You are a young eager physician finishing your residency program and transitioning into practice. You have narrowed your opportunities and have been presented the following two contracts:
- Contract A has a salary of $400,000 and,
- Contract B has a salary of $392,000.
All contract details are the same except for the following:
- Contract A ($400,000) has a limitation stating if you were to become sick and unable to work, after 90 days, you will not get paid.
- Contract B ($392,000) has a similar limitation stating if you were to become sick or unable to work, after 90 days, we will pay you $8,000 until you are able to return to work.
Which contract would you choose?
Your answer to the above question illustrates your risk tolerance relating to your income. If your income is not necessary, then you shouldn’t have to protect it. However, most individuals we work with are reliant on their income and therefore have disability income insurance.
When comparing disability income insurance, we believe there are four important aspects to consider: contract, company, price, and agent. This article intends to focus on explaining the contract.
WHEN AND FOR HOW LONG WILL A CLAIM BE PAID
Disability payments begin after a Waiting / Elimination Period ends. This is the time frame for which you are responsible. No benefits accrue during the waiting period. Industry standards are 90 and 180 days, but you may consider tailoring your Waiting Period to the amount of liquid savings you have to cover bills. If you choose a 180 day Waiting Period, but don’t have sufficient savings to cover your mortgage payments for 6 months, the policy isn’t going to do what you intended for it to do.
The real definition of disability is simply being unable to perform main duties of your job due to an accident or illness. Please note, it does not have to be CAUSED by work (that’s a Worker’s Comp issue) it just must prevent you from being able to work.
A Disability can take many forms:
• Some disabilities are TOTAL, meaning you’re not able to work at all
• Some disabilities are PARTIAL, meaning you can work either part-time, or perform partial duties
• Some disabilities are TEMPORARY, and allow for full recovery
• Some disabilities are PERMANENT (e.g.: loss of limb or permanent paralysis)
While some people say they only need coverage if they were totally disabled, most people recognize that they are as likely to be Partially Disabled, either by the amount of TIME they can work or the specific DUTIES they are able to perform.
It’s important to have a policy that covers both Total AND Partial disabilities, and to understand the calculations used for payments if you return to work.
RECOVERY BENEFIT
Most carriers pay a proportionate percentage of your Monthly Benefit Amount, based on your loss of income if you become partially disabled.
While some people say they only need coverage if they were totally disabled, most people recognize that they are as likely to be Partially Disabled, either by the amount of TIME they are able to work or the specific DUTIES they are able to perform.
It’s important to have a policy that covers both Total AND Partial disabilities, and to understand the calculations used for payments if you return to work.
Most carriers pay a proportionate percentage of your Monthly Benefit Amount, based on your loss of income if you become partially disabled.
MENTAL & NERVOUS CLAIMS
In 2014 the Council for Disability Awareness published a study showing 8.3% of all new long term disability insurance claims were mental or nervous claims.
Some occupations are clearly more stressful than others and we would venture to say that an anesthesiologist, emergency room physician, anesthetist or pain management physician has a bit more stress. Some occupations do have more mental and nervous claims than others simply because of the deep stress associated with having patients’ lives in your hands every day.
RIDERS TO CONSIDER
You can customize your contract with riders to expand your coverage and some carriers offer a total of 14+ riders (certain state limitations apply)! When choosing riders that are appropriate for you consider your needs, understand the purpose of the rider, and if there is an additional cost. Below are a few riders that we believe are worth considering:
- Future Insurability Option or FIO - Carriers typically offer optional riders that will increase the policy coverage amount without having to go through medical underwriting all over again.
- Own-Occupation - Your Occupation at claim time is based on your main work duties immediately prior to the start of your disability. Perhaps you are a physician. An occupational review of your main duties just prior to the start of disability shows that they were limited to those associated with nuclear radiology. For this claim, we would consider your Occupation to be a nuclear radiologist.
- Catastrophic Disability or CAT – catastrophically disabled means loss of speech, hearing in both ears, sight in both eyes, use of both hands etc. Additional Monthly Benefit paid if catastrophically disabled. Catastrophically Disabled means that, due to an Injury or Sickness: (a) you are unable to perform two or more Activities of Daily Living without Stand-By assistance due to loss of functional capacity; or (b) you require Substantial Supervision due to Severe Cognitive Impairment.
- COLA – cost of living adjustment rider may increase the amount of benefits payable by multiplying each monthly benefit payable by a percentage.
As stated previously, when comparing disability income insurance, we believe there are four important aspects to consider: contract, company, price, and agent. This article intends to provide general guidelines that you would want to consider when entering a long term disability income insurance contract. We hope you are able to use this article as a resource to help gain a full understanding of long-term disability income insurance.
To learn more about this topic, check out our podcast episode on Own Occupation Disability Insurance
Most insurance policies have clauses that allow the carrier to deny coverage under certain conditions or circumstances. Subject to underwriting.
These are the views of LongView Planning Partners and not those of MML Investors Services, LLC or its affiliated companies, and should not be construed as investment advice. Neither the named Representative nor MML Investors Services, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, MML Investors Services, LLC makes no representation as to its completeness or accuracy. The author is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.
Securities and investment advisory services offered through registered representatives of MML Investors Services, LLC, Member SIPC. 5100 Poplar Avenue, Suite 2300, Memphis, TN 38137 (901) 748-8888. Longview Planning Partners is not a subsidiary of MML Investors Services, or its affiliated companies. MML Investors Services, LLC does not provide tax planning services. CRN202509-2961780
