You sign up for group disability insurance at work. It feels like a no-brainer. Premiums only cost a few dollars per month, and getting insured is easy: no insurance agents, underwriters, or medical exams.
Then, something happens to you. You think, “Thank goodness my disability insurance protects 60% of my income.” You file your claim, and after a couple of months, you get the bad news: You’re only going to get half of what you expected.
Or even worse, your claim is denied, and you’re left with nothing.
When it comes to disability insurance for doctors, group coverage may be no more than a financial placebo. It is important to understand the disadvantages of group disability insurance because it makes you feel financially secure if something goes wrong—until you discover that sense of safety was all in your mind.
5 Disadvantages of Group Disability Insurance
1. You Could Do Another Job
Imagine you’re a cardiac surgeon who suffers an injury to your dominant hand, and you can no longer perform surgery. Because it’s impossible for you to do your job, you’re eligible for disability benefits, right?
Not necessarily. Many group policies, if you’re not too injured to earn income in some other way, won’t pay benefits for the salary you lost. You only receive benefits if you can’t perform the tasks required in any occupation that’s suitable for someone of your experience and education. You may not be able to perform surgery, for instance, but you technically could take an administrative role or teach at a university and this would disqualify you from receiving any benefits.
Limited Duration and Shifting Criteria
Other group disability insurance policies will pay benefits if you can’t perform the duties for which you were hired, but only for a couple of years. After two years of being on a claim, some policies change the definition of disability to “any occupation”. If the insurance company determines you are able to work elsewhere, your benefits will stop. It doesn’t matter if you don’t want to become an administrator, or if you have no desire to teach—or if that new job will only pay a fraction of what you were making before. The insurance company gets to decide.
2. You Won’t Get 60% of Your Prior Income
Disabling injuries can make you eligible for Social Security Disability Insurance benefits or workers’ compensation. If your injury is the fault of someone else, including your employer, you may quality for a substantial legal settlement. You may also have association disability benefits or take on a part-time job after your disability.
If you think you’re getting all of these and your group disability benefits, think again. Group insurers reduce their benefit payouts if you have alternate sources of income.
Even worse, most group policies only cover your base salary. If you earn a production bonus, that’s typically not covered—and it’s gone for good.
In addition, if your employer covers the premium on your group plan, any benefits you do receive are taxed as ordinary income.
Most doctors, after benefits are offset by alternate income sources, only receive an estimated 35% to 40% of their salary from a group disability policy.
3. You Make Some Career Changes
Another one of the disadvantages of group disability insurance isn’t portable; it’s connected to your employer. Let’s say you put in a few great years at a hospital or medical group, and you decide the next step is to go into private practice. Because your new practice is small, group disability insurance may not be an option for you. Depending on your health, you may not be able to qualify for an individual policy. This could leave you without coverage.
4. Your Employer Cancels Your Policy
Your employer and the insurance company control what happens to your policy. Unfortunately, if they decide to raise rates, reduce benefits, or worse, cancel the policy, you’re out of luck. If your employer cancels your group policy, you’re taking your financial future back to the roulette table.
5. Your Group Insurer Doesn’t Keep Its Promises
Group disability insurance is covered by ERISA (Employee Retirement Income Security Act of 1974), a law that gives group disability insurance companies protection from most law suits. ERISA also places severe restrictions on the things you can sue for, limits the damages you can collect, and subjects you to a hard-to-navigate series of time limits and rules. You usually have to file at least one appeal before you can sue, and most people have to secure legal counsel to navigate the complex rules. As a result, it’s often hard for policyholders to prevail against group insurers in court.
If your long-term disability claim is denied, you may discover that you have little recourse, even though you’ve faithfully paid your premiums and your disability is most assuredly real. You may also find yourself on the hook for considerable legal expenses with nothing to show for it.
Individual Disability Insurance for Doctors: Real Peace of Mind
Individual disability policies, for just a tiny fraction of your annual income, can provide far better coverage than group disability insurance. Many individual policies define disability as the inability to work in your own occupation. Even if you can do a related job based on your training and education, you don’t have to; you can still receive disability benefits no matter what you decide to do.
Additionally, individual policies pay benefits even if you do qualify for Social Security Disability benefits, workers’ comp, or a legal settlement. Instead of eroding your disability benefits payout, these additional benefits may stack on top. Futhermore, passive income doesn’t offset individual disability benefits. You can still provide for your family, pay your bills, and have some discretionary income to enjoy life.
Another benefit of having a supplemental individual disability policy: You don’t have to wait to take that next step in your career. If you open a private practice and subsequently become disabled, you’re covered by an individual policy.
Prevention Is Always Best
As a doctor, you know preventing a bad situation is much wiser than waiting until it happens. If you wait to get a supplemental individual disability policy until you develop a preexisting condition, the insurer can deny coverage, and you’ll be stuck with the limits of your group policy.
If you want to prevent financial disaster from disability and snap out of the placebo effect—or take that next step in your career—start looking for an individual policy now rather than later.
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