Disability is a risk every working person must face: More than one in four 20-year-olds will be out of work for at least one year because of a disabling condition before reaching the average retirement age.1 But the stakes are particularly high for high earners such as medical and white collar professionals, and many independent business owners. Their earning potential typically relies on specific physical and cognitive skills which, if compromised, could leave them still able to work – but in an occupation with far lower pay. While it seems counterintuitive, a relatively minor condition could put your lifestyle at risk – particularly if you’re a younger practitioner saddled with high student loan debt.
Your ability to earn a living is likely your most valuable asset. That’s why disability insurance is so essential: it can help protect a portion of your income if you get too sick of injured to work. However, if you’re a high earning professional, not just any policy will do. You need an insurance policy that can help you earn income doing what you do best. This article will help you better understand:
There are two basic types of disability insurance: Short-term disability insurance, also called STD, designed for temporary disabilities and typically replaces 60%-80% of your income while you're unable to work. Benefits typically last 3-6 months – and never more than a year – or until you recover. Long term disability insurance, also called LTD, is for more severe and even permanent disabilities. The income benefit lasts for many years – through retirement if needed – replacing 60%-80% of your after-tax income if you are totally disabled.
The definition of disability is key
Every policy has a specific definition of what it means to be disabled in order to qualify for total disability benefits. An STD insurance policy has a relatively simple definition: if you are unable to perform the substantial duties of your present occupation because of illness or injury, you may qualify for total disability benefits. After all, STD coverage only lasts a few months, and the assumption is you’ll go back to your regular occupation when you’ve recovered.
However, longer-lasting disabilities present another possibility: an injury or illness could make you unable to perform the substantial duties of your own occupation, but might not prevent you from practicing any occupation. So, some LTD policies have an own-occupation definition of disability, and others have an any-occupation definition. Depending on who you are and what you do, either type of policy can be beneficial. For example, a permanent foot injury might keep a railroad conductor from walking easily and performing his or her regular occupation, but with a little retraining, that person might be able to perform many kinds of desk jobs – even within the same organization – for similar pay. An LTD insurance policy with an any-occupation definition of disability can provide adequate protection for such a person.
Policies for physicians, dentists, lawyers, and independent business owners need to be more comprehensive. A surgeon who loses part of a finger in a car accident might be unable to perform surgery. A trial attorney whose vocal cords are damaged by throat cancer might not be able to argue a case in court or perform other substantial duties. In both situations – and countless others – a professional’s earning potential can be severely impacted by disabilities that make them unable to perform the things they do best, even if they are still qualified and physically able to do other work.
Long term disability insurance with an own-occupation definition of disability – or for short, own-occupation disability insurance – pays a benefit if you lose the ability to perform your regular occupation. Because these policies can provide a much more comprehensive level of financial protection, they can be generally more expensive than any-occupation plans. For that reason, insurance companies offer different forms of own-occupation coverage to tailor benefits more cost-effectively to your needs. For example, Guardian offers a number of options under their own-occupation definition of disability2:
1. True Own-Occupation
If you can’t work in your regular occupation but are willing and able to work in some other capacity, this definition means you can get your full benefit payment even while holding another kind of job. If the surgeon in the above scenario had disability insurance for physicians with this definition, he or she could take a teaching or consulting job and still receive replacement income for the entire benefit period.
2. Modified Own-Occupation
This definition pays a full benefit if you can’t work in your regular occupation and you are not gainfully employed in another capacity. Accordingly, the lawyer in the above scenario would receive benefits as long as he or she wasn’t earning income – but if they decided to start working as a legal consultant, income benefits would stop.
3. Two-Year True Own-Occupation
This definition of disability offers a two-year period of True Own-Occupation. If you’re still disabled after two years, your coverage converts to a Modified Own-Occupation definition for the remainder of your benefit period.
4. Two-Year Modified Own-Occupation
Another option is to simply have a Modified Own-Occupation definition for the first two years. If you’re still disabled after two years, your coverage converts to an Any-Occupation definition, meaning that due to sickness or injury, you’re unable to work in any occupation.
A disability insurance policy is a binding contract with an insurance company that’s customized for each policyholder’s needs. In addition to a definition of disability that spells out what is needed to qualify for benefits, the contract will also have provisions that define when benefit payments start, how much is paid, for how long, and so on. Important terms and features to consider include:
The waiting period
Every policy has a waiting or “elimination” period – the amount of time you have to wait after you are disabled until the insurance company starts paying benefits. It can also be longer or shorter depending on the specific carrier and policy contract: a longer waiting period will tend to lower your premiums, and a shorter waiting period will raise them. If you have short term disability coverage, your LTD waiting period should coincide with the end of STD benefits to avoid a lapse of income.
The benefit amount
Generally speaking, an LTD policy should replace about 60%-80% of your after-tax income. Any less, and you could struggle to make ends meet; any more, and the policy could be unaffordable, leading you to let the coverage lapse. Also, insurance companies may not let you “over-insure” with a benefit amount larger than your current earnings. One exception: a disability insurance for physicians policy may allow medical residents to over-insure if they expect significant income growth in the near future.
The benefit period
This is the maximum length of time that you can receive benefits. In an LTD policy, the benefit period could be as little as 2 or 5 years – or it could go all the way to retirement (or until you recover from being disabled). Of course, the longer the benefit period, the more expensive the policy.
