Written By Caitlin See
Long-term disability insurance (LTD) generally protects up to 60% of your gross income against an unexpected injury, illness or medical condition. However, most insurance companies have a maximum disability insurance allowed, which typically caps out around $15,000 to $30,000 per month, depending on specialty and other determining factors.
For most professions, the maximum benefit amount is plenty to live off of, considering disability income from an individual policy is tax-free. But if you’re a high-income earner — we’re talking $750,000 to north of seven figures — you’ll want to keep reading and plan to seek professional guidance to strategically get the most disability insurance coverage possible.
What determines the maximum disability insurance allowed?
The type of disability insurance plays a large role in determining your maximum monthly benefit. For example, if you have employer-sponsored group disability coverage, your policy could cover up to 60% of your income. But there might also be a cap on disability insurance benefits, which is often set at a $5,000, $10,000 or $15,000 monthly maximum. Additionally, if your employer covers your premiums, any disability benefits you receive will be taxable income, so that 60% quickly becomes closer to 45% after taxes.
In comparison, an individual disability insurance policy typically allows for coverage between 50% to 60% of your pre-disability earnings. However, the payout is tax-free since you’ll pay for your own premiums with after-tax dollars. The disability income you receive from an individual policy can stretch much further during a time when you really need it.
Disability insurance companies consider several key factors to determine your maximum limit, including your income, occupation, medical history and existing coverage through an employer, professional association or individual policy.
Additionally, the individual insurance carrier might impose a monthly maximum cap of its own based on occupation.
For example, the “Big 5” disability insurance carriers generally allow a maximum monthly benefit of $20,000 to $30,000 for physicians. For most physicians, this tax-free payout is enough to replace most of their take-home pay to cover fixed expenses and other essentials, while hopefully still maintaining their preferred lifestyle.
But for some high-income earners with equally high expenses, the standard maximum benefit might not cut it.
How to get the maximum disability insurance allowed
Regardless of income, one of the best ways to maximize disability coverage is to buy an individual disability policy first. Then, if you join an employer who provides group coverage, it won’t impact your individual plan and you’ll be able to collect disability income from both types of coverage. However, the same isn’t true if you already have group coverage in place when you go to buy an individual policy since the carrier will take into account any existing disability coverage.
Other potential strategies to get the maximum disability insurance allowed might include:
- Leveraging multiple individual disability policies: If your high income (e.g., $1 million or more) requires a higher payout than the standard $20,000 to $30,000, you might need more than one individual policy for additional coverage. In which case, it’s best to work with an experienced insurance broker to discuss your needs.
- Buying a policy with an excess disability insurance carrier: In some cases, a supplemental policy through Lloyd’s of London might be a viable option. For example, let’s say you’re an orthopedic surgeon earning $800,000 a year with a five-figure physician mortgage, luxury vehicles, private school tuition and an overall taste for the finer things in life. It might make sense to take on much larger premiums to adequately protect your specialty income given you have hefty fixed expenses and a lifestyle that isn’t easy to walk away from. Or let’s say you’re a high-income earner with a pre-existing condition, such as a really high BMI, that’s making it difficult to find coverage with a traditional disability insurance carrier. Lloyd’s of London might be a solution — albeit an expensive one — but if it’s your only option, it’s better than no coverage given your specialized training and high income.
- Implement a group LTD plan for your practice: If you own a practice and are on payroll with at least one other W2 employee, then you can put a group disability policy in place without an underwriting requirement.
Bottom line: If you’re concerned about not having enough coverage to maintain your family’s standard of living, you need to work with a knowledgeable broker to find the best strategy to maximize coverage.
Getting the best disability coverage for your needs
SLP Insurance searches the “Big 5” for own-occupation disability insurance that provides comprehensive coverage for specialty income with the best discounts. Our team has experience with finding solutions for high-income earners who need more than the typical maximum disability insurance allowed, as well as those who might have limited options due to pre-existing conditions.
Fill out the form below to have SLP Insurance evaluate your existing disability policy and financial situation to identify gaps due to maximum benefit limits or insufficient coverage.
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