Editor’s Note: Today’s post comes from Stephanie Pearson, MD, a former practicing OB/GYN who, after being injured during the delivery of a baby, became unable to continue her medical practice. Now, she educates physicians and other high-income professionals about individual disability insurance. We have no financial relationship with PearsonRavitz, although we are exploring ways to work together. All guest posts, even those from partners, have to meet editorial guidelines to be published. In this article, we asked Stephanie to walk us through different options for individual disability insurance, and she gives us some questions to use to evaluate the strength of group insurance policies that are offered by employers.
As a disabled physician who has spent the last several years speaking with other white collar professionals, I am often in the unenviable position of informing people of the deficiencies in their group employer coverage.
I have found that most of us do not fully understand what we have in our employer benefits’ packages, and often find out when it is too late. Almost daily at PearsonRavitz, we hear, “I am covered by work,” “I have enough insurance through my employer,” or “I am healthy, I won’t ever need this.”
Statistics show that 25% of attorneys will leave practice due to illness and/or injury and will not have adequate financial protection (1). We know enough to insure most of the valuable things in our lives – our health, our automobiles, our homes. However, a large percentage of us tend to ignore our biggest asset- the ability to earn income to care for ourselves and our families.
Let’s look at a case study:
As a lawyer working for a large firm, A.B. felt that her employer-paid disability insurance
would be enough should she be unable to work. She had previously declined to obtain a separate individual policy because she did not see the benefit of having two policies. A.B. believed that 60% of her income was covered. Then, she was diagnosed with leukemia and found out that their group coverage had a maximum benefit of $5000/month and only covered her base salary. A.B. was surprised to learn that the benefit would also be taxed. Suddenly, the employer-paid benefit did not meet her expectations, and the decision to forgo a second policy significantly compromised the financial security of her family.
This is a common story. A quality, tailored private disability policy would have made all the difference for A.B and her family.
Proper private individual disability insurance for attorneys ensures that you continue to receive a portion of your income, should you become physically or cognitively unable to fulfill the requirements of your specific job in law. If you, like me, ever became unable to practice the profession you were educated and trained for, individual disability insurance would help you to meet your expenses. It would allow you and your family to continue your standard of living. The financial consequences of becoming disabled can be devastating.
Studies indicate that almost 40% of disabled attorneys will struggle to pay their normal living expenses within three months of losing their regular income. These studies also state that approximately 65% will be unable to pay their normal living expenses within one year of becoming disabled (2).
Disability insurance varies greatly between group and individual plans.
The main points of consideration between group and individual policies are differences in taxation, portability, and terminology.
Group vs Individual Disability Insurance
A comparison of the differences between group disability vs individual disability insurance policies with respect to major issues.
|Issue||Group Policy||Individual Policy|
|Taxation||Taxable or Tax Free||Always Tax Free|
|Portability||Usually Not Portable||Portable|
|Terminology / Language||Weak||Strong|
There are several nuances you need to be aware of when you’re evaluating the utility of your group long-term insurance policy, such as:
● Does it cover your own occupation or any occupation?
● How does it define total disability?
● How is “salary” defined?
● What restrictions exist?
The answers to these questions reveal how much — or how little — your employer’s group long-term insurance plan covers you.
Many group benefits will cover your own-occupation for a period of time and then switch to any occupation based on your training, education, and skill set. Most define total disability as the inability to perform your job AND not be gainfully employed. You do not want to worry about losing part or all of your benefit while you are trying to figure out what is next for you. Often, salary is defined as base income; bonuses and other over-time income are not considered. As in A.B’s case, the group had a maximum benefit that was much lower than her total income.
Although something is better than nothing, we do not recommend relying on group benefits as your sole protection. Individual policies can be tailored to your specific needs and situations. They have stronger language, can take into account all sources of income, and are portable.
Important Riders for Individual Disability Insurance
A general description of the important disability insurance riders.
|Specialty Specific Riders|
(Ex: Own Occupation, True Own Occupation, Pure Occupation, Regular Occupation)
|Guarantees the insured will be considered totally disabled if he/she cannot perform his/her job, regardless if he/she is gainfully employed in another occupation.|
(ex. Benefit Update, Future Increase Option, Guarantee of Physical Insurability, Benefit Increase Rider, Future Purchase Option, etc.)
|Ability to increase coverage without additional medical underwriting.|
|Cost of Living Adjustment (COLA)||Inflationary protection – ensures that while on claim, the insured’s monthly benefit will increase yearly with inflation.|
|Catastrophic Rider (CAT)||Additive coverage if the insured needs assistance with at least 2 activities of daily living or has significant cognitive impairment.|
|Mental Health / Substance Abuse Coverage||Criteria for this coverage varies widely amongst the traditional carriers.|
What makes a good individual policy?
The goal is to have a policy that will cover you under any circumstances. Keep in mind that you and the carriers have different incentives: you want great coverage, they are looking for pre-existing diagnoses so they can limit their coverage. Ideally, you want to obtain coverage at your youngest and healthiest. Had A.B gotten a private policy at the start of her career, she would have been covered. A.B. wished she knew this sooner!
Please review your group disability plan with a qualified professional and confirm your coverage. Then, explore supplemental coverage to protect you and your family should you become disabled.
(1) The Facts about Social Security’s Disability Program. SSA Publication No. 05-10570, Jan 2015.
(2) Council for Disability Awareness, Disability Divide Consumer Disability Awareness Study. 2010
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Personal Capital keeping track of his money and is always looking for honest companies that provide insurance for a fair price without selling you products you don't need.
Three thoughts on Is Your Group Disability Insurance Enough?
Thanks for your posts, I’ve been religiously reading them. I just started out as a first year and do you have any suggestions regarding which benefits/insurance to enroll or forego? The long-term disability insurance is paid by my firm. I assume I should go for the post-tax plan as opposed to the pre-tax one? Should I opt in for the long term care plan and employee critical illness insurance? Thank you!
Hi Dan, we appreciate your inquiry. Josh asked that I reply to your benefits question. As the co-founder of PearsonRavitz, I assisted Dr. Pearson in crafting this article. In short, it depends on health history; At the same time, a tax-free group benefit sounds nice, however, if the language is inferior to a private policy, it will interfere with what you could qualify for in terms of supplemental coverage. It’s not a one size fits all answer. I often tell folks not to enroll in a post-tax plan for long-term group disability and buy a supplemental portable plan with better language. I would be happy to audit the material. Feel free to email me at [email protected]
Thanks for the question Dan. I asked Scott to weigh in because, as he mentioned, it’s pretty complicated and requires a review of the docs to know for sure. At my firm the long-term disability insurance was also paid by the firm (I think that’s pretty common) but ultimately I ended up purchasing a supplemental portable plan because (1) it was portable; (2) it had better language than the group policy meaning it covered more things; and (3) the group plan had a max benefit of $15,000 a month which seems like a lot of money but could have caused problems supporting a family and saving for retirement in the event I was completely unable to work and needed constant care but still alive (the true “worst case” scenario).