September 13, 2022
4 minute read
Between lost income and increased medical care costs, disabling injuries sustained by high-income physicians can cause financial devastation that far exceeds that of their premature death.
Yet many physicians who earn $600,000 or more a year will find it extremely difficult to obtain adequate disability insurance coverage for themselves, their practices and their families.
Group coverage offered by the employer
There is no doubt that disability is a common enough risk to warrant coverage. According to the CDC, 26% of American adults have a disability. In 2019, less than 20% of these adults were employed. In 2015, the CDC found that 36% of all adult healthcare expenditures in the United States were related to disabilities.
David B. Mandell
Many physicians working for universities and large corporations assume that the group coverage offered by their employer is sufficient to cover their needs. Unfortunately, group disability often limits the length of coverage or the amount of benefits paid, ultimately providing high-income physicians with only a small portion of their annual compensation. Additionally, since group coverage is most often an employer-paid benefit, money received during disability is generally taxable as income for the insured. Finally, employer or group disability coverage can be terminated at any time, for any reason – this is not a very secure position for a physician.
For these reasons, most physicians, especially those with higher incomes, must purchase their own disability insurance policy. Usually, this means having up to three types of disability insurance: traditional, white-collar and business. Here is an overview of each of these policies to better understand why each is necessary.
Many physicians purchase a traditional disability insurance policy either during residency or upon entering practice. These are individual policies provided by traditional insurers, and they are designed so that payment can be made whenever a disability renders a doctor unable to practice his “own” profession. This is an essential distinction because it means that even if the doctor could practice a different profession outside the practice of medicine, he will still receive a benefit. When designed correctly, these policies feature residual or partial disability riders, a cost of living rider to protect against inflation, and the ability to increase income limits in the future.
Typically, these individual policies are best paid for with after-tax dollars, allowing the doctor to receive their payments tax-free.
A problem that many high-income doctors have with their traditional disability coverage is that most insurers limit benefits to around $20,000 per month, which means they won’t provide benefits beyond that. , even though this is well below the doctor’s income. Physicians who are also covered by an employer-sponsored group insurance policy may obtain a higher cumulative benefit limit, but the total benefit will likely remain below their actual work income. In these cases, a white-collar policy may be necessary.
When a doctor’s income exceeds the limits of traditional, 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 by traditional and group policy payments. The benefits of white collar policies can range from an additional $5,000 to $500,000 per month. As with a well-designed traditional policy, white-collar policies may specify that a doctor is entitled to compensation once he cannot work in his own profession.
As with the traditional individual policy, white-collar policies are best paid with after-tax dollars, allowing their payments to be received by the doctor tax-free.
White collar policy benefit periods typically last between 5 and 10 years, which is not as long as a traditional policy will pay benefits. This means that the white-collar policy can replace the income needed to help a doctor pay off mortgages, student loans, and other debts, but the shorter policy term can seriously hamper a high-income doctor’s ability to save for retirement. Retirement Security Protection is a disability coverage option that provides contributions to a trust that the insured cannot access until age 59.5, which can help replace the physician’s contributions to a 401(k) or other qualifying plan.
Business insurance policies
Physicians who have their own practice or partnership may worry 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 an easy way to get those funds after a partner suffers an unexpected disability. Corporate disability policies can also be designed to pay for the overhead costs of a practice that is unable to meet income requirements after a physician becomes disabled. To help maintain services and secure replacements when a provider becomes disabled, practices can consider disability policies for key people, so employees and patients can count on the practice to stay open no matter what. ‘he is coming.
Since the tax treatment of premiums and payments varies from policy to policy, it is essential to work with experienced insurance and tax advisors who can help you choose the right policy for your medical practice.
Balancing different insurance policy needs and managing their costs is a tricky process. Physicians, especially those with higher incomes, need to understand not only the abundance of disability policy types available to them, but also the many ways to structure these policies to provide adequate protection with affordable premiums.
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David B. Mandell, JD, MBA, is a lawyer 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 described here. Mandell and Lewellen can be reached at [email protected] or 877-656-4362.