Seven pitfalls to avoid when choosing disability insurance

The right disability insurance policy can keep you financially whole if an accident or illness limits your earning potential. But failing to consider these pitfalls could cause some unpleasant surprises.

1. Benefits cancelling each other out. Insurance benefits from group policies (including employer-provided policies) typically subtract benefits from other group disability insurance sources, including Social Security Disability payments. But private (personal) policies that you purchase as an individual are not subtracted from group policy benefits.

2. Policies that aren’t occupation-specific. If you purchase an “any occupation” disability insurance policy, you may not be able to draw benefits unless your disability prevents you from working any job. On the other hand, an “own occupation” policy allows you to draw benefits if your disability prevents you from working the job you had before. This is especially important for high-income professions.

3. Student loan debt. People who become disabled used to be able to forgo paying student loans, but the rules around that changed in 2020. If you have significant student debt, you may want to purchase a rider for your disability insurance policy that will pay it off if you are unable to work.

4. Limited coverage for mental and behavioral health. Some disability insurance policies limit coverage for mental and behavioral health conditions, including substance use disorder. These are some of the most common causes of disability in the United States, so it’s worth examining how various policies cover them.

5. Lack of health insurance. If you’re unable to work, you will lose employer-sponsored health insurance, and very few disability insurance policies provide health insurance coverage. This may be another rider to consider, especially if you’re not close to Medicare eligibility. Americans under age 65 may qualify for Medicare after a 24-month period of disability, but they must have amassed a certain number of “work credits” that varies by age (for instance, if you become disabled in your 30s, you need 20 credits, or five years of work, to qualify)

6. Tax implications. Benefits from group disability policies typically include Social Security taxes, but personal plans that you buy as an individual typically do not. Therefore, if the majority of your income comes from benefits from a personal disability policy, you will receive smaller Social Security payments upon retirement and you should plan accordingly.

7. Pressure to resign. Your employer may pressure you to resign rather than go on long-term disability, because the employer will have to cover full or partial salary during your sick leave and short-term disability before your long-term disability plan kicks in. If you find yourself in this situation, seek help from your medical school, university, or hospital faculty ombudsperson, your human resources department (if your employer has one), or an attorney who specializes in health law or disability law.

 Read the full FPM article: “A Practical Guide to Physician Disability Insurance.”