The Importance of Private Disability Insurance

The Importance of Private Disability Insurance for High Earners

Disability insurance is one of the many benefits offered by employers to their employees to provide them income if they were to be disabled and unable to work for an extended period. This benefit can be extremely helpful but most often has restrictions on it that may not fully pay the benefits or income you are expecting.

How Disability Insurance Works

Disability Insurance is designed to provide income replacement if you were not able to work. Typically disability insurance is designed to replace 66% of your pre-tax income before your injury. With disability insurance, the benefits will either be tax-free or taxable depending on who pays for your insurance. If your insurance is paid by you or is a taxable benefit to your from your employer, the disability benefits will be tax-free; and if your insurance is paid by your employer but not considered a taxable benefit, then the insurance would be taxable. This can make a tremendous difference in your quality of life when you are disabled. Most employers fall into the first category, but it is still possible to see the later.  Disability insurance is designed only to replace lost income; you are not able to be in a position where you are better off financially due to a disability.

Own, Regular and Any Occupation

There are three classifications for disability insurance, Own Occupation, Regular Occupation and Any Occupation. These different classifications make a substantial difference in the number of benefits you would receive if disabled and whether the benefits will continue to pay if you fit to work.

Own Occupation: Own Occupation is the highest definition of disability and is usually only available to high earning professionals such a lawyer, doctors and business owner. With Own Occupation, you are considered to be disabled if you are unable to perform the essential duties of your occupation due to sickness or injury. An example of this would be a surgeon who has an injury to their hands and can longer work as a surgeon. There is no restriction on whether benefits would be paid if you were to take another position, as long as it is not the same position they had before the injury. In the example of the surgeon, if they were able to use their medical knowledge for another career opportunity in medicine, such as teaching, and made more money than when they were working, they would still receive their disability benefits as they are no longer able to work as a surgeon.

Regular Occupation: Regular Occupation is the standard definition available to most employees and is the condition of most group disability benefits. Regular Occupation disability insurance will pay as long as you are unable to perform the duties of your occupation and not engaging in any other employment. The main difference between Regular Occupation and Own Occupation is the addition of “not engaging in any other employment”. For the surgeon in the example above, if they were to work as a teacher, they would not receive the full benefits of the disability insurance, and their salary earned as a teacher would reduce it. Also, some policies provide for this definition for the first two years of disability and then change to the Any Occupation definition.

The definition of regular occupation can be a grey area for some careers such as medical residents as many insurers consider your professional duties to be that of a doctor in training, not the specialty you are undertaking such a surgical or internal medicine resident. This means that if a surgical resident were not able to perform surgeries any more but could work as a family medicine resident, they would not be entitled to their disability benefits as they could continue to operate a doctor in training.

Any Occupation: With any-occupation disability insurance, you will not receive any disability benefits if you can work in another occupation, regardless of whether you take another job. Any occupation is the strictest provision under definitions of disability and that while it could result in lower premiums during the life of the disability policy, you may end up losing out if you become disabled but find you can’t claim the benefits you’d been paying for all that time.

It is essential to check what definition your disability insurance is for and if you were to be disabled what benefits you would qualify for. Some policies state that you must be unable to perform all functions of your job, whereas some may state you must be unable to perform only the significant duties of your job and these differences can make a significant difference if you are disabled.

Payout Maximums

Many group, disability insurance benefits, provide a maximum that would be paid per month if you were to be disabled. This income cap can often not be enough to cover the income needs of the disabled, especially if they were working in a high earning career before the disability. For example, if you were making $175,000 pre-tax before your disability and your group disability benefit provided a maximum disability benefit of $5,000 per month, you would only be replacing $90,900 of pre-tax income per year. This can create a significant change in lifestyle if not supplemented by private insurance.

Many private disability insurance policies for professionals can allow you to purchase disability insurance up to levels much higher than what you may be entitled to through work.

Other Things to Consider

Private disability insurance also allows for many more riders that are not available to with group insurance. Typically with group insurance, if you were to leave your employment, you would lose your benefits. With private insurance, the benefits are portable and remain if you were to switch jobs

Also, with group insurance, the benefits are negotiated directly with your employer and the insurance company and are subject to change at any time. With private insurance, the benefits are not subject to change and are guaranteed renewable, meaning that the insurance company cannot change the premiums as long as the policy is in fore. Most policies for professionals also have future income riders which allow you to purchase additional insurance coverage as your income increases without having to undergo additional medicals which are of great benefit to many professionals who are still growing their careers.

Conclusion

While group disability insurance is of great benefit to employees, it is essential to make sure you understand precisely what the insurance covers. For many professionals, it may be appropriate to get additional private insurance to make sure you and your family are fully covered.