Written By: Derek Melvin
Looking into long-term disability insurance can be a daunting task. Although disability insurance is a simple concept, protecting your income in the event that you cannot work anymore, disability insurance policies can be very complex. With differences in contract language between carriers, additional add-on features available, etc., choosing a policy can get confusing… fast. Our goal is to simplify this process and tell you what to look for in a disability insurance policy to provide you with confidence as you obtain coverage.
Note that the key focus will be on long-term disability rather than a short-term disability insurance policy. Short-term disability covers you for 0 – 90 days, where a long-term policy can cover you to retirement age, making it much more important to your overall financial plan.
What is a Disability Insurance Policy?
A disability insurance policy is designed to supplement one’s income in the event they are injured or sick and cannot work. The reason disability insurance is so important is because most of us need all of our income to make our financial plan work.
If you were unable to work for a full year, 5-years, 10-years, or 20-years, that is a lot of income that we are potentially losing if not fully protected. You can also forget about a robust retirement plan, that beach home, or all-inclusive resorts because there is no income there to save and pay for these things. It becomes evident very quickly that this is an important product and one worth insuring against.
Types of disability insurance
Now that we know how important coverage is, I want to talk about the two different types of disability insurance. Those are group coverage (employer provided) and individual coverage (personal policies).
A group policy is provided by your employer and is typically paid for by your employer. Please note that not all employers cover the cost of long-term disability insurance or even offer group long-term disability insurance. It is important to confirm your current coverage with your current or future employers.
Below are the key features of group policies:
- Employer Paid: Typically paid for by your employer, so often times this is a free benefit. Sometimes, there are buy-up opportunities to secure additional coverage.
- Provided to all employees: No medical underwriting needed, all employees are covered.
- Covers a portion of your income: If it is free and everyone gets it, you can assume it will not be very robust. Group policies cover a portion of your income and are capped at certain amounts. One of the more common group policies we see is “60% of gross income, up to $10,000/month”. This means the benefit will cover up to 60% of your gross income or $10,000, whichever is less.
- Taxable Benefit: If you see that example above, it mentions gross income. This means the benefit is taxable to you.
- Non-Portable: These are employer specific, and you cannot take them with you to other employers.
- Definition of Disability: This is a big one. A lot more to come here later in the blog post. Typically, we see own-occupation language for the first two years, then it switches to any occupation. See below for a breakdown of own occupation vs any occupation
An individual policy is one you obtain outside of your employer. These policies are individualized and are independent of your employer.
Below are the key features of individual policies:
- Paid by the Individual: These are your own policies, so you are paying the premium with dollars that have already been taxed and are sitting in your checking accounts.
- Application Process: You must go through medical underwriting and answer health questions and complete a phone interview to be approved for coverage.
- Protects Full Take-Home Income: As mentioned above, a group plan (if you have one at all), only covers a portion of your income. An individual plan will dovetail the gaps of a group plan to ensure your full take-home income is protected.
- Tax-Free Benefit: Premiums are not tax-deductible, so the monthly benefit is tax-free.
- Portable: This is your own policy. This is portable. If you move states or change employers, the policy travels with you.
- Definition of Disability: The goal for an individual policy will be to have true own-occupation contract language. In short, if you are unable to work in your own occupation, you will receive a benefit. Please see a more detailed explanation below.
As you can see, a group policy may only cover 40% – 50% of your take home income, making it important that you secure an individual policy to protect the rest of your income.
Own-Occupation Disability Insurance
Now that we have established the importance of individual disability insurance, we can then discuss what to look for in an individual disability insurance policy.
The most important aspect of a disability insurance policy is the contract language. Your monthly benefit on the policy is cool and all, but if you do not have the correct contract language, it may never pay out. This is where we focus in on true own-occupation disability insurance.
True own-occupation definition of disability means that if you cannot perform the material and substantial duties of your own occupation (your own occupation being defined as what duties you perform to earn your income day-to-day or month-to-month), you are considered disabled and you will receive your benefit.
With true own-occupation language, you can also work in any other gainful occupation, and still receive your disability insurance benefits AND the income earned from that other gainful occupation, as long as you are still unable to perform your original duties.
Let’s go to an example here.
