The Different Types of Disability Insurance
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In a previous post, blog sponsor Pattern, gave an informative introduction for physicians about disability insurance titled, “5 Things Physicians Need To Know About Disability Insurance.”
At my request, Pattern is doing a deeper dive into the various types of disability insurances out there and what you need to consider before going into a contract with one.
WHICH IS BEST FOR DOCTORS?
After you’ve invested an enormous amount of time, education costs, and postponed income, your time and education are your most valuable assets as you finish up your training.
But anything from a back injury, vision loss, or a hand injury will threaten those assets that you built through years of difficult work in training.
Physicians have a 30% chance of missing out on income because of an unexpected sickness or injury in their careers!
You may also have student loan debt, which can’t be discharged if you are injured and can’t work—even if you declare bankruptcy.
Disability insurance protects you against financial hardship if injury or illness prevent you from working.
But be careful when you look at disability insurance policies!
It’s a particular product that works in a unique way.
There are four main types of disability insurance.
In this blog post we will be comparing the most common types of disability insurance and explaining which is best for physicians.
TRUE OWN OCCUPATION
Under this type of disability insurance policy, an insured is considered disabled if they aren’t able to perform the duties of their occupation.
In the case of a physician, this would be their medical specialty.
The important part of this definition of coverage is that it provides benefits if you aren’t able to work in your specialty without taking away your flexibility to make an income in another occupation.
This definition is the most favorable for the policy owner, and is usually available only with select individual plans.
It is almost never provided with employer group plans.
An example would be a surgeon who injures her hand and is no longer able to work in her specialty, but who starts teaching at a university.
If she has true own-occupation coverage, she will be able to continue receiving her disability benefits even though she has found work in a different capacity.
There is not a limit on the additional income earned in her new profession to offset her received disability benefits.
Few insurance carriers have maintained true own-occupation coverage, while most have tacked on a clause to the end of their definition that says something like “so long as you do not engage in any other occupation.”
That is very different from the definition of true own-occupation coverage which guarantees full disability benefits as long as you do not engage in your primary occupation as a physician, even if you get a different job somewhere else.
TRUE OWN-OCCUPATION IS THE BEST AND ONLY TYPE OF DISABILITY INSURANCE FOR MEDICAL PROFESSIONALS DUE TO THE COMPLEX DEFINITION OF DISABLED.
TRANSITIONAL OWN OCCUPATION
With this definition, your policy will pay benefits if you cannot work in another occupation and start earning income in a new occupation—but your total new income (including benefits) cannot exceed the total original earned income.
If you make more with your new occupation than you did in your medical specialty, your disability benefits will be offset until your total income is equal to the benefits plus your new income and is not higher than your income as a medical professional.
For example, a cardiologist who is diagnosed with a chronic disease that prevents him from working in his specialty is still able to write articles for popular science magazines about the medical field.
If his income as an author grows to match his income as a cardiologist, then his benefits are reduced until his total income (benefits plus new income) is equal to his original earned income.
MODIFIED OWN OCCUPATION
According to this definition, a person receives benefits when they can’t work in their own occupation and are totally disabled.
With this kind of disability insurance, benefits do not continue if that person wants to work earning an income in another profession.
The options of a totally disabled person with this kind of disability insurance coverage would be to either live off their benefit check and remain totally disabled or return to full-time work in a different occupation.
This type of coverage is usually used as a base level of coverage for company employees.
Most executives and other employees with higher salaries will usually get a secondary policy with a true own-occupation definition.
An example would be an emergency physician who injures his back and is no longer able to practice in his specialty.
In this case, he has only the employer-provided modified own-occupation coverage.
Due to this definition, when he is offered a job working on emergency medicine policy for his state, he has to choose between taking the opportunity or receiving his disability benefits.
This is the most common form of disability insurance, and is usually found in employer-sponsored group long-term disability insurance plans and low-cost individual contracts.
In this definition, an insured is considered disabled only if they are unable to work in any occupation for which they are qualified.
This is the least beneficial type for the insured and it also provides the greatest leverage to the insurance company for determining claim eligibility.
Someone with any-occupation coverage can only receive benefits for a claim if their injury or illness prevents them from working anywhere, not just in their specific occupation or another occupation for which they have qualifications.
One of the most commonly overlooked considerations when examining the disability insurance offered by employers is that (assuming the employer is paying for the coverage) this insurance is taxable!
If you are injured and relying on employer-provided disability insurance coverage, you must report as income any amount you receive.
If you pay for better disability insurance that is separate from the employer-provided plan, however, you do not need to include any disability payments as income on your tax return.
In addition, employer-sponsored physician disability insurance plans are rarely portable, so if you switch to an employer who offers inadequate coverage you can’t take your former employer’s policy with you.
This is definitely something to think about, because changes in age and health status can decrease your chances of getting an individual policy later.
Ultimately, employers are going to do what is in their best interest and you should do the same.
The problem with most employer sponsored plans is that they do not offer real own-occupation coverage which could leave you without the benefit you’re expecting.
When it comes to disability insurance for physicians, true own-occupation is the only type of disability insurance that will fully protect medical professionals.
True own occupation coverage is the most comprehensive and will allow you the option of working in another field if you are unable to work in your medical specialty.
When shopping for a policy, getting a physician specific “own occupation” definition is always the first and most important thing to consider.
If you are ready to get started with your own-occupation coverage policy today, head over to Patternlife.com to fill out a quote request and compare all your true own occupation options!
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