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Is Your Current Physician Disability Insurance Enough?

Is Your Physician Disability Insurance Enough?

Would your current physician disability income insurance make up for lost income if you were sidelined by a serious long-term illness or by injuries sustained in an accident?

The time to answer that question — and to make the needed adjustments — is now.

It pays to do the math.

To find the answer, begin by comparing your monthly income with what your existing disability insurance would pay in the event of a claim. A typical amount is 65 percent of base salary. Easy enough, right?  Assuming that 35 percent of your salary goes to taxes, you could come out close to your base salary IF you paid the premium on your disability insurance from after-tax income. In that event, you would not be liable for income tax on the insurance benefits.

If your employer pays the premium as part of your benefits package, the benefits would be taxable and the monthly benefit might be substantially less than what your family may need. Over time—disability claims may continue for years, not just months—the shortfall could force you to make drastic changes to your financial plans.

Take a look at this example:

Base Income $230,000 $230,000
Less Tax (35%*) $80,500 $80,500
Net Income $149,500 $149,500
Monthly Disability Benefit $12,500 $12,500
Number of Months 12 12
Annual Disability Benefit $150,000 $150,000
Tax on Benefit (35%)   $0 $52,500
Net Disability Benefit $150,000 $97,500

*Important Note: This chart is purely for illustrative purposes and does not reflect the progressive tax rate system used by the Internal Revenue Service and many states. Consult your own legal counsel or tax advisor.

Do you depend on bonuses, overtime or other “extra compensation?”

The words “base income” in the illustration are important. Group disability policies typically pay benefits calculated only on base salary and do not consider extra compensation when calculating the monthly benefit. If you depend on extra compensation such as bonuses or overtime to meet your monthly budget, it would be prudent to consider supplementing your employer-provided disability policy.

Another question you’ll want answered: How does your disability policy define “disabled”?

Many employer-provided disability policies define “disabled” as “unable to perform any work.” This definition does not work for physicians, who are better served by policies that pay until the claimant is able to perform the work for which they trained. The best option is a policy with an “own specialty” definition of disability, recognizing particular requirements of each area of specialization.

An important reminder.

Make the time in your busy schedule to review your disability coverage periodically. Your financial needs change over time—children are born, educated, and eventually become independent.  Investment income may become a substantial resource that would not be considered when determining employer-provided disability insurance benefits. Supplementing your current physician disability income insurance can help to meet your changing needs.

Benefit from experience.

Look for a physician insurance specialist who is thoroughly familiar with your profession’s unique needs and the options available to meet those needs. This is one of those areas where experience makes a real and beneficial difference.