John is an emergency medicine physician who is regularly tasked with a wide variety of treatments and care plans for traumatic and life-threatening injuries or illnesses. This is typically a very fast-paced environment, and it is key to be able to respond quickly efficiently to care for patients.
If John is unfortunately diagnosed with a chronic illness or sustains an injury that limits his ability to be active and respond to these situations in a timely matter or without significant pain, he cannot be an effective emergency room physician. In this case, if he has own-occupation disability insurance, John will be able to file for a claim and be compensated for his lost income.
Beyond being able to obtain his disability insurance benefit, John can also take up any other gainful occupation, which may be an administrative role in the hospital or be completely unrelated to medicine, like a marshal at your local golf course, and still earn that income without it limiting his disability benefit.
With any occupation, it is extremely important to protect your income as there are many ways you can become disabled. Often times I hear, “Well, I only perform these relatively non-labor-intensive duties, I don’t need a policy.” I then think of a presentation I attended from another financial professional, like myself, who works in an office setting and is at his desk most of the day.
He was diagnosed with cancer, and his treatment completely limited his ability to focus, perform, or even get out of bed each day. Thankfully, he was covered by an own occupation disability insurance policy, and this allowed him and his family financial flexibility while missing work for extended periods of time.
Any Occupation Disability Insurance
Any occupation disability coverage, which typically is what group policies transition to after a defined period of time, is the lowest form of contract language. This states that if you cannot perform the duties of any job (which does not consider your current position or what you trained to become), you are not considered disabled and you will not receive a benefit.
This is nearly the social security threshold of disability insurance language, and it is very hard to meet the qualifications to receive coverage. Therefore, when looking for a disability insurance policy, make sure it is own occupation.
How Much Does Own-Occupation Disability Insurance Cost?
Now we know we need own-occupation disability insurance, so how much does it cost? For an own occupation policy, these range anywhere from $50 – $1,000+ per month based on your age and health, the monthly benefit, and your occupation as some occupations have higher risk of disability than others.
The younger and healthier you are, the cheaper you are to insure. This makes it important to secure coverage while you are young and medical history is smaller.
Outside of health, age and occupation, the main cost driver is the monthly benefit. The higher the benefit, the higher the cost.
There are also many different add-ons, formally known as riders, that you can have on your policy that will impact your premium. The most common riders are:
- Future Increase Option: Ability to increase your benefit as your income increases without proof of insurability, only proof of income. This is extremely important to have on your policy to protect your future income.
- Residual Benefit: The ability to apply for a partial claim if you can only work part-time due to a disability. Also, a key feature as most disability insurance claims are partial claims.
- Inflation Protection: Allows your benefit to grow with inflation while you are on claim.
- Catastrophic Benefit: If you are severally disabled and you cannot perform 2 of the 6 acts of daily living, you receive an additional benefit.
- Student Loan Rider: Pays an additional benefit while you are on claim to cover your student loan payments.
Other ways you can decrease your premium without losing the core benefits of an own occupation policy:
- Own-occupation not-working: This type of policy provides you with own occupation language, but the monthly benefit will be reduced if you earn an income in another occupation.
- Guaranteed Renewable Polices: This gives the carrier the ability to adjust the premium of your policy if they deem your entire occupation class was mispriced, therefore, increasing the premium costs for that entire occupation. This is unlikely to happen and may be worth the decreased monthly premium.
- Waiting period: The waiting period is the amount of time between when you file a claim and when you are paid the first monthly benefit. This is typically 90 or 180 days. The longer the waiting period, the cheaper the policy.
How do I Obtain a Policy?
There are a few carriers that offer true own-occupation coverage. When looking into these policies, I would mention to go through a “trial application” process that allows you to go through the medical underwriting process and see how the rates come back before making a decision.
As an independent financial planning firm, we work with all of the own-occupation carriers here at the Finity Group and would be happy to assist you in this process. Feel free to visit our website to get an initial conversation set if you would like to look into your policy options.
Related Blog Posts
- The Importance of Individual Disability Insurance and The Pitfalls of Group Coverage
- Own-Occupation Disability Insurance
- 7 Mistakes Doctors Make with Disability Insurance
Related Podcast Episodes on Financial Clarity for Doctors