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Do I need Long-Term Disability Insurance (LTD)?

Do I need Long-Term Disability Insurance (LTD)?

Question

Do I need Long-Term Disability Insurance (LTD)? If I do need LTD, what policy best fits my situation?

Executive Summary

Long Term Disability (LTD) Insurance is form of insurance that replaces your income if you become disabled and can no longer earn an income. LTD is often mentioned at the end of medical school as many of the plans available to residents and medical students have unique benefits if adopted at the beginning of residency. The need for LTD can be lost in the shuffle of the transition from medical school to residency. Today, we will be reviewing the value of LTD, the options available to you, and which option makes the most sense for residents in British Columbia.

Background

Long Term Disability (LTD) replaces your income if you become disabled and can no longer earn a living. As residents, we are in a unique financial situation. Our debt load at the start of residency is typically high, and without an above average salary we may struggle to afford both the necessities of life and pay-off any outstanding debt. Put another way, if you are unable to work as a resident for any reason, you may struggle to afford your rent and make payments to your Line of Credit. This is compounded by the fact that if we become disabled to the point that we cannot complete residency, we will never earn a staff physician’s income. Most residents take on a lot of debt with the expectation that staff wages will offset the debt in the future. Without a resident’s salary, or future staff physician salary, our medical school Line of Credit can quickly become a financial anchor that pulls down the rest of our financial life. As a result of this convergence of factors, we strongly suggest residents insure their income in the case of disability.

While the concept of losing your income and the financial impact that would have is easy to grasp, you may wonder about the frequency of claims. In other words, while total disability is a devastating outcome, how likely am I to experience that outcome? And if the likeliness of this outcome is low, why bother insuring against it? This is a reasonable consideration, and there is no single right answer. While statistics for disability rates among medical residents are hard to come by, the Provincial Housestaff Organization (RDBC) estimates one trainee per year requires disability coverage. At the end of the day, the decision to insure or not insure comes down to your own risk tolerance. Are you willing to risk a 1:1350 chance of a catastrophic outcome? Or would you rather insure against the catastrophic outcome, knowing that the chances of it occurring are relatively low. Given the catastrophic nature of a loss of income for the average medical resident, at the Financial Pulse we strongly encourage residents insure their income. Please note, this recommendation only endorses Long Term Disability Insurance. Other insurance types, such as Life Insurance or Critical Illness Insurance, require their own nuanced decision.

While the rest of this article discusses the nuances between LTD options, the most important decision you make is whether or not to insure yourself in the first place. The majority of LTD plans offered in Canada are roughly equivalent, while the nuances of one plan may better fit your needs than another. What matters most is ensuring that you are covered by some form of LTD. LTD provides some financial support should you encounter a worst-case scenario.

Fortunately, some LTD coverage is provided by your employer in British Columbia – which means you will have some employer-paid LTD benefits as a resident in BC. Therefore, the discussion around LTD for residents in BC centres around the decision to purchase additional LTD insurance.

LTD Plan Types

With the need for LTD insurance established, it is worth reviewing the specifics of what is available to residents who wish to insure themselves.

To begin with, most LTD plans can be categorized as either an individual plan, or a group/association plan. Individual Plans refer to an insurance product that is purchased in your name. Group or Association Plans refer to plans that cover a group of employees that work for an employer. While there are several differences between the two types of plans, there are three main variables that you should consider when making a purchasing decision. These are:

  1. Cost: Most individual plans set a fixed premium rate at the time of purchase. This rate may increase if you opt to increase your coverage over the course of your plan, but otherwise the premium rate remains fixed. Most group plans adjust rates based on age brackets. As you increase in age, typically in 5-year brackets, the cost of your coverage increases. As with individual plans, if you increase your coverage over time, the price will also increase.
he net effect of this difference is that group plans cost less up front, but rapidly begin to outpace the cost of an individual plan over the lifetime of the insurance. If you hold your insurance for over 25 years, individual plans typically end up being cheaper over the lifetime of the plan. Yet, it is important to consider the time value of money. Occasionally, the higher upfront cost of an individual plan may be too great of a burden for a new R1 that is struggling with their cost of living. As a result, paying less up front via a group plan may benefit those on a very tight budget. This decision pathway accepts a higher cost later, knowing that staff income will be better able to tolerate an increase in fees. I is worth noting that irrespective of plan type, the cost of insurance will go up as you increase the benefit amount. A prudent strategy is to target a benefit amount that offsets your current monthly budget. As we age into staff life, our monthly budget typically increases. As a result, most physicians start with a small benefit amount as residents, and increase the benefit amount, at the cost of increased monthly premiums, to offset their increased monthly spending.
  2. Terms: Most individual plans have fixed terms that do not change throughout the lifetime of the plan. Most group plans have fluid terms that may be changed by the employer or insurer at any time. The difference here is challenging to quantify numerically. The bottom line, however, is that a private plan provides predictability and stability while a group plan presents some uncertainty. It is possible that terms may change in a way that is unfavourable for you. This occurred as recently as June of 2021, when the OMA group disability plan changed its terms as a result of increasing claims. For individuals wishing to avoid risk or in search of stability, the individual plan is superior. For individuals willing to tolerate some change in their coverage, a group plan may better fit your risk profile.
  3. Portability: Individual plans, as they are sold to an individual, are truly portable. This means you can work anywhere in the country, and often anywhere in the world depending on the specifics of the plan you purchase, and still be covered. True group plans are not portable and are tied directly to specific employment. In British Columbia, the employer-paid LTD plan all residents are automatically enrolled in as part of your employment contract is a non-portable plan. Once you complete residency in BC, you lose this coverage and have no ability to extend coverage beyond residency. Many other group plans in Canada will allow for an extension of coverage if a physician meets specific criteria. For example, the OMA group plan allows for a continuation of coverage if you maintain OMA membership.

