When you purchase a disability insurance policy, one of the decisions that you’ll need to make is how long you want your disability insurance benefit period to last. Your choice can significantly affect your insurance premium payment amount, but it can also determine how protected you will be in the case of an unexpected tragedy.
One in four of today’s 20-year-olds will have faced a disability of some kind before they retire. With those odds, it’s hazardous to lack financial protection against disability — especially as a high-income earning physician.
To better understand the ramifications, this article will break down the ins and outs of short and long-term disability benefit periods and help you to take some decisive action now to protect your finances in the future.
Your employer may provide short-term disability benefits within your physician’s employment contract as part of your benefits package.
When you do become disabled, your short-term disability plan covers up to 70% of your salary. This type of group disability plan takes effect quicker than most others, taking less than 14 days after being declared you meet the definition of disability before you start to receive benefits.
The name implies that these benefits won’t last long, however, which is true. Most short-term disability policies only last between three to twelve months.
Having a longer short-term disability period can save you money on long-term disability insurance because it can increase the elimination period of your long-term policy. Long-term disability policies with a more extended elimination period have lower premiums.
Long-term disability, on the other hand, is sometimes provided by your employer but is usually purchased privately.
This type of disability covers a little less than short-term disability and provides around 60% of your salary.
The elimination period varies from policy to policy, but the range is between 30-270 days. The elimination period is the time between when you’ve been deemed disabled and when your disability insurance company will award your disability claim benefits.
Your short-term disability insurance can help buffer this elimination period by coming into effect quicker and awarding you benefits until your long-term disability elimination period ends and your long-term benefits start.
The length of the disability benefit period also varies between insurance carriers. With some policies, you can receive up to two years of disability income, while others offer benefits until retirement.
While shorter benefit periods are cheaper, a longer length of time allows you more of a chance to prepare, giving you peace of mind and protection should any disability befall you.
When you purchase a disability insurance policy, you have the option of choosing the length of your benefit period. The longer the benefit period, the higher the cost of your premiums because it offers you more protection.
This would be the cheapest policy you can purchase and does provide you with a measure of protection if you are only disabled for a short time. However, the length of this disability insurance benefit period is not long enough to cover even the average disability. The risks of such a short benefit period are too high, and a longer benefit period is strongly advised.
While this more than doubles the two-year benefit policy and is a lot more economical than the policies with a longer benefit period, it is still lacking in protection should your disability be more severe. The cost difference between a five-year policy versus one to age 65 is minimal anyway.
This disability insurance benefit period is more expensive but protects for longer. It is a better choice than the five-year option for those that can afford it and gives a physician a decade to arrange his affairs should he need to find a way to provide for his family once the benefit period ends. Again the cost difference for a ten-year plan is not less compared to a full benefit period to age 65, so a longer benefit period is better.
Having protection against disability financial ramifications until you retire leaves you with no worry of losing the lifestyle you worked so hard for due to disability. This is the best policy to have if you can afford it, but needless to say has a higher premium payment. Most of these policies continue to award you the benefit amount until you reach retirement age (usually 65). You can purchase even more benefits by extending that to the age of 67 or even 70.
The best bet is to choose the most prolonged benefit period you can afford and put money into investments that won’t ever “expire” (as benefits would) so that you can transition your disability insurance payments to financial independence in the future.
Since the average long-term disability lasts 31.2 months, you wouldn’t want to get a disability insurance benefit period any shorter than that.
When your short-term disability period ends, this is when you make the transition to your long-term disability policy.
Unless you use the same insurance company for both your short and long-term disability insurance, you must apply all over again for coverage, proving your disability even if you were granted eligibility for short-term disability.
Since this demands a waiting period for communication between the doctors and insurers, it’s crucial that policyholders start this process before the maximum benefit period ends so that you aren’t left with a period without benefits.
At the very beginning of your career, or as soon as possible, you should be thinking about the scenario of possibly being disabled.
What would you do if your disability insurance benefit period is coming to an end, but you are still unable to work?
This may seem like a bleak situation, which is why it’s wise to consider it as early as you can. This gives you plenty of time to come up with a solution.
