Tag Archives: individual disability policy

The Importance of Regularly Reviewing Your Disability Policy

The new year is often a time for making resolutions and planning for the future.  This should include reviewing your financial situation, including assessing whether you will be adequately prepared in the event that you become disabled and have to stop practicing.  We recommend that you make a periodic review of your disability policies and evaluate:

  • What type of policy(ies) do I have?
  • Do I understand the terms and provisions of my policy(ies)?
  • How much coverage do I have?
  • Do I have enough coverage?
  • Do I qualify for any increase options?
  • Should I buy an additional policy(ies)?

Many physicians and dentists purchase their policies as residents or when they are first establishing their practice, and then file their policies away and don’t think about them again until the unexpected happens and they need to file a claim.  This is problematic, because financial needs and obligations change over time, and the income and standard of living for a resident is vastly different than that of a physician with a family 20 years down the road.

While insurance companies’ underwriting standards are typically structured in a way that prevents you from collecting the exact same amount of monthly income you were making pre-disability, your goal should be to get as close as possible.  In other words, if you are a dentist earning $20,000 a month and need to file a claim, you don’t want to have to end up relying on a disability policy with a monthly benefit of $5,000 as your primary source of income.

Often policies have future increase options that allow you to purchase additional coverage without changes to the terms of the existing policy.  Typically, these options will only be available during certain discrete time periods set forth in the policy, so it’s important to read your policy carefully to make sure you don’t miss out on the opportunity to take advantage of an increase option.

If your policy does not have increase options and you’ve outgrown the monthly benefit amount, you can also purchase another policy to increase the total coverage you would receive if you filed a claim.  However, if you’re going to be purchasing a new policy, you need to keep in mind that you must purchase a policy that compliments you’re existing coverage, and does not cancel out your other policy or policies.

For example, some policies contain provisions stating that a claimant cannot collect total disability benefits if he or she is working in another profession (a “no-work” provision).  Other policies require the policyholder to work in some other capacity, in order to collect total disability benefits (a “work” provision).  Thus, if you were to purchase a new policy with a “work” provision, and your old policy had a “no work” provision, one of the policies would be rendered useless (because it would be impossible to collect total disability benefits under both policies).

When purchasing a new policy, it’s also important to keep in mind that disability policies have become increasingly more complex, restrictive and less favorable to policyholders over time.  There is no longer a “standard” policy that every company sells—each policy will have it’s pros and cons, and it is therefore important to take your time to familiarize yourself with the policy at the point of sale, so that you know what you’re purchasing.  And if you didn’t pay close attention when you purchased the policy, or you can’t remember exactly what your policy says, you should review your policy to assess whether it still meets your needs and make sure that you have an accurate understanding of the scope of your coverage.

Policy Riders: Social Insurance Substitute Rider

In prior posts we’ve talked about riders and how they can modify the terms of a disability policy.  In this post, we will be looking at a rider we sometimes see in individual disability policies called a Social Insurance Substitute (SIS) rider.

An SIS rider is an optional rider that provides a monthly benefit that works a little differently than a standard base benefit.  Generally speaking, SIS benefits can be reduced if you are eligible for and receiving social insurance benefits (e.g. Social Security retirement or disability benefits, workers’ compensation benefits, etc.).

SIS riders can operate differently, depending on the terms of your policy.  In some instances, the benefit paid by the insurer will be reduced by the amount received from social insurance (usually up to a certain amount).  In other policies, a certain percentage is subtracted from the benefits based on how many different forms of social insurance you are receiving (e.g. if you are receiving Social Security benefits, you might only receive two-thirds of your monthly benefit amount, and your monthly benefits might be further reduced if you started receiving benefits from a second source, like worker’s compensation).

The appeal of the SIS rider is that including it in a policy will typically result in a lower premium.  The logic behind this is that the insurance company shares the risk of payment with the government.  The primary downside to an SIS rider is the fact that your benefits will be reduced in some fashion if you obtain social insurance benefits.

In addition, policies with an SIS rider can also place additional requirements on policyholders by:

  1. Requiring policyholders to apply for social insurance benefits;
  1. Requiring policy holders to reimburse them if a lump sum payment is received from social insurance(s); and
  1. Requiring policyholders to go through the entire appeals process following any social insurance denials and/or re-apply for social insurance benefits periodically.

When choosing a policy, it is important to weigh what you can afford in premiums now with potential future benefits.  If you can afford a higher premium, it is often in your best interest to choose a policy without an SIS rider and with a higher base benefit.  As we have discussed previously, there are also certain riders that you can purchase that will automatically increase your monthly benefit (and premiums) by a certain amount each year and/or allow you to apply to increase your monthly benefit in the future, without undergoing additional medical underwriting.  Whether you are shopping for a policy, or evaluating your existing policy, you should always keep in mind that the cost of the premium is not the only consideration.  There are other factors in play that you must consider when purchasing a policy, and the type of insurance that you purchase can have a significant impact upon your financial position if you should become disabled.

“Transitional Own Occupation” Provisions

In prior posts, we’ve talked before about how an individual disability policy with a true “own occupation” provision is ideal.   Under this type of provision, you are “totally disabled” if you are no longer able to perform the material and substantial duties of your occupation (for example, you can no longer perform dentistry), and you can still work in a different field and receive your full benefits (if you are able and choose to do so).

