You studied hard and stayed in school years after your friends had already joined the workforce. Perhaps you went to graduate school, law school, or medical school. After thousands of dollars and countless hours studying, you finally became a DMD, MD, JD, etc. And now it is all paying off. Years of sacrifice have come to fruition and you now have the means to provide your family with a comfortable life and enjoy some luxuries. But now that you have arrived at this place in life, are you protected? Your greatest asset may be your ability to earn your income. Is it properly insured?
Looking at earning an income as an asset means focusing largely upon your ability to work in your specific profession. And the way to protect the income that you are accustomed to in the face of life’s uncertainties is through disability insurance. Simply put, disability insurance replaces your income in the event that you are unable to work due to a disability. (For related reading, see: Intro to Insurance: Disability Insurance.)
Disabilities to Insure Against
When most people think of disabilities they think of physical disabilities. A grave illness, being confined to a wheelchair, or the loss of a limb. However, most white collar professionals are more susceptible to loss of ability to work based on mental, nervous, or emotional disorders rather than physical impairment. Most likely, you could still practice law from a wheelchair, but how about with debilitating depression? I think most patients would have no qualms about seeing a doctor in a cast, but one suffering from bipolar disorder? Would they be able to trust the counsel given? When it comes to protecting against disabilities, it is just as important, if not more so, for professionals to insure against mental health issues as it is physical impairments.
Key Differences Among Disability Insurance Policies
The first important thing to analyze when shopping for disability insurance is how the insurance policy defines disability. Some define it as the inability to perform your own occupation and others as the inability to perform any occupation. There is a huge difference between the two, just as there is a huge difference between the income of a dentist and that of a Wal-Mart door greeter.
There are many policies out there that require the insured to be totally disabled before they pay benefits. In this case, a temporary or partial disability is not sufficient to file a claim and receive benefits. Other policies do not require total disability, but rather a qualifying loss. For example, a policy could state that in order to receive benefits, only one of three things must happen: loss of the ability to perform one main duty, loss of 15% of income, or loss of 15% of the insured’s time. This is a key part of the policy for you to be aware of, because of the likelihood of experiencing a temporary or partial disability rather than total disability.
The whole purpose of disability insurance is to have money to support your family and lifestyle if you can’t generate an income, so your monthly benefit amount is vital. Most disability insurers look at the last one to three years’ worth of tax returns to establish your regular income. If you have your own firm or practice, you may not have a steady income year-to-year and a few down years could set you up for low disability benefits. Other policies allow you to establish your income by averaging the last one to two years or any consecutive 24-month period within the previous five years, so it is much more flexible for those with fluctuating incomes.
The rate and duration at which benefits are paid are significant as well. Some policies immediately pay the full benefit, while others begin by paying only a percentage of the benefit or a portion of the lost income. Also, some policies only pay benefits for two years, no matter the length of the disability. (For related reading, see: Disability Insurance for Business Owners.)
Often overlooked, depending on when you are disabled and for how long, inflation can greatly affect your benefits. Some policies limit the amount that a benefit can be adjusted for inflation or for how many years it can be adjusted. Others guarantee a certain percentage increase with no maximum for life. Only having inflation protection for several years could render your insurance almost useless if you are permanently disabled at a young age.
Many professional organizations offer disability insurance to their members at a discounted price. It is important to note, though, that accurate actuarial calculations do not change depending on the insurance provider. The only way to cut the price of insurance is to cut the benefits as well.
If you look closely at bargain insurance policies, you will see some of the discrepancies listed above. Many require total disability before benefits are paid. If you think about it, how many people do you know that have experienced a disability were completely incapacitated to begin? Also, what could be the most critical to professionals in your position is that many only cover mental health issues for two years, no matter how long the issue persists.
For a high-earning professional, income protection is essential. However, you need to be sure that your disability policy insures your income against all possible disabilities, without loopholes and exceptions. Not all policies offer the same level of protection, and you don’t want to put your family at risk just for a discount. (For related reading, see: Gain Financial Wisdom With These 5 Steps.)