Even as an educated medical professional, it can be confusing to understand all the different physician disability insurance products that protect one’s income from the effects of an illness or injury. But, as a physician earning a high annual income, it’s essential that you have some form of coverage to protect yourself in case you have an illness, injury, or disability.
Two types of insurance that offer benefits for serious illness are:
- Long-term disability insurance, which pays benefits if you have any medical condition that prevents you from doing your current job
- Critical illness insurance, which pays benefits for a few specific medical conditions and chronic illnesses
While there are some similarities between the two policies, there are a number of differences as well.
Here’s our guide to critical care insurance vs. disability insurance, plus some insights as to which one you should have.
What is Critical Illness Insurance?
Critical illness insurance, also known as critical care insurance, was introduced in the 1990s as a way to help people cover expenses associated with serious conditions and life-threatening illnesses. Even with health insurance, serious illnesses can impact a family’s finances. According to the American Association for Critical Illness Insurance (AACII), medical problems contribute to over 60 percent of bankruptcies in the U.S.
Critical illness insurance provides a one-time cash payment to help the insured avoid major financial loss. The money provided by the policy can pay for out-of-pocket health care costs related to the critical illness. It can also help cover household expenses, such as mortgage payments, while the insured recovers.
The biggest disadvantage of critical illness insurance is that it only pays benefits for specific medical conditions (more details on that below).
Some critical illness policies are simplified issues, which means you can automatically get a small amount of coverage, usually between $10,000 and $50,000. Other plans are fully underwritten. These policies are available in higher amounts, such as $500,000 to $1 million.
Policies often have many limitations, and if you have a pre-existing condition, an underwritten policy may exclude it from being covered.
Like disability insurance, you can buy an individual policy through a licensed insurance professional or enroll in a group plan offered through an employer or membership association. In addition to a standalone policy, some insurance companies also offer the option to add critical illness insurance as a rider to a life insurance policy.
How Much Does Critical Illness Insurance Cost?
The cost of monthly premiums for critical illness protection varies depending on a variety of factors:
- Age
- Current health condition
- Tobacco use
- Amount of coverage
If you purchase an underwritten plan, you will pay more in premiums if you use tobacco or if you have a history of health issues. The older you are when you apply for a policy, the higher those premiums will be.
The American Association for Critical Illness Insurance recommends that you buy enough coverage to equal between 6 and 18 months of rent or mortgage payments. So if your mortgage is $4,000 per month, you’ll want somewhere between $48,000 and $72,000 in coverage.
According to the AACII, a 40-year-old, non-smoking male can purchase $10,000 of coverage for $82 per year. That same coverage amount will cost a 40-year smoking male $134 per, more than 60% more.
Keep in mind that premiums on new policies are higher the older you are, so it’s beneficial to apply for a policy when you’re younger and healthier than when you’re older and potentially have already developed a pre-existing condition.
What is Disability Insurance?
Disability insurance is income protection insurance that pays a percentage of your salary when you are too injured or ill to work and earn your regular paycheck. It is not supplemental health insurance — you must be employed (and then unable to work and earn your salary) to qualify for disability insurance.
Unlike critical care insurance, eligibility to collect benefits does not depend on what your medical conditions are. Depending on the type of disability insurance coverage you choose, any medical condition could potentially qualify you to collect benefits.
Disability insurance policies come in two forms:
- Group policies offered through an employer
- Individual policies that you pay for out of your own pocket
It also comes in two variations:
- Short-term policies, which typically pay benefits for up to one year
- Long-term policies, which can pay benefits until the day you retire
Long-term individual policies are always the preferred option, as they can be fully customized with a variety of beneficial riders that provide even greater protection. With an individual policy, you can customize the benefit period, waiting period, and coverage amount up to a maximum of 60% of your current salary.
Unlike critical care insurance, long-term disability insurance policyholders pay monthly premiums and collect monthly benefits, and those benefits can last from as short as a period of two years all the way up until you reach retirement age.
Related: What Medical Conditions Qualify for Long-Term Disability?
How Much Does Disability Insurance Cost?
The cost of disability insurance coverage varies based on a variety of factors, including how much financial protection you need. For example, a physician earning $300,000 per year can get a policy that pays $180,000 per year, or $15,000 per month. That will cost significantly more each month than an individual who only needs $5,000 of coverage per month.
Other factors that affect the cost of disability insurance include:
- Age: The younger you are, the lower your premiums will be.
- Health condition: The healthier you are, the lower your premiums will be.
- Gender: Unfortunately for women, premiums are almost always higher than men’s. . This is due to womens’ higher occurrence of disability.
- Occupation: The amount of coverage you take depends on how much you earn per year.
