This is a guest post written by Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF. Mr. Keller is a sponsor on this site, and many other physician finance websites. I’ve found him to be a trusted resource for all things insurance related. Today he writes about an important and often confused topic: Group Long-Term Disability Insurance and Individual Supplemental Disability Insurance. Take it away, Larry!
Long-Term Disability Insurance
If you work for a large practice, multi-specialty clinic or hospital, whether you realize it or not, the odds are very good that you are provided with or offered some type of Long-Term Disability (LTD) insurance coverage.
While I would not recommend that it serve as the foundation of your disability income protection, due to the generally less favorable contractual provisions associated with it, there may be some significant benefits to it – especially when supplemented with an individual disability insurance policy.
This article will highlight some of the distinctions between group LTD coverage, individual disability insurance policies, and some reasons to be insured under each type of policy.
The Benefits of Group Long-Term Disability (LTD) Coverage
Employer provided or sponsored group LTD plans will cover a percentage of your income up to a maximum monthly benefit or “cap”. For example, a typical LTD plan might provide coverage of 60% salary to a maximum of $10,000 or $15,000 month. However, the percentage of income being replaced can vary along with the maximum monthly benefit under by the plan.
Therefore, it is important to understand the coverage provided to you by your employer, if any, when purchasing or increasing your individual disability insurance coverage.
Generally, if you enroll when you start your job, group LTD plans typically do not require medical underwriting. Therefore, no medical or lifestyle questions need to be answered. As such, you do not need to disclose your medical history, use of prescription medication(s), your participation in “hazardous” activities such as skydiving, rock climbing, motorcycle racing or others that might require an underwriter to take adverse action during the underwriting process when applying for an individual disability insurance policy.
This might also include your application for coverage being declined or modified to include a higher premium rate, exclusion rider(s) for certain body parts, conditions or activities or even a limited benefit period (two or five years and not benefits to the age of 65 or longer) based upon your answers to these questions.
Finally, the cost of this type of coverage is typically less expensive (if you must contribute toward the cost) or “free” (if the coverage is part of your benefits package provided to you as an employee) compared to an individual disability insurance policy.
The Potential Shortcomings of Group Long-Term Disability (LTD) Coverage
Many physicians mistakenly believe that their group LTD plan will support their lifestyles in the event of a disability. Unfortunately, this may not be the case for several reasons:
Reason Number 1:
Doesn’t Include Whole Income
Group LTD plans may not include certain components of your earned income (such as overtime pay, shift pay, bonuses and/or productivity or “incentive” pay) when calculating the monthly benefits payable. As stated earlier, Long-Term Disability policies also have a “cap” or maximum monthly benefit associated with them. For example, assuming a physician earns $300,000 annually and is insured under a group LTD plan that covers 60% income to a maximum of $10,000 month, they would be insured for the maximum monthly benefit of $10,000 month but this policy would only insure him as if he were only earning $200,000 (60% of $200,000 provides for $120,000 annually or $10,000 month, the plan’s maximum monthly benefit). In this example, he is earning $100,000 in excess of what the group policy covers, leaving a significant amount of his income uninsured!
Individual disability insurance policies will take all components of income into consideration when determining the amount of coverage available and, therefore, a larger amount of you income can potentially be replaced.
Reason Number 2:
The LTD Benefit is Taxable
Most physicians may also not be cognizant of the fact that if their employer is paying the premium for their group LTD plan, and not adding it back to their taxable income, (essentially making them pay the tax on the premium), any benefits received from the group LTD plan would be taxable, further reducing the amount of their income actually being replaced. The monthly benefit from an individual disability insurance policy is typically received on an income tax-free basis when paid with post-tax dollars.
Reason Number 3:
Not True Own-Occupation
Group LTD policies typically do not have a true “Own-Occupation” definition of disability. In fact, a well-known group LTD carrier’s policy states that “You are disabled when due to your sickness or injury: You are unable to perform the material and substantial duties of your regular occupation and are not working in your regular occupation or any other occupation or, You are unable to perform one or more of the material and substantial duties of your regular occupation, and you have a 20% or more loss in your indexed monthly earnings while working in your regular occupation or in any occupation”.
While this policy protects a physician’s income, their monthly benefit may be reduced or potentially eliminated if they can no longer perform the duties of their medical specialty and choose to work in another occupation or specialty. As a result, supplementing a group LTD plan with an individual disability insurance policy can also be very important.
Reason Number 4:
LTD Plans Subtract Other Income
Group LTD plans also typically subtract (from your disability benefits) any payments received for Social Security Disability, Worker’s Compensation and other “deductible” sources of income. With the exception of the Social Insurance Substitute (SIS) Rider, which coordinates with payments received under Social Security and some other government programs.
