Don’t Skimp on Your Disability Insurance

Insurance is a product we don’t want to purchase, but know we have to. After purchasing, we hope we never need it! Because of this unusual dynamic, we are often tempted to save as much as possible on premium payments. In some cases, this might make sense. For example, purchasing term life insurance as opposed to whole life will lower premiums and might make more economic sense depending on your situation. For other types of insurance, I urge caution before simply choosing a policy based largely on premium costs. I believe individual disability insurance falls in the latter category because it protects the means by which you provide for yourself, your family, and ultimately the quality of your retirement.

This article focuses on individual disability insurance. If you own your practice, it is vital to purchase practice overhead disability insurance, as well.

As a matter of disclosure, I am an embezzlement consultant and financial advisor for dentists. However, I do not hold an insurance license and do not earn commissions or referral fees on any insurance product.

There are numerous options when determining which disability plan is best for you. Because disability can strike at any time and have a dramatic impact on your ability to earn income, I believe it is vital you avoid the temptation to focus primarily on premium costs.

Your first consideration should be the type of plan. Non-cancellable, guaranteed renewable policies are plans that cannot be cancelled by the insurer (except for nonpayment of premium) once you are approved. Additionally, the premium payments are fixed for the life of the plan and cannot be increased. These policies are typically more expensive because the insurer cannot make future adjustments to premiums. These plans are sometimes referred to as private or individual plans and are typically purchased directly through an insurance company or their authorized agents.

Level premiums are certainly an advantage of these plans. Having additional legal options at your disposal is another advantage. I hope you are never in the situation where you need disability insurance.  If you do, I hope you never have to initiate legal action against your insurer. Should legal action become necessary, there are often more options available including the right to sue for compensatory and punitive damages (although each state can have different guidelines). Obviously, an attorney consultation would be needed in these situations.

Guaranteed renewable policies also cannot be cancelled by the insurer (except for nonpayment of premium). However, guaranteed renewable plans do allow for premium increases which might be based on negative claim experiences and/or increasing age. However, premiums cannot be raised on an individual basis, but must include all policy holders. For example, premium increases might be automatic as policy holders reach certain age thresholds. 

Many association plans are setup as guaranteed renewable. They typically offer lower premiums since the insurer has the ability to increase revenue through price increases. Additionally, association plans have the ability to negotiate lower premiums on behalf of their members. Still, the premium costs can and do rise over time.

Association plans typically limit your legal options in case of a dispute with the insurer. Many association plans are covered through ERISA (Employee Retirement Income Security Act), federal law that sets standards for retirement and health plans issued by private entities.  There is a pre-defined process that must be followed in the case of disputes. Also, ERISA does not allow for compensatory or punitive damages, usually just a payment of unpaid benefits plus interest.

I’m not saying you should avoid association disability plans. As a matter of fact, one of my disability policies is an association plan I used to supplement a non-cancellable, guaranteed renewable plan  I purchased years ago. My point is that it is important to compare the features of multiple plans to find the one most suitable for your situation.

My advice is to purchase non-cancellable, guaranteed renewable policies if you qualify and can afford the higher premiums. This is especially true if you are a younger dentist, since disability insurance becomes more expensive and harder to purchase as you age. Non-cancellable, guaranteed renewable plans typically have higher underwriting requirements and will be more expensive than their guaranteed renewable counterparts. However, the peace of mind in knowing the premiums will not increase, along with additional legal options should you need them, make these plans worth considering.

Once you select a plan type, the next step is deciding which provisions and/or policy riders should be included. The more provisions and riders you choose the higher the premium, but the better income protection you can receive following a disability. I would consider the following:

  • Benefits payable to at least age 65: Some plans allow for higher age limits and should be strongly considered if available.
  • The ability to extend coverage should you choose to work beyond age 65: For example, some plans will let you continue paying premiums up to age 75. If you become disabled after the age of 65, the plan will typically provide two additional years of benefits.
  • Own occupation coverage: This coverage will pay benefits even if you are able to work in a different occupation. For example, you might be disabled from clinical dentistry, but you can still teach or work in a different professional capacity. Own occupation plans will pay full benefits in these situations. Some plans offer own occupation for a period of time (typically 5 years) and then revert to a modified, any occupation. These plans have lower premiums, but I don’t recommend them since your disability could be long-term or even permanent. I would certainly avoid a pure any occupation plan since it would be easier for an insurer to deny benefits based on a perceived ability that you can work at something.
  • Flexible waiting periods: You should have the ability to choose 30, 60, 90 or 180-day elimination periods before you receive benefits. The longer the elimination period, the lower the premium.
  • Residual benefits: A provision that allows you to return to work in your own occupation on a limited basis and still receive partial benefits.
  • Voluntary rehabilitation program: Your disability plan will pay for physical or occupation therapy to assist you in returning to work faster.
  • Mental and nervous conditions: Many plans limit benefits for mental health conditions to five years. I highly recommend a plan that provides full mental health benefits for as long as you are disabled.
  • Future increase option: This provides you with an option to periodically purchase additional protection without a medical exam. Should you exercise this option, your premium will increase, but you will receive higher benefits should you become disabled.
  • Cost of Living (COLA) option: If you become disabled, your benefits will increase to match future inflation.

I admit adding these provisions and riders will increase your premium. The temptation will be to lower the premium today and hope you never need the benefits. Multiple studies suggest that there is a 1 in 4 chance that dentists will suffer some degree of disability during their careers. My advice is to purchase as much as you can as early as you can. The older you get, the more difficult and expensive it will become to purchase a disability plan. I believe the risks are simply too great to put you and your loved ones in a tenuous position should you become disabled.