Disability insurance policies vary greatly based on the quality and rating of the insurer, the definitions of disability they offer, the maximum benefit limits available and their premium rates. It is more important than ever for professionals to take the time to compare the contractual provisions of policies they are considering and to understand how and why they differ. There are 3 important factors to consider when evaluating any disability insurance policy: Many other insurance terms and factors can influence which policy is the best fit for your needs and your decision to buy a policy. Consult with a professional insurance adviser or financial planner who specializes in working with physicians or other professionals. They will be familiar with which policies are best suited to the needs of an individual physician or the physician’s practice. If you need assistance in finding a reputable adviser AMA Insurance's Physicians Financial Partners program offers physicians access to vetted financial professionals all across the country. Professionals must pay careful attention to the definition of disability found in their policies because it ultimately determines how any claim for benefits will be judged. There are 3 definitions of disability commonly found in the insurance industry with significant differences between them. A key component of an individual disability income insurance policy is the price (or premium). Premium rates are based on factors such as the insured’s age, gender, monthly benefit, waiting period, optional riders and the insured’s occupational classification. As a general rule, the younger a physician is, the lower the cost. Policies with more specific definitions of disability are more expensive than those offering a broader definition—like a policy with a any occupation definition. In addition, other factors can influence the price of the policy, such as the type of plan being purchased: Residual disability policy: Adding a residual disability rider to the policy would allow a disabled person to continue receiving benefits proportionate to the loss of income if they returned to their occupation on a part-time basis. Generally, to qualify for residual disability benefits, one must experience an income loss of 20% or more as compared to pre-disability earnings. Additionally, if the loss of earnings is greater than 75% or 80%, depending upon the rider’s provisions, 100% of the monthly disability benefit might be paid.
- Catastrophic disability (CAT) rider: This rider was introduced by many insurance companies to pay additional benefits if an insured is unable to perform 2 or more activities of daily living (ADL) without human standby assistance, or if the insured suffers a cognitive impairment or an irrevocable disability.
- Cost of living adjustment (COLA) rider: Designed to help an insured’s benefits keep pace with inflation after a disability has lasted for 12 months. The adjustment can be a flat percentage or tied to the consumer price index (CPI).
- Future increase option rider: Offers the ability to increase an insured’s disability coverage, regardless of future health as income rises. It is important to know when coverage can be increased, and by what increments, on any given option date. This can be an especially attractive feature to young physicians, as they grow into their career.
- Tax implications: According to IRC section 104(a)(3), personal disability insurance benefits are received free of income tax, provided that premiums are paid with post-tax dollars. This is generally the case when purchasing an individual policy. If an employer provides coverage and takes a tax deduction for the premiums paid on the insured employee’s behalf; however, the benefits are taxable when received. This means that an employee could lose as much as nearly 1/3 of the benefits when they are most needed. It is important to understand the difference.
- Mental & nervous provision: Often referred to as M&N, this provision can exclude coverage or limit coverage if a mental disorder or substance abuse causes a disability. Many carriers place a 2-year restriction on benefits paid when a disability is triggered by this type of condition. Some carriers, on the other hand, will pay benefits to age 65—but that feature is likely to increase the policy’s premium.
- Loan payoff provisions: Several disability plans now offer benefits that can help an insured pay off their student loans if they were to become disabled. This benefit can range from $150,000 to $250,000 and is paid in addition to the monthly benefit specified in the policy.
- Maximum monthly benefit: Someone who has an old policy with a future purchase option rider might be subject to the rules that applied at the time the policy was purchased. In such a case, the insured might be able to purchase coverage in excess of the maximum monthly benefit.
Related AMA Resources
Disability insurance and other policies for physicians and their families
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