Other standard and optional provisions
Remember: a disability policy is a contract, and like many contracts, it contains fixed terms and provisions, but there are also optional provisions, which are called riders. Some important provisions and riders to consider when purchasing a policy include:
Non-cancelable provision: This states that the insurer cannot raise your premiums as long as you keep paying them. Typically goes with a guaranteed renewability provision.
Guaranteed renewability: A provision which states that the insurance company will not cancel your policy or change the terms and features as long as you continue paying your premiums – but they can raise your premiums (unless the policy is also non-cancelable).
Waiver of premium: This means that premiums are waived while you are disabled and receiving benefits. Guardian goes a step further by offering a plan that waives premiums an extra six months after you recover and benefits end.
Student loan protection rider: Early-career professionals often have substantial student loan debt – and it doesn’t just go away if you become disabled. This optional benefit provides extra money to ensure student loans are paid during the benefit period.2
Basic or enhanced partial disability benefit rider: These options help protect you by paying a partial benefit if you suffer an injury or illness that limits your ability to perform certain duties but doesn’t cause you to be totally disabled.
Future Increase Option: This provides the opportunity to increase the benefit amount, typically once a year without going through additional medical underwriting, to account for inflation or increased earnings.3
Cost-of-living adjustment (COLA): A rider that states the insurance company will increase your benefit while on claim to account for inflation.4
An own-occupation disability insurance policy is a significant investment in your financial future. Make sure to go through all the provisions with a financial professional to understand the conditions of your contract and the circumstances under which you will be paid a benefit.
There are two basic ways to get a disability insurance policy.
Group disability insurance through your work or an association
Some companies might offer STD coverage, but not LTD. However, if your company, firm, or practice employs a number of high-earning professionals, they may offer own-occupation disability insurance as well. If you’re self-employed or a sole practitioner, you may be able to get group disability insurance through a professional association. Either way, group coverage can be an excellent choice: Because the company or association is buying for a large group of people, the premium is typically lower than for an individual policy.
An added benefit to getting a policy through your employer is that they may also subsidize a portion of the premiums, further lowering your cost. On the other hand, because the company or association is effectively “buying in bulk,” you may have less opportunity to tailor the policy to your needs. If the premiums are paid with pre-tax dollars (which is common), then the benefit you get down the road may be taxed. Finally, if you leave the company or association, in most cases the policy is not portable and you may lose your coverage.
Individual disability insurance
This is a policy you purchase for yourself, so you can tailor it to your needs. Since it is paid for with after-tax dollars, the replacement income it provides is also tax-free. It’s typically bought through a financial professional; if you don’t have one, or if that person doesn’t have a lot of experience with disability insurance, a Guardian financial professional can give you a disability insurance quote. When you discuss disability insurance with your financial professional, be prepared to share as much as you can about your financial situation and goals, so that he or she can tailor your disability policy to your needs.
The cost of an own-occupation disability insurance
Disability insurance is one of the most individualized types of insurance you can get because every person’s situation is unique. Expect the cost of disability insurance to range between 1% to 3% of your annual income. The actual premiums you pay will depend on the following factors:
|Age||The older you are, the higher your premiums|
|Health||The fewer your medical issues, the lower your premiums|
|Smoking and risky activities||Smoking will raise the cost of your policy, as will other risky activities such as scuba diving and auto racing|
|Occupation||If you have a high-risk occupation or work in a dangerous environment (e.g., an oil rig), your premiums will be higher|
|Definition of disability||The broader the definition of what is means to be disabled, the higher the premium; own-occupation coverage will cost more than any-occupation coverage|
|Waiting period||A shorter waiting period will increase policy cost|
|Benefit length||The longer the insurer has to pay benefits, the higher the policy cost|
|Income/benefit amount||The more income you need to replace, the higher the cost|
|Extra features||Many riders – such as the cost-of-living adjustment rider that increases your benefit for inflation while on claim – will also increase your policy cost|
Once you apply for a specific policy, there will be an underwriting process (similar to that for life insurance) in which the company assesses your age, lifestyle, and health – you’ll be asked to take a medical exam. It may seem like a lot to think about, but with the help of a good financial professional, you can come up with an own-occupation disability plan tailored to your needs at a cost you can afford. A final piece of information: don’t put it off – the younger and healthier you are, the more affordable it will be.
What is the difference between own-occupation and any-occupation?
Any-occupation disability insurance policies only pay a benefit if you are totally disabled and unable to perform any work at all – even a simple job completely outside of your regular occupation. Own-occupation insurance policies pay a benefit if you are unable to perform the substantial duties of your regular occupation or profession (and physician disability insurance may pay if you are unable to perform your sub-specialty). Some providers, including Guardian, offer variations on this to give more flexibility to policyholders.
Is disability insurance based on income?
Your income is one of many factors that go into calculating the cost of a disability policy because the benefit amount is typically set between 60% and 80% of after-tax income. Other considerations will also affect the cost of a policy, such as the definition of what it means to be totally disabled and/or unable to work, your age and health, the waiting period, benefit period, policy features and options, as well as other factors.
Are disability benefits taxable?
If you pay for your disability insurance with after-tax dollars, the benefits are usually not taxed. However, if the premiums are paid with pre-tax dollars – as they may be with a group plan through your employer – then the benefit may be taxed. Talk with your financial professional for details.