What physicians need to know about disability insurance

Stephanie Pearson, MD, was working as an OB-GYN outside of Philadelphia seven years ago when a sudden injury turned her world—including her career—upside down.

“I was kicked in the shoulder during a difficult patient delivery, and she destroyed my shoulder,” she says. “I ended up with a torn labrum.”

Dr. Pearson developed a frozen left shoulder and had surgery, but her disability remains. She has residual range-of-motion deficits and nerve damage, and has not been cleared to practice obstetrics or to operate.

Suddenly no longer able to pursue a career in medicine, Dr. Pearson quickly realized the value of her disability insurance policy.

“If I did not have the policy that I had, we would have had to sell our house, we would have had to pull our kids out of preschool,” she says. “I have no idea what my life would look like.”

Dr. Pearson now works as a licensed broker and CEO and co-founder of Pearson Ravitz, an insurance agency that works with physicians. She says her passion is to educate doctors and others about the value of disability policies, and to help them determine if they need this coverage.

In her own life, she said having disability coverage “made all the difference in the world” for her family.

“It allowed us to continue down the path that we planned on,” she says.

How disability insurance works

Disability insurance pays a portion of your income if you are unable to work due to illness or injury. There are two major types of coverage:

• Short-term disability insurance pays out for up to two years. Some policies have a waiting period of up to 14 days before they kick in, according to the Insurance Information Institute.
• Long-term disability insurance pays out from anywhere from a few years to the rest of your life. Policies typically have a waiting period of several weeks to several months.

Disability insurance pays out a benefit once you meet certain criteria, says Chris Cooke, brokerage director with BackNine Insurance and Financial Services in Westlake Village, California.

“If you become sick or injured and a medical professional deems you to be unable to work, then this policy will kick in,” Cooke says.

Although policy terms vary, disability insurance typically covers about 60% of your income after you become disabled, Cooke says.

Some carriers offer add-on features that can make your coverage more robust. A few options include:

• A cost-of-living adjustment. This feature increases disability benefits over time based on the inflation rate.
• A residual or partial disability rider. This feature allows you to return to work part-time so that you can earn a partial salary while also receiving a partial disability payment if you have not fully recovered.
• Return of premium provision. This feature allows you to get a partial refund of your premium if no claims are made within a specified period.

If you choose one or more add-ons, your premium costs may be higher.

When you might need disability insurance

While many people think of accidents and injuries as the types of disabilities that might keep you out of work, that is not always the case, says Rick Warren, managing partner and co-founder of Insuring Income, an insurance agency in Woburn, Massachusetts.

“The vast majority of claims that are processed under these policies are due to illnesses,” he says.

Such illnesses—and injuries like the one suffered by Dr. Pearson—can leave a physician unable to practice.

For example, surgeons rely on their hands for their livelihood. One unfortunate accident to a thumb, and their career could be over.

Even doctors who do not work regularly with their hands could suffer an injury or illness that leaves them unable to practice, depriving them of large amounts of income.

Dr. Pearson says she never would have believed it if someone had said that her career would end suddenly after turning 40.

“Now, I happen to know hundreds of stories of physicians who have had to leave work because of injuries or illness,” she says.

If you decide to purchase disability insurance, you will choose from group coverage, individual coverage or a combination of the two. AOA members have access to a variety of insurance coverage—including disability insurance—through AOA Insurance.

Group disability coverage

Physicians typically purchase group disability coverage through their employer or an association.

Most large hospitals, hospital systems and other big organizations offer group disability insurance as a part of their benefits package, Warren says. “We find that as the size of the employer grows, the frequency of employer-based plans increases,” he says.

On the other hand, smaller groups and practices may not offer such insurance.

The degree of coverage available varies widely from employer to employer. Many employer disability plans pay out until the employee is 65. But it is important to carefully read through the plan documents, so you know what you are getting, Warren says.

Participants often receive a one- or two-page summary of their coverage, but you should not stop reading there. “There is almost always a larger PDF behind it,” Warren says. “That PDF will be where all of the provisions, limitations, et cetera of the plan are spelled out.”

While group coverage can make sense for many physicians, it does have limitations. Employers can change the plan provisions at any time, and the policies typically are not portable, Warren says.

Group coverage also typically caps how much it will pay to any one participant. This is often 60% of your income. Group benefits would not protect an individual’s income above the insurer’s cap, according to Warren.

Group policies have another limitation in the form of taxes, Dr. Pearson says. She notes that the “overwhelming majority” of group plans are employer-paid, with the coverage being part of the employer’s standard benefit package.

“If your employer is paying for your benefit, any money that you get from that benefit is actually going to be taxable income,” she says. “That’s something that a lot of physicians do not know going into their first job.”

Individual disability coverage

Physicians also can purchase disability coverage directly from an insurer.

Individual plan coverage often makes sense if you do not have group coverage at work, or if you want more comprehensive coverage.

“Every physician should at least review what the individual marketplace has for them in terms of carrier options and the associated costs, even if they have group coverage,” Warren says.

Dr. Pearson says individual disability coverage often is more robust than group policies and can be tailored to the policyholder’s needs. For example, she notes that many group policies will limit payouts if the policyholder becomes disabled, but still works.

Under such a policy, a physician who can no longer practice medicine but who gets a job as a teacher may find policy payouts reduced.

“With private disability insurance, the definition that you want is that you are considered disabled if you can’t do your job regardless of whether you are gainfully employed in another occupation,” Dr. Pearson says.

In addition, unlike group insurance, policyholders who purchase disability coverage directly with an insurer do so with after-tax dollars. That means their benefit is not taxable.

The lack of taxation can make a big difference if your salary is $100,000 and you receive $60,000 in benefits, Cooke says.

“So, you’re talking about 60% tax-free,” Cooke says. “Now, that’s getting a lot closer to your taxable income.”

Why people are reluctant to buy disability insurance

Despite the compelling reasons to buy disability insurance, the Council for Disability Awareness estimates that 1 in 3 workers do not have adequate disability coverage.

There are many reasons for such reluctance to purchase a disability policy, Cooke says.

“Sometimes people think ‘It’s never going to be me,’” he says. “Sometimes, people look at the cost and say, ‘That’s too much.’”

However, such reticence can prove costly if you become ill or injured and no longer can command the high salary you did as a practicing physician.

“It comes down to this: You never think you’re going to need it until you need it,” Cooke says.

Tips for physicians shopping for disability insurance

Shopping for the right disability insurance policy can be challenging.

“One of the problems with insurance as a whole is that there’s really no standardization of language,” Dr. Pearson says. “So, companies can use the same phrasing and define it differently. They can use different phrasing and define it similarly. It’s really confusing.”

Because it is so important to make sure the language in your policy reflects what you need from a policy, it is crucial to work with an expert, Dr. Pearson says.

“They need to speak with a disability insurance broker,” she says. “They want to speak to somebody who’s independent, so not tied to any specific company, and really specializes in disability insurance.”

Also, look for “own occupation” policies. These provide coverage if you become unable to perform the “substantial and material duties” of your specific occupation, even if you still have the ability to work in another occupation.

Physicians should review options from carriers that have “own occupation” definitions that account for their medical specialty, Warren says. These are likely to be labeled as the equivalent of:

• “Own occupation”
• “True own occupation”
• “Pure own occupation”
• “Regular occupation”

Also, investigate options that can keep your cost down. For example, agreeing to choose a longer waiting period—known as an “elimination period”—before you receive benefits after a disability can lower your premium costs.

“There are options to moderate cost and still have a robust plan that is right-sized to the individual,” Warren says.

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What every physician should know about getting a medical license