I have wanted to speak to a disability insurance specialist for quite some time so I was very happy to sit down with Amy Thorson of Truluma. Truluma, is a disability income insurance consulting firm that helps insurance advisors design and implement income protection plans for their clients. Similar to our episode with Brandon Unger on life insurance, Amy’s role is that of an ‘insurance specialist’s specialist’.
I would encourage you to listen to full interview of this episode of ‘Planning on Call,’ the podcast, here:
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Amy shies away from defining disability insurance by the disability part of the insurance and prefers to refer to this type of insurance coverage as ‘income protection’. Essentially, she explains that disability insurance is to help guarantee income (subject to the claims paying ability of the carrier) if a health-related risk/ incident takes you out of work for some duration of time. So what type of health risks could fall into this category for medical professionals? Many… including but not limited to physical injuries to areas such as the back, eyes, or hand injuries for surgeons, as well as mental health issues such as depression or burnout. This insurance can also protect against more commonly thought of long-term illnesses such as cancer or multiple sclerosis. Amy also notes that insurance claims don’t have to be from an injury or illness that takes you completely out of work. A claim can come from an issue that causes you to reduce your hours and therefore compensates you for the lost hours of work.
When looking at the cost of these types of policies, it is important to note that they can be expensive as compared to something like a term life insurance policy. A factor that greatly impacts the relatively higher premiums on a disability policy is the fact that the likelihood of someone needing to use some or all of their coverage amount is fairly high – which ultimately should highlight the importance of having disability insurance. When shopping policies it is important to consider that a disability policy should cost in annual premiums about 2% of the interested party’s annual income. One important thing Amy noted is that rates are not the same for men and women. Women have to pay higher premiums than men as they have a higher likelihood of using their disability coverage than men (the opposite is true for life insurance premiums, where males pay more as they have a higher likelihood of dying earlier).
In terms of the structure of private disability insurance policies, they are usually designed to protect only a portion of income – typically around 60%. This is because disability policies are commonly ‘stacked’, meaning there are often several sources of disability income, including long-term disability group plan (employer) policies and Social Security disability insurance. While group plans and Social Security are both important pieces of protection, they commonly only cover a small portion of a standard physician’s salary. Also note that if an employer is paying the premium, you are paying the premium with pre-tax dollars, or the benefit is provided by Social Security, any resulting insurance benefits are taxable. However, any private disability insurance policy payouts (and employer-sponsored disability insurance benefits if the employee pays for the premium with after-tax dollars) are tax-free. This is why the private disability piece can be so important, especially for doctors earning a high income.
One very important term for doctors to understand is the ‘Own Occupation’ policy (commonly shortened to ‘Own Occ’). An Own Occ policy means that the policy will pay out if the insured is unable to perform the specific functions of their current job. A simple way to illustrate this kind of policy and its importance is with surgeons. Surgeons often earn the most of any medical specialty but also may require the use of most of their mental and physical faculties to perform their job duties at a high level. Therefore, if a surgeon loses any function in their hands they may be able to go back to school and work in another specialty, but not as a surgeon. An Own Occ policy will pay the difference between what their new job pays and what they would have made as a surgeon. Without the Own Occ policy, if the person can go back to work, but in a job that pays less, they most likely would not get a payout from the policy once they are back to full-time work. Amy stresses, that even if a person can’t pay for a perfect disability policy that has a lot of the protections discussed, like Own Occ, something is better than nothing. Even if someone has to start small, she recommends some protection!
Own Occ may be added to a disability policy with what is referred to as a ‘rider’. A rider, as Amy describes it, is what that can be added to a policy to change the specifications of a disability policy. For doctors, outside of the Own Occ rider… there are a few other riders that may be important to note. A ‘residual’ or ‘partial’ rider, can allow someone to continue to work at a decreased capacity, say part-time, and get income replacement up to the level of their full-time work. Future purchase riders can give the flexibility to increase a policy’s payout without going through additional underwriting in the future, which can be important for doctors whose income is increasing at a rapid pace. ‘Mental/Nervous riders’ can extend the coverage related to mental and nervous system disabilities beyond the standard 24 months of coverage. ‘Student loan riders’ can be important to cover private student loan debt, or for disabilities that may not meet the federal threshold for a disability (federal loans will be forgiven in the case of disability, as long as certain thresholds are met – for more information on federal student loans please see my Student Loan Education Series).
Younger physicians, those in residency and fellowship, should also be aware that there are disability policies designed specifically for doctors in training. Even before they are fully in practice, many disability insurance carriers offer lower premium (and benefit) policies. These policies are usually a little different from policies tied directly to an income that the insured would buy as an attending. Because of this, most carriers do not require proof of income or medical underwriting while in training. This means getting a relatively inexpensive policy through a simpler process while in residency. This is something to consider because any amount purchased earlier in their career offers the ability to potentially ‘lock’ that rate in for the long-term. This means being able to keep a certain amount of disability insurance at a lower premium level because it was bought when the individual was young and healthy. It is uncommon to be able to increase the amount of insurance substantially without going through underwriting again, but you may be able to keep the base amount at a lower premium for the long term. Many carriers offer discounts to residents and fellows as well, and may have special relationships with certain large medical institutions where many individuals are trained – so be sure to investigate the best available options when considering and purchasing these policies.
The last thing we addressed related to disability policies for physicians in private practice. As with other insurances, the key for an owner of a private practice is appreciating the cost of running the business in addition to income replacement when deciding on insurance coverage. Rent, utilities, and employees’ salaries are all things that should be considered when contemplating the coverage amount to be purchased. It is also very important to consider any business loans as well. If a younger doctor purchased a practice using leverage through some type of loan, Amy mentions they should absolutely consider disability coverage that will allow them to make loan payments even if they go out on disability for a period of time. It is possible to have ‘buy/sell’ disability policies that are similar to life insurance policies in that they allow business partners to be bought out using an insurance policy if something were to happen to one of them.
As with so many of the financial planning topics we cover on ‘Planning on Call’, disability policies can be complex and have certain considerations that individual doctors specifically have to take into account. Different carriers use different vocabulary for their riders, or may offer different premium structures, or even have different types of discounts. It is very important to work with someone you trust, who also understands disability insurance beyond the basics to give you a view into what policy/policies may be right for you and your family.
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