What do dentists need to know about disability insurance?

May 4, 2022 | Robbie Morris

Robbie Morris, CSLP®
Robbie Morris, CSLP®
Hey! I'm Robbie, the founder of Roots Financial Planning, a fee-only, fiduciary advisor located in San Antonio, TX working virtually with dentists across the United States. When I'm not helping dentists live their best life, you can find me making pizza, swimming, or skiing.

Becoming a dentist is a huge investment of time and money. The average student loan debt that a dentist leaves school with is increasing at a tremendous rate. This isn’t all bad news though! The time and money spent to earn your degree allows you to earn a fantastic wage and maintain a great lifestyle. Disability insurance is used to protect that investment you have made in your education and lifestyle.

The Social Security Administration (SSA) estimates that 1 in 4 people will become disabled before reaching retirement age (based on the SSA definition of retirement age in your 60s). With disability insurance, you can mitigate the risk of a career-altering disability.

How does disability insurance work?

Disability insurance pays you a portion of your income when you are unable to perform your duties as a dentist due to injury or illness. The most common replacement amount is 60% of your income. For example, if your normal income was $100,000 and your policy replaces 60% of your income, the disability insurance would pay you $60,000 per year when disabled.

What things do you need to consider in your disability policy?

Own-Occupation vs Any-occupation

An own-occupation policy will pay proceeds to you if you are unable to perform your regular duties as a dentist. For example, if you were to injure your hands you would be unable to perform any procedures as a dentist and thus your policy would pay you for the duration of that injury.

Own-occupation is often split further into modified own-occupation and true own-occupation. Where modified own-occupation will pay benefits if you are unable to do your job as a dentist; however, if you were to take a job doing something other than dentistry, benefits would stop. True own-occupation on the other hand, would continue to pay you benefits even if you decided to take another unrelated job.

An any-occupation policy will pay proceeds to you if you are unable to work in any profession. Sometimes, it is further defined as being unable to perform a job for which you are suited by education and training. Based on the most basic definition of any occupation, if you were injured and were unable to perform your procedures as a dentist but could work at the front desk of your office, your policy would not pay you any benefit. Any-occupation is not recommended for someone as highly specialized as a dentist.

There are many variations of own-occupation that will show up in policy details. Even a few different words can completely change how disability is defined in the policy. It is critical to review exactly what the definition of disability is in your policy before committing.

Benefit Period

The benefit period is how long the policy will pay benefits after you file for a disability claim. This time period can be any number of years and could even be written to pay until you reach age 65.

Elimination Period

The elimination period determines how long from the time of a disabling event until payments are sent to you from the policy. Generally, this period is anywhere from 30-365 days, with 90 days being a great sweet spot.

Noncancelable and Guaranteed Renewable

A noncancelable policy ensures that the insurance company cannot cancel your policy or raise the premiums (how much you pay for the policy) as long as you continue to pay the premiums.

Guaranteed renewable means the insurance company must let you keep your policy in force as long as you continue to pay the premiums. But there is no guarantee that the premiums stay the same over the life of the policy.

Having a policy that is both noncancelable and guaranteed renewable is a great benefit to have.

How much will you pay for a disability policy?

The answer to this question depends on each dentist’s unique circumstances and preferences. However, a good rule of thumb is you will pay 1-4% of your current gross income per year OR 2-6% of the annual benefit you would receive from the policy in the event of a disability.

For example, if your gross income was $100,000 then you would look to pay between $1,000 - $4,000 per year in premiums. $100,000 x 0.01 = $1,000 and $100,000 x 0.04 = $4,000

Now for an example using the annual benefit. Let’s again use an annual income of $100,000 and your insurance policy pays out 60% of that in the event of a disability. This equates to an annual benefit of $60,000. $60,000 x 0.02 = $1,200 and $60,000 x 0.06 = $3,600. As you can see, this rule closely matches the gross income rule.

What affects the price of your policy?

