The most valuable asset for almost all dermatologists is their ability to practice their profession, as the future stream of income from this asset is large and quantifiable. To protect this asset for themselves and the people who depend on it, dermatologists rely on disability insurance and life insurance as fundamental “asset protectors”. Young dermatologists should secure these tools early in their careers, and established physicians should regularly review existing insurance policies to ensure they maintain the necessary levels of protection.
In Part 1 of this 2-part article, we’ll focus on the basics doctors need to know about disability insurance, and we’ll cover life insurance in Part 2.
THE NEED FOR DISABILITY INSURANCE
Breadwinner disability can be more financially devastating to a family than premature death. With many cases of disability, medical care alone can cost hundreds of dollars a day, dramatically increasing expenses while income is reduced or eliminated.
COVERAGE PROVIDED BY THE EMPLOYER OFTEN INADEQUATE
If you are an employee of a university, hospital, or large dermatology practice, your employer may provide you with long-term disability coverage. However, group disability often limits either the length of coverage or the amount of benefits paid. For example, benefits may only last a few years, or benefit payments may only be a small portion of your annual earnings. Since this is most often an employer-paid benefit, money received while you are disabled will be taxable to you. Additionally, employer or group disability insurance can be terminated at any time and for any reason, leaving you without coverage.
GETTING THE BEST INSURANCE COVERAGE FOR THE MONEY: PERSONAL DISABILITY
Because many physicians do not have access to group disability insurance, and group coverage may be insufficient when needed, all dermatologists should consider individual disability insurance to protect the value of their future earnings. When evaluating options for an individual disability insurance policy, it is important to work with a reputable and experienced insurance advisor who can help you answer the following questions:
1. WHAT IS THE AMOUNT OF THE BENEFIT?
Most policies are capped at a benefit amount equal to 60% of income. You must be wondering how much money your family would need if you became disabled.
2. WHAT IS THE WAITING PERIOD (ELIMINATION TIME)?
This is the length of time you must be disabled before the insurance company pays you disability benefits. The longer the waiting period before benefits begin, the lower your premium will be. Essentially, the waiting period serves as a time deductible – you cover your expenses for the waiting period, and then the insurance company kicks in from then on.
3. HOW LONG WILL THE COVERAGE LAST?
It’s a good idea to get a period of benefit coverage that lasts until Social Security benefit payments begin, between age 62 and 70. Unless you’re still too young to qualify for Social Security, a policy that offers lifetime benefits at expensive premiums is usually not worth the extra expense.
4. WHAT IS THE DEFINITION OF DISABILITY?
Definitions vary from insurance company to insurance company, and even from policy to policy within the same company. The definition of disability used for a policy is of utmost importance. The main categories are self-employment, any occupation and loss of income. Self-employment policies, which pay a benefit if you cannot continue your own job (even if you can and do work in another job after disability), are the most comprehensive.
5. DOES THE POLICY OFFER PARTIAL BENEFITS?
If you can only work part-time instead of your previous full-time hours, will you receive benefits? Unless your policy says you are entitled to partial benefits, you will not receive anything unless you are completely unable to work. Also, are extended partial benefits paid if you return to work and experience a reduction in income because you cannot maintain the same rigorous schedule you had before becoming disabled?
6. ARE BUSINESS OVERHEADS COVERED?
If you own a practice, whether you have $10,000 or $20,000 in monthly disability benefits, you probably don’t have enough to cover your loss of income plus the costs of running the practice.
7. IS IT NON CANCELLABLE OR GUARANTEED RENEWABLE?
The difference between these terms is very important. If a policy is non-cancellable, you will pay a fixed premium for the duration of the contract and your premium will not increase for the duration of the contract. If it is guaranteed renewable, the contract cannot be terminated, but your premiums could increase. Ideally, you want a policy that is both non-cancellable and renewable.
8. WHAT IS THE FINANCIAL STABLE OF THE INSURANCE COMPANY?
Before buying a policy, check the financial strength of your insurer.
The value of a dermatologist’s future income is a valuable asset that must be protected, both for the physician and for the dependents who depend on that income. Dermatologists rely on disability and life insurance as fundamental protectors of this asset and should purchase these policies early in their careers. Here in Part 1 of this 2-part article, we focused on what doctors need to know about disability insurance. We will cover life insurance in Part 2.
Jason O’Dell is a financial consultant, insurance specialist and partner at the wealth management firm OJM Group (www.ojmgroup.com) in Cincinnati, Ohio. Michael Lewellen is Partner and Director of Financial Planning at OJM Group.
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