything about it.

So, what more do you need to know about group disability insurance…?

Advantages of Group Disability Insurance

• Coverage is provided with little to no effort on your part.
• In many cases, the company will pay for benefits or provide them to you at little cost.
• No health screening is required to get insurance.
• Group coverage plans are guaranteed issue, meaning you should be enrolled if you apply for coverage.

Disadvantages of Group Disability Insurance

• Group disability coverage is based on your employment – if you change or lose your job, the policy may not be transferable.
• If your group disability coverage is paid with pre-tax dollars, any benefit you receive is taxed, reducing your monthly benefit.
• Group policies generally offer basic disability benefits with few optional features. They may not provide adequate coverage to those with large incomes.

Group Disability Insurance Features to Consider

There are various contract features you should be mindful of, including potential impacts of filing a claim:

• Employer-sponsored insurance policies are not intended to cover 100% of lost income. These policies typically replace around 60% of your income.
• A waiting period (or elimination period) can range from 30 days to 1 year. Typically, the most common group waiting period we see is 90 days. This elimination period is the time you must wait after becoming disabled to when you begin collecting benefits. Even with a 90-day waiting period, your first check will not arrive until 30 days after your waiting period is complete.
• Some group insurance contracts could count individual coverage that you have against your benefit.
• It is typical with group disability contracts in the first two years of being disabled to use a "your-occupation" definition and after two years change to an "Any Occupation" Definition.

What Should a Doctor Expect if they Become Disabled and Have Group Disability Insurance?

Before you need to use your group insurance policy, it is crucial to understand what coverage is available and how it would impact your finances if you could not work.

Let's suppose a physician is making $400,000 a year, and their employer provides a disability benefit of 60% of their income with a monthly maximum of $15,000.

• Using an income of $400,000/year, we would multiply this by 60%, which equals $240,000.
• Then we divide this by 12, which equals $20,000 per month.
• Will you receive all $20,000 per month?
• Based on your employer's group disability coverage, you will not receive the maximum monthly benefit of 60 % because the group policy is capped at $15,000 per month. But, wait, that's probably not $15,000 in your pocket …
• Remember, if your employer paid the policy premium, any benefit you receive is subject to tax.
• Based on a benefit of $15,000 per month and assuming a 30% tax rate, the monthly benefit you would receive would only be $10,500.

The question becomes, can you afford a 50% reduction in your pay and still be financially okay?

If the answer is yes, then perhaps you’ll be fine with only your group disability insurance. However, if your answer is no, then you should consider adding additional coverage to make up the difference.

Keep in mind that insurance companies limit their exposure based on how much disability they offer you. They want there to be an incentive for you to go back to work. Typically, you can get 60% to 65% of your pre-disability income covered with individual supplemental disability insurance, and that's on an after-tax basis.

In the example above, the doctor would be able to receive an additional $8,000 - $10,000 monthly benefit with a supplemental disability insurance policy. The benefit would not be taxable as you would be paying the premium personally with after-tax dollars.

So, what should you know about individual disability insurance…?

How Can You Protect Yourself with Individual Disability Income Insurance?

You can purchase an individual disability insurance policy to either supplement a group plan's shortfalls or provide coverage if a group plan is not available.

Features of individual coverage include:

• You own an individual disability income policy as long as you pay the premium.
• The amount you pay for individual coverage is generally locked in and will not change unless you opt for more coverage.
• Individual plans are portable, meaning you don't lose coverage by a job change.
• Individual disability policies offer more personalized benefits.
• Some type of medical and financial underwriting is typically required.
• Purchasing individual long-term disability insurance benefits is generally a 1-4 week process.
• As long as you pay for this coverage with after-tax dollars, you will receive a tax-free benefit.

Final Thoughts

Ensuring you have enough income to support your family in the event that you suffer an injury or illness and cannot work for an extended period of time is an essential part of any financial plan. One of the best ways to protect yourself as a physician or dentist is to have disability insurance coverage.

Our team is here to guide you and offer assistance. Let's talk about what disability insurance could mean for you and your future. Please reach out to our financial planners at SDT once you’re ready to buy disability insurance.

A disability income policy has exclusions and limitations. For costs and complete details of coverage call 704-557-8750.

CRN202304-281346