We have summarized the key differences between Individual and Group LTD in Table 1

Plan Type Individual Group
Cost Fixed at the time of purchase, stays the same for the entirety of the plan Increases over time, typically in 5-year intervals
Terms of the Plan Fixed at the time of purchase Can be changed at any time
Portability Portable Non-portable
Bottom Line More expensive up front, cheaper over time, defined coverage that does not change over time Cheaper initially, non-portable, terms may change over the course of your coverage

Table 1: Comparison of Individual and Group Long Term Disability Plans

When to Start LTD Coverage

Once you have decided upon the type of LTD you wish to purchase, the next important consideration is when to start coverage. The golden rule for LTD is the sooner you get coverage, the better. There are many reasons why, but the most important include:

  1. Cost: The younger the applicant, the lesser the cost of insurance. This is most relevant for private plans, that fix your lifetime rate at the time of purchase. For group plans, while a younger applicant will get a cheaper rate initially, rates predictably increase with age as previously discussed.
  2. Medical Conditions: As we age, we unfortunately tend to accumulate medical conditions. Most LTD plans will allow for an application without a medical examination if you apply during specific time intervals, for example at the end of medical school, or if you are below a certain age at the time of application. This is crucial to achieving the best possible coverage for yourself. Be aware of time limited offers to apply without a medical, such as at the end of medical school, and take advantage of these time windows. When a plan requires you to submit to a medical examination, if any conditions or previous injuries are discovered, this could result in coverage exclusions. In practice, this means that if you are disabled as a result of a previously identified condition, you will not receive benefits. For example, let’s say a second-year resident has yet to apply for disability insurance. They submit an application at the end of second year and are asked to undergo a medical examination. The examination reveals a history of migraines, which began in first year, likely due to their heavy call burden. The insurance company nonetheless identifies this as a pre-existing condition. They grant the disability insurance, under the condition that if the resident is unable to work due to migraines, they will not receive coverage. If you apply during a time window that does not require a medical examination, your insurance will not be subjected to any exclusions. This is advantageous to you as the applicant, and you should always endeavour to apply whenever a medical examination is not mandatory.

Insurance Riders

We have established the importance of LTD, and when to apply for LTD. The next nuance is the concept of a rider. Riders are modifiers you can purchase that change the terms of your coverage. Typically, riders always enhance or improve your insurance plan, but at a significant cost. Whether the cost of the rider is worth it is a challenging question to answer. Typically, the value of a rider depends on your own personal circumstances and risk tolerance. We will review some of the more common riders offered to applicants, and discuss their utility to the average medical resident:

  1. Cost of Living Adjustment (COLA): A COLA increases the value of the benefit on an annual basis based on the rate of inflation. Every plan differs on the exact increase a COLA provides, but typically plans offer an increase that mirrors the rate of inflation. Should you become disabled at a young age, for example 33 years of age, you will need to live off your benefit for the remainder of your life. Due to inflationary pressures, without a COLA rider, your annual benefit will essentially decrease in value over time. Assuming a 2% inflation rate, if you require $3,000 a month today, by 2051 you will require $5,434 to maintain the same standard of living. Without a COLA adjustment, your benefit will essentially lose value over time. As such, this is an important rider to consider adding to your policy.
  2. Own Occupation: LTD insurance will pay the benefits in the event that you are disabled and not able to work. The definition of ‘not being able to work’ depends on your policy and if you have purchased particular riders. What if you are a surgeon who has lost fine motor coordination after an accident? You could still work in other jobs that do not require the fine motor coordination of a surgeon. A basic LTD plan provides benefits only in the event that you are not able to work any occupation. That means if the insurance provider determines that the surgeon who has lost fine motor coordination can work in another occupation or position, they will not receive a disability benefit. An own occupation rider creates a very narrow definition of employment. If you are unable to fulfil that narrow definition, then you are considered disabled and will receive a benefit. The value of an Own Occupation rider is often debated amongst physicians and other professionals. Based on our previous example, if the surgeon is no longer able to practice in their specialty due to loss of fine motor coordination, and they have the own occupation rider, they will still receive the benefit even if you are able to take on other work, such as working in a clinic or in a non-procedural field. Therefore, without an own occupation rider, if you are able to return to work in any capacity after an injury, even if you return to work in a completely different job, you may lose your benefit. The importance of this comes down to what kind of work you can return to. If you are able to work a low wage job, such as a frontline customer service agent, you may find yourself in a financially untenable situation. Specifically, your new employment may not pay enough to maintain your standard of living. Yet, because you can be employed, you also lose your LTD benefits. Some LTD plans contain a blend of the two occupation definitions. This blend usually begins with an Own Occupation definition of disability for a defined period of time, which then changes to an Any Occupation definition of disability after a proscribed period of time. Typically, the Own Occupation definition persists for two years. In practice, this matters most when you lose your ability to work as a physician but can still work in other positions. For the first two years after acquiring your disability, you will receive full the benefit amount. Once the definition switches to Any Occupation, you may lose your benefit if the insurance company deems you able to return to work in some capacity. The employer provided plan available to resident in BC uses this blended occupation definition. As with most blended plans, the Own Occupation definition in our employer sponsored plan in BC persists for two years before reverting to an Any Occupation definition.
  3. Guaranteed Insurability Rider: This rider guarantees you the right to increase the benefit associated with your plan without further medical examinations. There is a limit to how much coverage you can purchase as a resident. As your income increases when you become staff, you will be able to purchase a greater benefit. Typically, increasing your benefit becomes necessary as your cost of living typically increases over time. As a result, having the ability to increase your benefit may be important to many physicians. Furthermore, being able to do this without a medical examination prevents exclusions being applied to your plan.

While most plans have other riders available, the three outlined above are the riders we consider particularly important for resident physicians to consider.

LTD Coverage

Another common question with respect to LTD is how large of a benefit should you purchase? Before answering the how much question, it is worth identifying that there is a limit to the amount of benefit you can purchase. The limit differs with each plan, but the limit will always be less than your current income. The reasoning is that a benefit that pays out more than your current salary creates the perverse incentive of preferring disability over employment. Insurance companies seek to avoid this perverse incentive by capping the benefit you can purchase. As the maximum size of your benefit is relative to your income, typically you can purchase a larger benefit once you become staff. Whenever you decide to purchase a plan, make sure the sum-total of all the LTD benefits you have purchased does not exceed what any individual plan will allow as a benefit. If your insured total benefit exceeds your plan’s allowed benefit, you will not receive the total benefit in the event of a disability. Rather, the insurance company will claw back some of the benefit. In essence, you are over insured.

When it comes to deciding on how much benefit to purchase, you should purchase sufficient benefit to at least cover your cost of living and debt repayments. If you currently spend $4,000 dollars a month, it would make the most sense to ensure your total benefit works out to at least $4,000 a month. It is worth mentioning that often having a disability is expensive in-and-of itself. Therefore, if you do have a disability, your monthly cost of living may increase. As a result, purchasing slightly more benefit per month than you currently require may be a prudent approach to take.

Another important consideration is income tax. If you purchase your LTD plan with pre-tax dollars, the benefit itself will be subjected to income tax. This means the advertised value of your benefit is higher than the actual benefit you would receive in the case of a disability claim. For example, if you belong to an employer-paid LTD plan that provides a benefit of $3000 per month, that $3000 may be subjected to income tax. Therefore, your take-home payment would be less than the $3000. Be sure to take this into account when calculating the size of benefit you wish to purchase. Conversely, if you purchase your LTD plan with after-tax dollars, then your pay-out in the case of a claim is not subjected to any further deductions. This makes it easier to calculate if the benefit you purchase is sufficient to cover your needs. This nuance is relevant in BC as the LTD plan residents are enrolled in as part of our employment contract is purchased with pre-tax dollars by the government on your behalf. In other words, any pay-out will be taxed as income. You must calculate this tax when considering what your actual total pay-out will be in the case of a claim.