- Benefit period: This is the duration of time in which you can collect benefits. Long-term policies range from two years all the way up to retirement age. The longer the benefit period, the higher your premiums will be.
- Waiting period: This is the time period between the date of your injury or illness and the date that you can start collecting benefits. A typical waiting period is 90 days. The shorter the waiting period, the higher your premiums will be.
- Additional riders: You can add riders that will pay off your student loan debt, allow you to increase benefits in the future, increase coverage amounts based on inflation rates, and more. Every rider you add will increase your premiums.
- The definition of disability: The definition of disability is the standard you must meet to become eligible to collect benefits. For physicians, the preferred definition of disability is that of true own-occupation, which means that even a minor injury can make you eligible to collect as long as that injury prevents you from doing your current job.
Read Do Doctors Need Own Occupation Disability Insurance? to learn more about the various definitions of disability.
The Differences Between Critical Care and Disability Insurance
There are many differences as to how and what disability insurance and critical illness insurance cover, and we’ve already touched on a few of them above. Here is a full breakdown of the key distinctions between these two types of insurance policies.
The Illnesses and Injuries They Cover
Disability insurance policies, as long as they have the true own-occupation definition of disability, can cover any illness, with the exception of pre-existing conditions that you already have at the time of purchasing the policy. Insurance companies do medical reviews and exclude pre-existing conditions, so some injuries and disabilities may not be covered.
Should you develop any new injury or illness that prevents you from doing some, part, or all of your current duties, you can collect benefits.
Here’s why this is key for physicians:
With true own-occupation disability insurance, something like chronic lower back pain could render you unable to stand to perform procedures or evaluate patients. As long as you didn’t already have that back pain when you purchased the policy, that would make you eligible to receive benefits. That same type of lower back pain would never qualify you to collect critical care benefits.
Critical illness covers far fewer medical conditions and has many exclusions. Most critical care policies require you to have an acute illness as opposed to a chronic condition. Policies typically limit benefit payouts for:
- Cancer
- Heart attack
- Stroke
- Organ transplant
- Kidney failure
- Paralysis
So is critical illness insurance worth it?
It can be valuable if you’re diagnosed with a condition it covers. Just be mindful of the fact that critical care policies have many limitations.
How Benefits Are Paid
Because disability insurance is income insurance, you receive monthly payouts to replace a percentage of your monthly salary. Depending on the benefit period you choose, you could collect monthly payments every single month for two years, five years, ten years, or all the way up until you reach retirement age.
With a critical illness insurance policy, you will receive one lump-sum payout — and when it’s gone, it’s gone.
A lump-sum payout can be helpful if you’re looking to use the benefits to pay off an expensive medical bill or pay for immediate in-home nursing care. But if you prefer to use the benefits to sustain monthly mortgage payments and household expenses, most people find it beneficial to receive multiple payouts broken down over a longer period of time.
How Much They Pay in Benefits
The typical cap on a critical illness insurance policy is $1 million, regardless of how high your salary may be or how much you stand to lose from being out of work for an extended period of time.
Disability insurance, on the other hand, has annual monthly caps up to approximately 60% of your income.
So if you have a monthly benefit amount of $15,000 and a benefit period that lasts twenty years, you could collect $3.6 million dollars in benefits throughout the duration of the benefit period. If your monthly benefit is $20,000 per month, lasts through retirement age, and you become disabled at age 40, you could collect over $6 million, which far exceeds what you could ever collect with a critical care policy.
What the Benefits Can Be Used For
Both disability insurance and critical care insurance have one thing in common:
You can spend the benefits in any way you wish.
Typically, people use critical care benefits to keep up on monthly bills and pay for medical expenses that their health insurance plan doesn’t cover. But technically, they can be used for anything.
Disability works the same way. Because disability benefits replace your income, you can use them to pay for medical costs, pay for household expenses, fund a retirement account, take a vacation, or in any other way that you see fit.
Critical Care Insurance is NOT a Substitute for Disability Insurance
While it may not be a bad idea to have both types of policies to better protect you from the financial hardship of a serious illness, critical care insurance is not a replacement for disability insurance. As a practicing physician, you still need to buy individual disability insurance.
The one-time benefit you receive from a critical illness insurance plan can run out quickly, while disability benefits can provide regular income that can last for years and even decades. Also, your disability policy can provide benefits for a wide range of conditions not covered by critical illness.
Further reading: The Physician’s Guide to Hand Insurance
Conclusion
If you’re searching for peace of mind knowing that you can still collect income even if you’re too sick to work, disability insurance is the best option. Critical care policies do offer value, but disability insurance is the preferred option, especially amongst physicians that stand to lose a lot of future income if they’re unable to work.
To start comparing quotes from disability insurance providers, contact LeverageRx today.
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