How high-income physicians can secure enough disability insurance
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Between the loss of income and increases in medical care costs, disabling injuries suffered by high-income physicians can cause financial devastation that far exceeds that of their premature death.
Yet many physicians earning $600,000 or more per year will find that it is extremely challenging to secure adequate disability insurance protection for themselves, their practices and their families.
Employer-provided group coverage
There is no question that disability is a common enough risk to justify coverage. According to the CDC, 26% of U.S. adults have a disability. In 2019, less than 20% of these adults were employed. In 2015, the CDC found 36% of all U.S. adult health care expenses were related to disabilities.
Many physicians working for universities and large corporations assume the group coverage provided by their employer is enough to cover their needs. Sadly, group disability often limits either the term of the coverage or the amount of benefits paid — ultimately offering high-income physicians only a small part of their annual compensation. Additionally, since group coverage is most commonly an employer-paid benefit, the money received during the disability is generally taxable as income to the insured. Finally, employer or group disability coverage can be terminated at any time, for any reason — not a terribly secure position for a physician to place themselves in.
For these reasons, most physicians, especially those with high incomes, need to secure their own disability insurance policies. Usually, this means having up to three types of disability insurance: traditional, white collar and business. Here is a look at each of these policies to better understand why each is necessary.
Traditional disability
Many physicians purchase a traditional disability insurance policy either during their residency or as soon as they go into practice. These are individual policies provided by traditional carriers, and they are designed so that a payment can be made as soon as a disability makes a physician unable to work their “own” occupation. This is a critical distinction because it means that even if the physician could work in a different occupation outside of practicing medicine, they will still receive a benefit. When designed properly, these policies have residual or partial disability riders, a cost-of-living rider to protect against inflation and the ability to increase the income limits in the future.
Typically, these individual policies are best paid for with after-tax dollars, which allows their payouts to be received by the physician tax-free.
One hitch that many high-income physicians encounter with their traditional disability coverage is most carriers limit benefits at about $20,000 per month, meaning they won't issue any benefit above and beyond that, even if that is far below the physician’s income. Physicians who are also covered by an employer-sponsored group policy may get a higher cumulative benefit limit, but the total benefit will likely still fall below their actual working income. In these cases, a white-collar policy may be necessary.
White-collar disability
When a physician’s income exceeds the limits of traditional and group coverage, the next policy to explore is a white-collar disability insurance policy. These policies have higher limits and make payments that “fill the gap” left from traditional and group policy payouts. The benefits from white collar policies can range from an additional $5,000 to $500,000 a month. As with a properly designed traditional policy, white collar policies can specify that a physician is entitled to the benefit once they cannot work in their own occupation.
As with the traditional individual policy, white-collar policies are best paid for with after-tax dollars, which allows their payouts to be received by the physician tax-free.
White-collar policy benefit periods generally last between 5 and 10 years, which is not as long as a traditional policy will pay benefits. This means the white-collar policy can replace the income necessary to help a physician pay off mortgages, student loans and other debts, but the shorter term of the policy can put a serious crimp in a high-earning physician’s ability to save for retirement. Retirement security protection is a disability coverage option that provides contributions into a trust that the insured cannot access until age 59.5 years, which can help to replace the physician’s contributions to a 401(k) or other qualified plan.
Business insurance policies
Physicians with their own practices or partnerships may be concerned about how they would find the money to buy out a disabled partner who is no longer able to work. For them, a disability buyout policy offers a simple way to get those funds after a partner experiences an unexpected disability. Business disability policies can also be designed to pay overhead expenses for a practice that is unable to meet income requirements after a physician becomes disabled. To help maintain services and get replacements when a provider becomes disabled, practices can consider key person disability policies, so the employees and patients can rely on the practice staying open, no matter what.
Because the tax treatment of premiums and payouts varies among policies, it is essential to work with experienced insurance and tax advisors who can help you select the right policy for your medical practice.
Conclusion
Balancing the various insurance policy needs and managing their costs is a delicate process. Physicians, especially high-income earners, need to understand not only the abundance of disability policy types available to them but also the many ways to structure these policies to ensure adequate protection with affordable premiums.
Reference:
Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com, where Michael Lewellen is a partner and director of financial planning. You should seek professional tax and legal advice before implementing any strategy discussed herein. Mandell and Lewellen can be reached at mandell@ojmgroup.com or 877-656-4362.
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