Individual Disability Insurance
An individual disability insurance policy with a true “Own-Occupation” definition of Total Disability provides you the ability to receive your full disability benefits, even if you’re gainfully employed in another occupation or medical specialty, with no reduction in benefits, regardless of your earnings in this capacity.
Only Six Companies Offer True Own Occupation Disability Insurance
Currently, there are only six companies offer this definition of Total Disability to physicians including Berkshire Life (a Guardian Company), Standard Insurance Company, Principal, Ameritas, MassMutual and Ohio National but the availability of this definition may also vary based upon state of residence and/or medical specialty.
Limitations on Mental Illness with LTD Plans
Generally, group LTD plans have limitations for claims related to mental/nervous and/or substance abuse disorders. While some individual disability insurance carriers will cover claims for mental/nervous and/or substance abuse disorders in the same way as any other accident or sickness, the majority of companies limit these claims to a lifetime maximum of 24 months.
Although many physicians will opt to purchase a policy with the least amount of restrictions, some willingly accept a policy with this limitation in order to take advantage of the cost savings associated with it.
Cost of Living Adjustments (COLA)
Group LTD plans typically do not include a Cost Of Living Adjustment (COLA) Rider.
A Cost Of Living Adjustment Rider is designed to help your benefits keep pace with inflation after your disability has lasted for 12 months. Individual disability insurance policies offer riders to help your benefits keep pace with inflation. A Cost of Living Adjustment (COLA) rider will adjust benefits each year while you remain disabled and eligible for benefits. COLA riders can be vital to maintaining your standard of living during an extended disability.
Lack of Individuality and Security with LTD
Unlike individual disability insurance policies, group LTD policies cannot be tailored to meet your individual needs, goals and budget. As such group LTD plans are simply “one size fits all” with benefits that have been negotiated between your employer and the insurance company and cannot be modified.
Finally, premiums rates for group LTD coverage typically increase annually and are subject to change. Individual disability insurance policies that are both Non-Cancellable and Guaranteed Renewable offer the strongest premium and coverage guarantees available, which means if your premiums are paid on time, your policy cannot be cancelled, premiums cannot be increased and policy provisions cannot be changed.
The Best of Both Worlds
Group LTD plans are typically not portable. This means that should you change employers, the coverage that you once had as an employee is left behind. Don’t forget that your health is what allows you to qualify to purchase disability insurance and your money is what keeps the policy in force. Therefore, it is best to purchase an individual disability insurance policy while you are young and healthy.
Should you rely on an employer provided or sponsored plan and subsequently have a change in your health, you may no longer qualify to purchase an individual disability insurance policy – at any price or you may not qualify to purchase an individual disability insurance policy as you did prior to your change in health.
Therefore, most individual disability insurance policies include or offer a provision to allow you to increase your coverage, regardless of your health, as your income grows. Typically, this would require eligibility determined by your financial situation and evidence of good health (medical underwriting) each time you apply. However, when you have an increase option on your individual disability insurance policy, there is no medical insurability requirement. This is a great way to ensure that you can protect your income, regardless of any changes in your health.
Some Words of Caution
If your group LTD plan has a very restrictive definition of disability and you cannot opt out of the plan (you are automatically enrolled), you will not have the ability to “ignore it” and purchase a larger amount of individual coverage – even if you are willing to pay for it.
Remember, the insurance companies must assume that you are going to receive full benefits from the group LTD plan when determining the amount of individual coverage available. After all, they don’t want to finically incentivize you to the point that you can make more money not working than if you continued to practice.
The good news is that the individual disability insurance carriers provide special limits to Residents, Fellows and “New In Practice” Physicians (those in the last six months of training up to 24 months in practice, depending upon the specific insurance company) based upon their earning potential. These limits, which can vary from one insurance company to another, would allow you to purchase $4,000-$7,500 month of individual disability insurance regardless of your actual income or employer provided/sponsored group LTD.
Therefore, this provides you with another good reason to purchase coverage early in your career!
While employer provided/sponsored group Long-Term Disability (LTD) policies may have potential shortcomings when compared to individual disability insurance policies, they can work very well when supplemented with an individual disability insurance policy.
As mentioned earlier, some of the benefits of purchasing an individual policy may include the following:
- The ability to purchase a policy with a true “Own-Occupation” definition of total disability.
- The ability to protect all components your income, including incentive pay.
- A Cost of Living Adjustment (COLA) Rider to help your benefits keep pace with inflation.
- Your individual policy is yours and fully portable – regardless how many times you might change employers.
The key is to understand the contractual provisions associated with each of them so you can potentially create an income protection plan that includes the best of both worlds.
What do you think of Larry’s advice? Do you have a personal disability policy? Did you get it before joining a LTD plan? Were these shortcomings something that you were aware of before you read this post? Leave a comment below.