The best start is to speak to a professional team about setting up a financial plan. You should have an in-depth income and expense review to see where your priorities should lie. Financial experts can help you understand group plans, own occupation policies, and other insurance factors you may never have thought of to better protect you.
If you develop a plan of action should partial or total disability occur in the future, you know what to do now to prepare.
By considering your priorities and things that you can easily let go of, you can lower your expenses in a hurry, saving more of your benefits for the expenses that matter most.
It’s also vital to have monetary goals for financial independence. A team of financial advisers can help you make wise investments with your income to help provide some measure of cushion against a heavy financial downfall, such as disability.
This worksheet can help you to have a rough estimate of where your financial situation is, and presenting it to a financial advisor will make their job a bit easier as well.
There are a few ways to get started immediately to improve your financial protection. You can open up a savings account and begin to accumulate emergency funds.
Private pension plans are becoming more and more common since many employers are no longer offering pension plans. Individual pension plans are easily accessible, and you can begin with a small investment and continue to invest more over time. These pension plans are adaptable to your financial situation, depositing as little or as much as you can at any given time.
Once you have maxed these investments out, you can look into real estate, stocks, bonds, mutual funds, ETFs, and index funds.
Alternatively, you can invest in private equity, gaining ownership of a company that is not publicly traded. This option is to be made when you have accumulated enough savings to create a more substantial investment since the minimum for some private equity funds is $250,000 to one million dollars.
Your financial plan should be updated every year to see how far you’ve come and where you need to improve. You may find that some investments aren’t bringing in as much return as you would like, while others are working quite well. This is where you would adjust your investments to increase your yield.
Of course, the best way to increase the protection of your financial future is to take precautions with your health. Since most disabilities are caused by pre-existing conditions, not injury, your chances of disability lower significantly when you practice healthy habits.
As a physician, you have an advantage in this area because you know how to care for your body. It’s all about putting knowledge into action though.
Related Reading: How Much Life Insurance Do You Need?
Indeed, if your disability insurance coverage benefit period is ending and you still aren’t able to work, you are in for a difficult time. Even so, you can always take some steps that will improve your circumstances significantly.
Social Security Disability
Many whose disability insurance benefit period has run out are at the mercy of governmental assistance. However, Social Security Disability Insurance (SSDI) won’t even come close to replacing your benefit payments from a private insurance carrier. That is if you can even meet the standard of disability from social security, which is severe.
Mortgage Disability Insurance
You do have a choice of other types of disability insurance. If you own your house, you can get a mortgage disability insurance policy that will help you when your monthly benefit has run out.
Business Overhead Expense Disability Insurance
Also, if you own your practice, you can purchase a business overhead expense disability insurance policy, helping you to continue running your business while you are disabled. This type of policy generally has a short benefit period of only two years, but being able to keep running your business for any amount of time is of great benefit. It can even help you to find a way to save it in the meantime.
This insurance coverage will cover all the expenses of running a business such as payroll, utilities, equipment maintenance, insurance premiums for worker’s compensation, general liability, and the like. The benefits of this insurance are tax-deductible as a business expense.
Supplemental disability insurance is meant to close the gap on any other insurance. Of course, if you have purchased your own long-term disability coverage, you should aim to get a policy that doesn’t need any gap coverage. If you’ve been awarded long-term disability insurance through your employer, you might benefit from purchasing supplemental disability income insurance to help cover the difference in your benefits and financial needs.
When it comes to disability insurance, things can get complicated. You certainly don’t want to leave yourself without any income protection at all. Yet, purchasing a hefty individual policy to insure your future — can give you plenty of financial stress in the present.
We encourage our clients to help protect their financial stability by getting the best long-term disability insurance they can afford. As high-income earners, physicians can’t take a chance when it comes to losing that income.
Without a doubt, disability insurance, both long and short (short term only if highly subsidized by your employer), is a smart purchase and helps you be even wiser with your hard-earned salary.
Physicians Thrive can help you make those intelligent moves, and the earlier you get started, the better. Contact us now to talk to a disability insurance expert.
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