Disability Insurance: Private vs Group Coverage
Disability Insurance Basics
As a physician in training, the need for long-term disability insurance has probably been drilled into you several times by now. The best argument for DI is simple – you have spent way too much time and money becoming a physician to have that go unprotected.
There are many options for disability insurance, and two of the main questions that come up when considering DI coverage are:
- Can’t I get Disability Insurance through my employer?
- What kind of DI coverage is the right choice?
The short answer is yes, you can most likely receive some sort of disability insurance through your employer. But, in order to decide which coverage option is right for you, it’s important to understand the difference between private and group insurance.
Policies that employers may offer for Long Term Disability Insurance are Group policies intended to cover a group of people, whereas coverage attained individually outside of your employer’s offerings, like True Own Occupation disability coverage, is Private insurance.
Why Purchase Private Disability Insurance?
Three main reasons we recommend early-career physicians pick up private disability insurance are the way disability is defined, ownership of your policy, and the tax treatment of the benefits paid. Let’s break each one down:
Definition of Disability
This is one of the most important aspects of a disability protection strategy. It is what determines if and when you would be considered “disabled” and eligible to receive a monthly benefit.
With an employer-sponsored group policy, the definition of disability can be vague or vary because of the number of employees it must protect. Often, group policies define “disabled” as something like “the inability to perform any occupation for any wage”. Note that this does not specify disability as being unable to perform what you were trained to do, but as the inability to perform any job at all. This means that if you are unable to work in your specialty but deemed well enough to perform another job, you may not receive benefits.
In a private policy like True Own Occupation, specialty-specific coverage, the protection strategy is built around YOU, so the definition of disability is often much more specific stating something like “the inability to perform the material and substantial duties of your occupation at the time of disability, regardless of if you can work in a broader specialty, teach, or work in another occupation altogether”. Put simply, if you are unable to perform the duties of your occupation (either partially or fully) you are considered disabled and are going to get paid your benefit amount.
This one is pretty straightforward. You do not own the policy with group insurance, your employer does. This means that they can change or cancel coverage at any point in time on their terms. Additionally, if you ever change employers, the coverage does not follow you.
Private disability insurance is the opposite. You own and control the policy, and the insurance carrier can never raise your rates, cancel coverage, or change it in any way. Once coverage is locked-in, it remains the same for the lifetime of the policy (which can be canceled on your terms).
Tax Treatment of Benefits Paid
This is something many of our clients are unaware of when considering group vs private disability insurance options. With a group policy where your employer is paying for the coverage, the benefits paid to you (if you were to become completely disabled) would be taxable.
For example, a common group coverage is 60% of your income up to a cap of $15,000/month. Even if you’re thinking 60% doesn’t sound that bad and you could make it work, now consider that the 60% is taxable, and assuming a 30% tax bracket (estimate), you would be looking at receiving something closer to 42% of your income.
With Private DI Coverage, because you are paying the premiums, the benefits are paid to you tax-free.
A solid financial strategy should work for both the best and worst-case scenarios. Your main asset for a good portion of your career is the ability to go to work and earn an income, especially until you have built/acquired other assets that you can leverage in its place. For this reason, protecting that income early in your career and/or training is key. In fact, we have another blog post covering the reasons to pick up disability insurance while in training that may be helpful.