Other Insurance Benefits

The last nuance in the LTD discussion has a unique BC twist. In British Columbia, staff physicians are provided with an LTD plan from the government if billing MSP work. The key caveat here is that the physician must be billing MSP, and as a result, this plan is not portable to other provinces. This is called the Physician Disability Insurance (PDI) plan. It provides eligible physicians with $6,100 of monthly benefit in the case of a claim. The cost of the plan is covered by the government. Given that disability insurance plans typically cost hundreds to thousands of dollars per year, this is a large benefit to physicians in BC. One further, but crucial nuance, is that if you are enrolled in a long-term disability insurance plan with the Doctors of BC as a resident, you will be eligible to roll into the PDI plan as a staff without undergoing a medical examination. This is a complex, but potentially valuable benefit to be aware of. Essentially, you can obtain LTD through Doctors of BC as a new resident. If done within the first 90 days of residency, you will be covered without a medical. If you stay in BC as staff, you can obtain an excellent LTD plan for free without exclusions. If you know you will practice in BC once you complete residency, this option may be the most cost effective.

Actionable Conclusion

Long Term Disability Insurance should be considered a key component of your financial plan as a resident. Long Term Disability Insurance protects against a worst-case scenario and provides you with an ongoing income should you be unable to work.

Multiple different plans with different nuances exist. Prior to making a purchasing decision, review your own goals and preferences, and select a plan that best matches your needs.

Without knowing the preferences and goals of any individual, it is impossible to recommend one specific offering over another. Most group and individual plans offered in Canada are generally equivalent. The most important decision you can make is to be insured at all.

That being said, if you intend on working in British Columbia there are a few nuances that do make one specific offering preferred over others. The Doctors of BC Physicians Disability Insurance (PDI) is the lowest cost LTD option for staff in the province. If you purchase Doctors of BC LTD Insurance as a within the first 90 days of residency, you will be eligible to enrol without a medical examination. Your resident LTD insurance can then be converted to the PDI insurance, again without a medical examination, once you complete residency. The net effect is a no-cost LTD plan when staff without any exclusions or carve outs. As a result, for those planning on staying in BC as staff, the Doctors of BC plan may be the most reasonable option. If you are unsure about where you will practice as staff, this route is not necessarily better than other available options as the PDI plan is not portable to other provinces.

Practical Example

Kate is an incoming R1 in Urology, having just finished medical school in Nova Scotia. Prior to starting residency, she decides to purchase some long-term disability insurance. She is unsure which of the many options she should buy. She found the insurance salespeople rather pushy and is feeling a bit overwhelmed. She remembers to start with the basics and consults her monthly budget.

She is the sole financial provider in her family. Between herself, her husband, and her two-year-old child she expects to spend $3750 monthly. She realizes that if she requires a disability pay-out, she will need the pay-out to cover her monthly expenses and allow her to pay off her Line of Credit. She runs the numbers and decides an additional $750 per month would allow her to pay off her Line of Credit. All told, she determines that she will need $4,500 per month to maintain her family’s standard of living and pay off her existing debt should she experience a disabling event.

She reviews the terms of her employer sponsored LTD plan that is provided to all residents in BC. She notes that it covers 66% of her base salary if she were unable to work. Her R1 salary is $57,064.62, of which 66% works out to $37,662.65. Therefore, if she needs to access this disability plan, she will receive about $3140 per month. But then she remembers that the employer sponsored plan is paid for with pre-tax money. That means the benefit is taxable as income. Therefore, using an online income tax calculator, she realizes that her benefit of $37,662.65 works out to a take-home payment of $30,923 annually, or about $2,575 per month in benefits.

This amount will not meet her anticipated need as her budget indicates she would need about $4,500 per month to maintain her standard of living and pay off her debt. She decides to explore other options to supplement her employer-provided LTD. Kate has a strong family history of high blood pressure. She wants to make sure she gets covered without a medical to avoid having a hypertension exclusion. She decides to consider the RBC and Doctors of BC offerings, as both allow for enrolment without a medical for 90 days after starting residency. She finds both plans very similar in terms of costs and benefits over a 25 year time span, and is not sure which to pick.

She remembers the PDI plan is the best value for money as staff if she ends up practicing in BC post-residency, but she does not want to have to go through another medical to get on the PDI plan in five years. She remembers the Doctors of BC insurance nuance, namely, that if she starts with Doctors of BC now, she can convert to PDI without a medical at the end of residency. If Kate was unsure of her future practice in BC, she may consider exploring other individual plans instead of the Doctors of BC plan.

In the end, Kiran decides to purchase $2,000 of long-term disability insurance through Doctors of BC to augment her employer provided LTD plan. She adds the Own Occupation, Guaranteed Insurability, and COLA riders. As a 29-year-old non-smoker, her total cost per year ends up being $244 dollars, or $20.33 a month. Not bad for some piece of mind for her and her family!