Physician Group Disability Coverage May Cover Less Than You Think

June 13, 2014
Ryan E. Riggs, CFP, ChFC

Four potential drawbacks of group disability protection, and what physicians should do about it.

You may have been told that your medical practice pays for your long-term disability insurance, so you are covered in the event a disability occurs.  But you may be surprised to find that your group coverage does not provide enough benefit to cover your monthly living expenses if you become too sick or injured to work.

Here are four potential drawbacks of group disability protection to consider:

1.  Benefit Cap Problems
Many employers offer group long-term disability coverage that consists of insuring 60 percent of salary up to a certain monthly benefit cap.  You may find, however, that your group coverage only insures 60 percent of your base salary, and does not include bonus or other income provided by ownership in the practice.  If a portion of your income is comprised of bonus or ownership income (also known as K-1 distribution if you file as an S-Corp) then you may be underinsured.  In addition, many group policies have a limit on the monthly benefit up to a certain amount such as $10,000 per month or $15,000 per month.  This amount may be considerably less than the maximum eligible benefit to cover your income. 

Take a close look at how the benefits are listed and what portion of your income is insured.  The costs to a group disability plan are typically much less than the costs of purchasing an individual policy.  As a result, these policies are typically limited and restrictive in the definition of disability, and have limited contract provisions.

2. Hidden issues
Another drawback of group coverage is that your policy may be canceled by the insurance company or moved to a new carrier.  In addition, premiums may be subject to adjustments based on the claims history of the group.  Most physicians do not know that rates may increase as they get older, usually occurring in five year age bands.

3. Tax concerns
Often, group coverage is paid by the practice and the premium is tax deductible by the business.  As a result, the benefit is completely taxable to the recipient.  Rather than receiving 60 percent of their gross income, many physicians find that they are more likely to receive around 40 percent due to taxes.  Suppose you are making $400,000 and you became disabled.  If your group monthly benefit is $15,000 you could likely only see $9,000 after taxes.  This could mean not having enough money to pay for monthly living expenses.

4. Unexpected changes
Another problem to consider is that, if you change employers and your employer does not offer disability coverage, you may have to purchase individual coverage. However, you may not be able to qualify for an individual policy. That could hold you back from a great practice opportunity. Another risk you may face is switching to a practice that provides coverage but its plan requires you to be on the plan for one year before paying a disability benefit caused by a preexisting condition.

Knowing the provisions of your group  plan and whether it covers the income you want to protect is important.  Check with your human resources director and get a copy of your plan to have it reviewed by an insurance professional.  What you may assume to be a good benefit may not provide the full protection you may expect. 

One option to consider: Supplementing with an individual disability policy
Because there is a “gap” in group long-term disability coverage due to taxes, many insurance carriers will allow you to make up the difference with individual coverage.  The benefit, when purchasing an individual policy, is paid on a tax-free basis which can help you get back to the 60 percent of your gross monthly income.  The tax-free benefits are a result of the premiums being paid with after tax dollars.  An individual policy may also offer a better contract in regards to the definition and the provisions that are available.