For most young physicians, their largest asset by far is a present value of all the income they have not yet earned. Many physicians neglect to view income as a tangible asset because it comes in small increments (paychecks), much of it goes out for monthly expenses, and it is earned over a very long period of time. Income is a measurable, tangible asset that represents the funding of your current AND future financial obligations. If you go into practice and earn $250,000 per year and work for 30 years, you own a $7,500,000 asset that will be responsible for funding nearly everything in your finances: Housing, food, retirement planning, college savings for kids, travel, etc. Without this single asset, the entire financial household would fall apart. Therefore, it is necessary to transfer the risk of losing income to entities that manage risk such as insurance companies, corporations, or trusts. Statistically, disability is one of the largest risks to this asset. According to the Social Security Administration, nearly 1 in 3 Americans will become disabled for a period of 90 days or more in their lifetime.
There are two main categories of disability insurance, group and private. The main difference between the two lies in how they manage risk.
Group disability insurance contracts are typically provided through your employer and are required to insure everyone employed by that group or hospital the exact same way, regardless of age, health, tobacco use, unhealthy habits, or other risk factors. For this reason, group disability plans manage risk by inserting language to the contract that reduces the likelihood of claims paying out. Typical language you’ll find in a group disability policy includes:
Any-Occupation Definition of Disability: This language requires you to be 100% totally disabled from ANY other occupation to receive a claim. In other words, if you can no longer perform the duties of a neurosurgeon, but you can flip burgers at the local fast food restaurant, the claim will not pay out.
Self-Inflicted Injury: This language refers not only to intentional self-harm, but also to placing yourself in any hazardous situation. This language will often limit or deny claims for injuries from sports, driving, or other accidents.
Integrated and Taxable: Group disability payments are typically reduced by any other income one earns from worker’s comp, social security, or any other sources. Benefits are also taxed as income.
Cancelable: The employer or group disability insurance company reserves the right to modify or cancel a group plan at any time. Employees have little or no say regarding changes to the policy.
Conversely, a private disability contract is written on an individual. Private disability insurers manage risk in a much different way than group insurers. As the policy is written on an individual and not a group, a private insurer manages risk by underwriting. Underwriting involves an insurance company’s evaluation of an individual’s medical history, labs, travel history, hobbies, and other areas that have the potential for risk to the company. The underwriting process is quite thorough because if there is a claim on an individual disability contract, there is an extremely high probability that it will pay out as the language in an individual contract is much more favorable than the language in a group policy. Typical language in an individual disability contract includes:
- Own Occupation: Private contracts specify that if the insured can no longer perform the duties of their own occupation or specialty, the insured will receive a disability claim in addition to any other income (with no limit) that can be generated from any other specialty, career, or job.
- Guaranteed Renewable and Non-Cancelable: Private disability contracts must be honored as they were written, meaning the insurance company can never drop you, change your coverage, or change your rates.
- Non-Integrated and Tax Free: Private disability claim payments are tax free and are NOT offset by any group benefits, social security, or any other benefits you receive.
- Residual: Private disability companies do not require 100% disability to receive a claim. As long as the insured has a 20% or greater loss of income or duties, the claim will pay out.
- Future Increase Option: Ability to increase a policy’s monthly benefit without medical underwriting.
- Riders: There are many optional benefits one can add to their disability policy, however it is important to work with someone that understands the cost/benefit of each individual rider.
Negotiating private disability contracts can be tricky without proper guidance. There is not a “one-size-fits-all” disability insurance company. Your specialty, age, sex, stage of practice, and a variety of other factors help us to determine which companies will be best. Physicians still in residency or fellowship need to secure their private disability contracts PRIOR to finishing training to maximize benefits and reduce cost. The independent financial professionals at Westmark Wealth Management will help you not only to shop out which companies will be best for your given specialty, but will also handle the underwriting and negotiation of the contract from start to finish with no additional cost to you.
If you had a home worth $7,500,000, it would go without saying that you would buy homeowners insurance so you wouldn’t have to write a check to replace the home should it burn down or be damaged. Your future income is no different. Disability poses a risk to your financial future. You have sacrificed several years and thousands of dollars to get the training that will allow you to earn the substantial income you deserve. Spend the time now to make sure your financial future is secure and that your future income (your largest asset!) will be there for years to come.
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