There are many factors that are taken into consideration when determining what you will pay for your disability policy.

  • Gender – all other things being equal, woman can pay up to 40% more than men. Woman have to contend with pregnancy and its related issues. They also have a higher chance of autoimmune disorders, depression, and anxiety. Woman are also more likely to get help and utilize healthcare.
  • Health – a physical exam is often part of the underwriting procedure. Medical history, pre-existing conditions, and tobacco use are also taken into consideration. If you are at more risk for a disabling event due to sub-optimal health this will increase the cost of your policy.
  • Location – where you live will affect the price of your policy by as much as 30%. State regulations can inhibit certain policy types from being offered. Cost of living and average income in your state will affect the cost. A high cost of living area will have higher premiums. Claims history in your area is also a major factor. If there is a history of numerous claims then the premiums will be higher.
  • Disability definition – an own-occupation policy will cost more than an any-occupation policy because it is more specific.
  • Benefit period – the longer you choose for your benefit period the more your policy will cost.
  • Elimination period – a longer elimination period will reduce the price of your policy. Generally, there are diminishing returns for an elimination period any longer than 90 days.

What is a rider?

A rider is a provision that you can add on to a standard insurance policy to provide an additional benefit. A rider is similar to opting for additional features on a base car model, like heated seats, a sunroof, or a navigation system. Some of the most useful riders to look for are the following.

Future Increase Option (FIO)

This option will allow you to increase the benefit of your policy without the need for additional medical checks. This is a great option for a dentist early in their career that expects their income to increase over time. If you are a later career dentist with a stable income, this is a less valuable rider.

Benefit Increase Rider, Benefit Purchase Rider, or Benefit Update Rider (BIR/BPR/BU)

These three riders have a purpose similar to the FIO, however they function slightly differently. They are all no-cost riders. Every few years you must check in with the insurance company and complete an application to increase your coverage. If you do not qualify you can wait until the next check in date. If you do qualify, you must purchase at least 50% of the offered increase in order to keep this rider on the policy for later. If you fail to check in every few years the rider will also be removed. These riders also allow you to increase your benefit any time your income increases or the insurance company limits increase.

Partial/Residual Disability Benefit

This rider will pay a benefit if you are still able to practice dentistry but have reduced income or hours. A basic version of this rider requires a 20% loss of income and hours. An enhanced version of the rider might only require a 15% loss in income.

Cost of Living Adjustment

This option will increase the benefit being paid to you after a claim has been filed. Instead of the benefit remaining the same for the duration of your disability, the benefit will increase at the rate of inflation. This rider is more valuable to early career dentists.

Should you use graded or level premiums?

It depends on what you can afford now and how long you expect to keep the policy in force.

Level Premiums

As long as your policy is non-cancelable and guaranteed renewable, level premiums will remain the same for the life of the policy. The only time the premium will change is when you increase your benefit as your income increases. If you plan to practice dentistry past your 50s and keep the policy in place, then level premiums will likely be cheaper in the long run.

Graded Premiums

Graded premiums start lower than a level premium would at the same age. Over time the premium will increase on a specified schedule until it is eventually greater than what a level premium would be. Near the tail end of your career the premiums will be very expensive, kind of like term life insurance. You are more likely to suffer a disability later in life. A graded premium can be helpful early in your career if you cannot afford the full level premium. At any time, you can switch from graded to level, however any level premium you switch to at an older age will be higher than it originally could have been. 

When should you purchase a disability policy?

As soon as possible after graduating from dental school is the best time to get a policy in place. You can even begin looking for a policy during your final semester of dental school. At this point in your career, you are youngest and likely healthiest compared to any time down the road. It is a great time to lock in lower rates due to these advantages. You may even be able to find student, resident, or association discounts through certain providers.

When it comes to disability insurance, comparing different companies and polices is never straight forward. What is included in one policy could be a rider on another policy. It is critical that you understand what you are looking for in a policy so that you can choose the one that aligns best with your needs and goals.