Most doctors looking for a disability policy know that it’s important to get an “own occupation” policy, but may not realize that there are several, less-favorable provisions that are also styled as “own occupation” provisions.  These provisions contain the phrase “own occupation,” but also contain language that can dramatically impact a doctor’s ability to collect.  For example, a policy might provide benefits if you are no longer able to work in your occupation, but only if you are not working in any other occupation.   And some newer disability policies actually require you to work in another occupation in order to collect benefits.

Another type of restriction we’ve been seeing recently is a “transitional own occupation” or “transitional your occupation” policy.  As we stated above, under the true “own-occupation” policies prevalent in the 80’s and 90’s, you can work in another profession and still collect full benefits, regardless of whether you make less, the same, or more than when you were practicing.  With “transitional own occupation policies”  or “transitional your occupation policies,” you can work in another profession, but your benefits are reduced if your total income (from your benefits, employment, and other insurance benefits) ever exceeds what you made immediately prior to your disability.  So, with these types of policies, your earning potential is essentially capped at what you were making before you became disabled (if you want to keep receiving benefits under your policy).

Transitional own occupation policies may seem attractive because they may have lower premiums, but it is important to know that they are not the same as true “own occupation” policies, and they can result in a reduced benefit payment and/or limit your options if an lucrative employment opportunity should ever arise.

While many policies contain the phrase “own-occupation,” including “transitional own occupation” provisions, they often aren’t true own-occupation policies and you shouldn’t rely on an insurance agent to disclose this information.  Oftentimes, your agent may not even realize all of the ramifications of the language and definitions in the policy that he/she is selling to you. Additionally, most of the newer disability policies now contain language saying that you cannot rely on an agent’s statements and/or that agents cannot change the terms of a policy.  Consequently, you should always read a policy from start to finish and make sure you have a clear understanding of what you are buying, before purchasing a disability policy.

Are Benefits Taxable?

 

The Answer Is: It Depends

Whether your disability benefit payments are taxable depends on what type of policy or plan you have and how your premiums are paid.  This post is not intended as tax advice—we’ve outlined some basic information below only.  You should always speak with a tax professional regarding your particular situation.

Individual Policies:  These are policies that you purchase yourself.  Generally speaking, if you pay the premiums with after-tax dollars, the benefits you receive are tax free.  However, if you pay with pre-tax dollars or deduct your premiums as a business expense, then your benefits will likely be subject to federal income taxation.

Group Policies: Group policies are those offered through associations such as the ADA or AMA.   These types of policies offer special terms, conditions, and rates to members and function much like individual policies, with similar tax consequences.  Generally speaking, if you pay the premiums (with after-tax dollars) then the benefits you receive are tax free.

Employer-Sponsored Policies: These types of policies can be less straightforward when it comes to taxes, as the payment of premiums can be structured several ways.  According to the IRS website:

  • If your employer pays the premium and does not include the cost of the premiums in your gross income, then benefits you receive will generally be fully taxable.
  • If the employer only offers a policy, but you pay the entire premium without taking a tax deduction, then the benefits you receive will generally be tax-free.
  • If both your employer and you pay the premiums then the tax liability will generally be split.

If you are unsure what type of policy or plan you have, and you think your employer might be paying the premiums, you can look at your application (there is typically a portion that states who is responsible for the premiums) or talk to your HR department.  For more information, talk to your accountant.  You can also go to to the IRS website on disability insurance proceeds to find additional information.

It may be tempting to save money by enrolling only in a plan solely paid for by your employer, paying premiums with pre-tax dollars, or deducting premiums as business expenses.  But keep in mind that, if you do become disabled, the amount of your benefits actually available to you will substantially decrease if you are required to pay income tax on them.

Selecting a policy is an important decision, and how benefits will be taxed is a significant factor to consider. With statistics showing that one in four dentists will be disabled long enough to collect benefits at some point in their careers, choosing to save now could hurt you financially down the road.

Unum UK CEO Takes Over Individual Disability Policy Block

Unum announced last week that Jack McGarry, former CEO of Unum’s United Kingdom arm, has been brought back to the U.S. to manage Unum’s closed block of business.  This “closed block of business” includes its individual disability policies issued prior to the mid-1990s–the type of policies that Unum no longer sells.  According to Unum Group CEO Thomas Watjen, quoted in this article, Unum hopes that McGarry’s experience will benefit the company:

“Our closed block of business represents over 25 percent of our capital, and I’m confident that Jack’s significant financial and operational expertise will help us improve the performance of this business.”

Unum doesn’t explain what it means by “improving the performance of this business.”  The policies McGarry will be managing aren’t sold anymore, so he can’t improve that block’s performance by changing the way policies are sold, who they are sold to, or how they are priced.  And at this point, Unum has to honor the outstanding policies as they are written, so he can’t lawfully help the block improve performance by skimping on benefit payments.

Watjen’s statement could mean that McGarry, who has discussed Unum’s confusing policy language in the past, will help the individual disability department better serve customers by making Unum’s communications easier to understand.  However, it is also likely that “improving the performance” of that block of business means that McGarry will focus the company’s efforts on continuing to scrutinize claims made on the individual policies to avoid paying benefits (and thus save Unum money).  Either way, our disability insurance attorneys will be closely monitoring Unum and any new developments under McGarry’s leadership.