Disability Insurance – What You Need to Know

Many of us are at the stage in our lives where concepts that once seemed so far away are now staring us in the face. Things like having children, getting a job, saving money, buying a home, protecting your family - these were concerns for our parents, not us. But the truth is, we’re not in school any more and we have put in long hours of training and studying to get to this point. It is now our responsibility to plan for the future and this why we have begun our newest series: Residential Planning. Every month we will tackle a new issue that residents face inside (and outside) the hospital and bring you the hard facts as well as interviews with experts in the field. Our only goal is to educate you and provide you some framework with which to make future decisions.

We begin with a topic that many of you have probably heard about but rarely taken seriously: DISABILITY INSURANCE. You’re young, healthy, and careful in the hospital so you don’t need to think about getting sick or injured on the job right? How many doctors actually become disabled? Your hospital would help you if you couldn’t work, wouldn’t they? How many doctors actually end up needing Disability? To help us better understand the real deal with Disability, we have brought in Paul Ferrante of Northwestern Mutual Financial Network, named one of America’s Most Admired companies by Fortune Magazine and ranked #1 by the American Customer Satisfaction Index (ACSI).

SPM: Paul, can you give us a brief explanation of what disability insurance is?

Paul Ferrante (PF): Your most important financial asset is your ability to earn an income. Disability income insurance is designed to replace a portion of your earned income lost due to a partial or total disability. It is basically money given to you if you become sick or are injured and are no longer able to work - either temporarily or permanently.

SPM: Many of the training physicians that visit our website have been offered disbaility insurance at least once. Because of the many debts incurred as a resident, and the belief that we are still semi-invincible at this point in our career, most are reticent to buy. Give us your top 3 reasons why young doctors should have disability insurance.

PF: OK. Good question. Giving only three is not easy but let me see if I can break it down to the 3 most essential reasons.

1. The most important is to protect your earning potential. A 30-year-old physician beginning a career with an annual earned income of about $100,000, will earn over $3.6 million during his or her working years (until age 65) - this assumes no increases in one’s income. If that same physician had 3% increases in income each year, he would earn over $6.3 million. This is a large sum of money regardless of how long you have trained or the risks that you face on the job. This is money that will support a family, send children to school, take you on vacation, even provide for your retirement. It is earnings that you need and deserve and you want it preserved no matter what.

2. Secondly, protect your future insurability.

3. Lastly and especially important considering all the loans you guys have: insurance premiums are lower at younger ages.It is always prudent to pay less for the same product if you can and if you believe that you may want Disability in the future, it would benefit you to start now rather than wait unitl later.

SPM: Are there different types of disability insurance? What type is best for residents?

PF: Your individual disability income insurance policy may be purchased as either a “non-cancelable and guaranteed renewable policy” or as a “guaranteed renewable policy.” Not all companies offer both types.

A non-cancelable policy cannot be changed unilaterally by the Company. The premiums and provisions are guaranteed once the contract is issued.

A guaranteed renewable policy cannot be cancelled nor have its terms, other than premiums, changed by the Company. Premiums may only be changed by class and may be subject to approval by the appropriate regulatory agency.

SPM: About how much would a typical plan cost per year?

PF: Cost for plan varies greatly on a number of factors, including sex, age, health, occupation, smoking status, total disability definition, benefit period, beginning date, state of residence and additional benefits. Individual disability income insurance, by itself or as a supplement to employer-provided group coverage, is essential for anyone who works and relies on that income. A good financial representative can help individuals explore the many options available and select a disability insurance policy to suit each person’s budget and personal financial needs. The most important step is to make sure a policy is in place.

SPM: If I was injured and could not do my job, how do they determine how much I would get?

PF: Generally, if you are injured or sick and can not perform the duties of your regular occupation, you would receive 100% of your monthly benefit (assuming you were totally disabled). If you could perform one or more of the principal duties of your regular occupation, you would not be totally disabled. In that situation, you may qualify for partial disability benefits.

SPM: As you know, doctors love data. Can you give us some stats that make us think a little harder about disability insurance?

PF: My pleasure. These data come from a variety of sources which I have attached below.

Disability Statistics

- 82% of U.S. workers have either no long-term disability coverage or coverage they feel is inadequate (1).

- One out of every five people will be disabled through injury or illness for a period of three months or more during their working life (2).

- There are over 18,000 known medical impairments. Each has different causes and effects.

- Approximately 75% of disabilities are caused by an illness and not an accident (3).

- In 1980, there were 55 companies that were considered major competitors in the disability income marketplace (4). Today that number has dwindled to 13, because many competitors have either abandoned the disability income marketplace, or have merged their product line with another company (5). Of the top five competitors on the list, only Northwestern Mutual has remained in the disability income marketplace without merging its product line with any other company.

- Based on premium earned, Northwestern Mutual is the number one mutual company in total non-cancelable individual disability insurance in force. Northwestern Mutual is the second largest in total non-cancelable individual disability insurance in force among all insurance companies (6).

- Northwestern Mutual allocated $72 million in total dividends for policyowners in 2004.

- Northwestern Mutual paid $330 million in disability benefits to our policyowners in 2004, and more than $1.6 billion during the past five years.

- In 2004, over 68% of the new disability insurance policies issued by the company were purchased by existing policyowners within the Northwestern Mutual family (7).

(1) 2001 survey by the Consumer Federation of America and the American Council of Life Insurers.

(2) 1985 Commissioner’s Disability Table (a).

(3) 1986 Commissioner’s Disability Table (a).

(4) Source: Northwestern Mutual. These are companies that offered an individual non-cancelable disability income insurance policy in 1980.

(5) 2004 Company Annual Statements.

(6) Figures as of December 31, 2004.

(7) Figures as of December 31, 2004.