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How to Fill the Disability Coverage Gap for Doctors With High Income

by Jason Zimmerman, CLU, CAP

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Long-term disability coverage is important for many occupations, but for physicians it’s particularly critical. Even a relatively minor accident or illness can interfere with their ability to practice medicine or perform surgeries. Many high income earning doctors are finding a serious gap between the benefits of traditional disability and the replacement of their true income

A physician at the prime of his earning potential has usually created a plan for growing his wealth; has a lifestyle dependent upon a certain level or income; and may have ownership in his practice. All are financial obligations that make the protection of income a crucial consideration.

Identifying the Gap

The first step is to measure the gap between the physician’s current income and the benefits their disability policy provides. A basic individual disability policy typically covers 60 to 65 percent of the current monthly income when a doctor starts practicing, but these policies also place a cap on monthly benefits — usually the most they may obtain is between $5,000 and $15,000 per month. As their income grows, their disability may not be able to continue to insure all of their after-tax income.  Thus, there will be a gap in protection and exposure.

How Traditional Group LTD Plans Discriminate Against the Highly Compensated

Example shown: Group LTD covers 60% of earnings up to $10,000 per month.

It’s also important to consider taxes. Generally, benefits received under an employer-paid plan are taxable, but if you pay the premiums using after-tax dollars, the benefits are tax-free. A 65-percent tax-free benefit would likely come close to duplicating after tax income (assuming the monthly limit is high enough).

High-end disability programs can fill the income gaps left by standard policies. These high limit contracts have features that include benefits of up to $100,000 per month, $1,000,000 lump sum payout and a key feature of guaranteed issue when obtained for more than 3 physicians in a group.

When you weigh the coverage options, here are the most important policy provisions to consider:

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Coverage amount. Look for a policy with a monthly benefit that’s sufficient to comfortably meet the physician’s monthly budget in the event an extended disability causes income to take a hit. The best policies offer maximum benefits of $50,000 to $100,000 per month or more and cover up to 75% of your current income.

Guaranteed Issue. High-end group disability programs may offer guaranteed issue policies, which cover participants without the need for a medical exam. This is a huge benefit for physicians groups whose members have pre-existing conditions.

Definition of total disability. The most comprehensive policies provide benefits if you’re unable to perform the “material and substantial” duties of your “own occupation.” Policies that provide true own occupation coverage pay full benefits even if you get work in another occupation and regardless of how much you earn. For example, a surgeon who injures her hand would be eligible for benefits even if she gets a teaching job at a medical school.

Residual or partial disability. Residual or partial disability benefits are critical since they can have a significant impact on earnings. Typically, benefits are triggered when an illness or injury causes your income to drop by a 15 or 20 percent.  Most of these policies pay a 50-percent benefit for the first six months to one year of a partial disability claim, although some base benefits on the doctor’s actual losses.

Recovery or transition benefits. These provisions recognize that even after the injured physician recovers from a disability, the impact on their earnings persists as they strive to rebuild their patient base.

Benefit period. High-end supplemental policies, particularly those that offer guaranteed issue, typically have benefit periods of five years. But riders are available that provide large lump-sum payments at the end of the benefit period. The best policies are non-cancelable (meaning premiums won’t increase) and guaranteed renewable throughout the benefit period.

Future increases. Look for a policy that offers cost-of-living adjustments and the option to purchase additional coverage without the need for a medical exam.

Lump Sum Benefits.  Lump sum benefits for permanent disabilities can be used to fund a buy-sell agreement, replace retirement plan contributions or purchase long-term-care coverage. Some policies can be converted into long-term-care policies at retirement age.

Not all disability policies are created equal. A high income earner like a physician shouldn’t assume that they are protected against financial loss just because they have a standard group or individual disability policy. Advisors should help them scrutinize the policy’s terms and consider acquiring high limit disability coverage if the current program fails to fulfill the financial plans created and provide the security desired.