Why it is critical to supplement your employer provided Long Term Disability Insurance

For many graduating residents and fellows there is a mad dash to graduation that includes negotiating employment contracts, taking boards, moving, and getting credentialed in new states. Oftentimes, making sure to secure individual disability insurance falls through the cracks despite huge discounts and easier underwriting and this piece then goes unattended to for many years. Most of the time, physicians are covered by an employer provided group Long Term Disability insurance plan and in recent years, more group contracts have gone as high as $20,000 or even $30,000 per month in maximums. It would seem that having $20-$30,000 per month is more than enough, but is it? Why would someone need Individual Disability insurance at this point??

Group and Individual Disability Insurance

Let’s dive into how Group and Individual Disability insurance work together. There are two ways to protect income, through group LTD and Individual protection. The two can be combined and the industry goal is to get one’s income insured up to 60% NET. Remember, employer paid group coverage often insures base pay (not bonus) up to 60% gross. Additionally, since the employer pays the premiums, the benefits would be considered taxable by the IRS as income. Since you lose the income tax on that benefit the only way to recoup that is to purchase individual protection via after tax premium payments. With these premiums paid, the benefits are tax free from the individual policy and it allows the insured to not only recoup the tax loss but insure much of the bonus income that is also left uninsured by group plans.

Here is an example of how this works: Suppose we have an income of $200,000…60% of this would max out at $10,000/month in group benefit. But that would become $6000/month NET. In this simple scenario, we clearly need $4000/month tax free individual benefit to get back to 60% NET combined… For someone earning $150,000, the 60% group benefit would be $7500/month gross or closer to $5000/month NET. In this scenario, we might get $3000/month issued to get back to the combined 60% NET benefit. If we look at a high-level income of $750,000 and a group benefit of $20,000 per month, we have multiple reasons to secure individual protection. First, the tax loss on the group plan would turn $20,000 into more like $12,000 NET. But at $750,000 of income, one needs $37,500 to reach 60% NET. This person is $25,000/month underinsured! The need for this person is extremely obvious that they must secure individual protection.

Ask for Help

In some cases, physicians will buy policies out of residency and then forget to increase coverage over time or get offered more individual protection as they move from place to place. Carriers will allow multiple individual policies but the sum monthly benefit total along with the net group benefit is added together and cannot exceed the 60% NET combined replacement based on income. So, in the situation where one might have older policies, we would need to know what those benefits are combined so we can look at current income and the group benefit to determine if there is any more room to add this new policy.

The age-old excuses not to buy more protection remain are “I already have it”, “my employer provides it”, “I can’t get anymore” but these can be huge mistakes to lean on.  Asking a professional to review existing coverage and checking on what else can be insured takes little time yet it could be the biggest difference maker in maintaining lifestyle should injury or disability occur.

Danny Mensh

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