A Practical Analysis of Physician Individual Disability Insurance

This is the first of a 2-part series. The second article will be posted on July 6, 2014.

There is an old saying that only 2 things in life are certain: paying taxes and dying. However, the former can be minimized and the latter delayed, possibly. What individuals do in between with their money and time is up to them; but, ultimately, before death it may be the difference of protecting yourself and loved ones or not.

Disability vs. death

Over the years we have seen statistics illustrating the chances of having a greater chance of experiencing a disability or dying. According to Social Security Administration Fact Sheet (2/7/2013) approximately a quarter of 20-year-olds, who often (at this age) consider themselves invincible, will experience some form of disability before retirement. In addition, the US Census Bureau (American Community Survey, 2011) states 12% or in excess of 37 million of our neighbors are disabled and all before age 65.

As practitioners, you have all seen the negative effects disability can cause individuals—especially those who had not prepared for this possibility—although statistics make it seem more of a probability. Whether patient, colleague, friend, family member, or self, it seems no one is immune from experiencing this eventuality.

According to Council for Disability Awareness (CDA) 2013 Long-Term Disability Claims Review by Diagnosis, the top 3 new claims categories in 2012 were musculoskeletal or connective tissue disorders (28.5%), cancer (14.6%), and injuries and poisoning (10.6%). Surprisingly, accidents cause only 10% of disabilities and illnesses cause the remainder.

Knowing your ability to practice and, subsequently, earn an income depends on your continued capability to work. Preparation for the possibility of not being able to perform your duties as a healthcare provider may appear morbid, but proactive. Interested in knowing your Personal Disability Quotient (PDQ)? Visit http://www.whatsmypdq.org/.

Disability insurance vs. Social Security benefits

Opportunities may exist to become self insured. This involves a tremendous amount of self-discipline and pragmatic investing to ensure assets continue to grow and are available when needed. Unfortunately, this is far from the norm as 48% of American households do not save and more troubling is the fact that over 65% of adults do not have any emergency funds (3 to 6 months cash on hand to cover monthly expenses) set aside, according to the US Federal Reserve Board’s 2010 Survey of Consumer Finances.

Compounding this statistic is false thinking as to whether Social Security disability may be available if you become unable to work, and whether it is sufficient to protect you and your family in case of disability. In theory, yes; but in reality, probably not. According to the Social Security Administration’s Disabled Worker Beneficiary Statistics from December 2012, 65% of initial disability applications were denied. Sadly, the average the monthly benefit for males was $1,256 and females $993. Thus, Social Security disability should not be considered any type of “safety net” to prevent your household from crashing down following a disability.

The importance of minimizing risk and maximizing returns should be the mantra and plan. Disability insurance exists with the purchaser (the insured) paying a premium to a company (the insurer) in exchange for a contract outlining the legal responsibilities of both parties prior to any claims paid and shifting the risk (all or part) to the insurer. If it was only that simple!

Remarkably, a large cross section of our populace is under the misconception their likelihood of succumbing to a long-term disability is remote.

“64% of wage earners believe they have a 2% or less chance of being disabled for 3 months or more during their working career,” according to the Council for Disability Awareness’ 2010 Disability Divide Consumer Disability Awareness Study.

Individual disability insurance

Let us take a look at Dr. Physician. In practice a few years, he has seen a fair share of patients experience disability on the job, from motor vehicle accidents, or due to sickness. Dr. Physician has also witnessed patients die due to illness, accidents, or old age.

Interestingly, a majority of patients seem to experience a disability more often than death. In 2012 the Council for Disability Awareness reported in its Long-Term Disability Claims Review that “less than 5% of disabling accidents and illnesses are work related. The other 95% are not, meaning Workers' Compensation doesn't cover them.”

Some states allow for workers’ compensation coverage for the owner and will pay because of a work-related disability. However, this may or may not affect access to benefits of any individual disability policy purchased.

Understanding the chance of developing a disability is greater than the chance of dying, Dr. Physician decided to explore the purchase of disability insurance; being proactive if the ability to practice ceases or is greatly reduced. After all, for people who suffer a long-term disability lasting at least 90 days, odds are they will be disabled for more than 3 years.

Prior to investigating the purchase of this policy, the proposed insured should be on stable financial footing. A smart approach is to have your financial situation secure and consistent with your ability to pay all personal and business expenses in a timely manner. It is suggested excess income (positive cash flow) be used to pay for the policy. The upside to owning a policy pales when compared to the financial difficulty and accompanying stress if unable to make the annual payment. Policy costs vary depending on a multitude of factors when the application is first submitted: age, health, occupation, type of coverage, monthly benefit and additional riders, elimination period, etc.

Dr. Physician is surprised to learn the definition of individual disability varies: any, modified, or own occupation, and, furthermore, many have subset caveats of additional definitions and requirements. In addition, the elimination period can vary greatly (think of this as a time deductible) prior to benefits beginning, as can the length of payments (finite years, to age 65, or lifetime). Riders (additional purchased benefits) are often only available if purchased with the initial policy. It’s also important to know and understand the fine print as the insurer can challenge any claim.

“The ‘own-occupation’ definition in one carrier's contract is not always the same as the ‘own-occupation’ definition in another carrier's contract,” wrote Steve Crawford at About-Disability-Insurance.com. “The consumer, who should not be expected to read the different definitions in various contracts may be left with a contract, which they believe to be own-occupation and is in-fact a ‘modified own-occupation; policy.”

Prior to any policy being offered and accepted, the proposed insured must pass underwriting scrutiny. Payment may be made personally (benefits are tax free, but not income tax deductible) or paid via the practice (taxable benefit but a business expense). Suggestion: Prior to purchasing any individual or group policy, know your tax implications—deductibility and policy income benefit—and discuss it with your financial or accounting professional.

In addition, the purchase of a separate Business Overhead Expense policy may be considered and accessed if the insured were to become disabled. These policies also have varied terms, including whether an insurer will provide coverage for any medical provider covering the practice while the insured is disabled.

In the second part of this series, we will discuss the need for benefits, the process and pitfalls of obtaining disability insurance, and the importance of planning.

H. William Wolfson, DC, FICC, MS, MPAS is a financial consultant and advisor. After passing the rigorous Certified Financial Planner examination, Dr. Wolfson obtained a Master of Science in Personal Financial Planning from the College for Financial Planning. He was subsequently awarded by the College a Master Planner Advanced Studies. Dr. Wolfson is a member of the Financial Planning Association (FPA). Dr. Wolfson retired after 27 years of active practice and remains active volunteering his expertise to the continued education and success of professional colleagues and investors. Dr. Wolfson may be contacted at drhwwolfson@gmail.com.

Jason Newfield, Esq., is an advocate, litigator, negotiator, and practicing attorney in Garden City, NY. Jason has spent the past 13 years handling disability insurance claims on behalf of healthcare providers, especially medical physicians, doctors of chiropractic, other professionals and individuals. His firm represents clients throughout the United States. He is a founding partner of Frankel & Newfield, P.C., founded in 2004, and dedicated to protecting insured’s pursuing their disability insurance claims. He graduated from Hofstra Law School, where he was a member of the Hofstra Law Review. Jason can be reached at jan@frankelnewfield.com or (516) 222-1600.