High-Limit Disability Insurance: A Comprehensive Guide for High-Earning Physicians

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Not everyone encounters the terms “high limits” or “lump sum coverage” when exploring disability income insurance. It's a valuable piece of protecting your income, especially for those with much to insure.

Let’s get into it.

High-limits Insurance Policies

They offer significantly higher disability insurance monthly benefits than others available from US-domiciled insurance carriers, similar to lump sum coverage.

Lump Sum Coverage

A fixed benefit amount in one payment. Combining or ‘stacking’ high-limit policies with domestic policies enables individuals with substantial earnings to protect a larger proportion of their income.

This article explores high limits and lump sum disability insurance. We will discuss how to secure coverage, the benefits and drawbacks, and who is eligible.

Overview

High limits and lump-sum disability insurance plans are designed to provide coverage that goes beyond the standard offerings of domestic disability insurance.

These plans are often used as additional coverage stacked on individual disability insurance (IDI) or group insurance (GLTD) policies.

Ideal target audience

Physicians in high-earning specialties

Physicians in peak earning years

High-limits disability insurance pays a monthly benefit of up to $500,000. Many of the policy provisions are the same as a domestic disability policy, except for the benefit period, which is usually limited to 5 years.

What is Lump Sum Coverage?

Lump Sum disability coverage offers a disability benefit after a defined period of time (normally 5 years). This is issued in cases of a permanent total disability where the insured person is unable to work in any capacity.

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Note: When the insured pays the premium with post-tax income, the benefit is received tax-free.

Underwriting Process

High-limits and lump-sum disability insurance can be underwritten individually or as part of a group.

Individual underwriting

When High-limits and Lump Sum disability insurance are secured individually, the underwriting process follows a similar playbook to that of domestic US insurance carriers such as MassMutual.

The insured will need to provide evidence of income and extensive information on their medical background, i.e. disclosing pre-existing medical conditions

There are fewer applicants for high-limits coverage, so it can be easier to speak to experienced underwriters

It can be easier to secure coverage where there are pre-existing health conditions compared to those lower limits

Group underwriting

When procured as part of a group insurance plan, the high limits and lump sum disability insurance can be offered as Guaranteed Standard Issue (GSI) coverage.

The insurer provides the coverage without requiring individual underwriting or evidence of insurability from each member of the group. This acts as an advantage to insureds who want to protect more of their income because the process of securing coverage is shortened and the ‘hassle factor’ is removed

Where to Access Coverage?

Policies with high limits are provided by Managing General Underwriters (MGUs) and underwritten by Lloyd's of London, a specialist marketplace for unusual insurance risks. Lloyds of London is what’s called an ‘alien’ insurance company’, the broker selling the coverage is called a surplus lines broker and is unable to deal with the insureds directly. What this means in practice is that if you are looking for high-limits coverage, you need to work with an intermediary such as Hollowtree to secure coverage.

Benefits

High limits and lump sum disability insurance plans come with numerous benefits that make them attractive to high-income professionals:

Higher Coverage Limits: These plans offer significantly higher coverage limits compared to domestic insurance coverage, ensuring that high-income earners have adequate financial protection in the event of a disability.

Income Gap Closure: High limits and lump sum plans can effectively close the income gap left by domestic insurance coverage, providing a more accurate reflection of the insured's income and lifestyle.

Tax-Free Benefits: As these high limits and lump sum plans are typically structured as voluntary plans, the benefits received are often tax-free.

Drawbacks

While high limits and lump sum disability insurance offer significant benefits, they also come with certain drawbacks:

Limited Benefit Period: Unlike most domestic insurance carriers that offer extended benefit periods, high limits and lump sum plans typically have a 5-year benefit period.

Policy Duration: These types of plans usually need to be rewritten every five years, which can lead to increased rates over time.

Delayed Lump Sum Payout: If a lump sum coverage is included in the plan, the payout generally occurs after five years of disability and if the insured is still unable to work.

Who Can Benefit?

We see a very specific use case for high limits and lump sum disability coverage for high-earning physicians.

These fall into two broad categories:

High-income specialists such as Plastic Surgeons or Brain Surgeons: Since domestic coverage only covers a fraction of a specialist's actual earnings, stacking high limits and lump sum coverage can close the income gap.

Physicians in Their Peak Earning Years: Most physicians reach their peak earning years in their early 50s, and while they may have paid off their mortgage and college funds, they do not have substantial retirement savings. A disability event during these years can have an outsized financial impact. High limits and lump sum coverage can provide enhanced protection and insulate physicians from the downside risk to their savings during these critical years.

The Hollowtree Solution

High limits and lump sum disability insurance offer a comprehensive solution to high-income earners who find that traditional disability insurance policies do not adequately cover their income. By understanding the benefits and drawbacks of these plans, companies can make an informed decision about whether these types of coverage are appropriate for their specific needs.

Remember: While these policies are designed to offer enhanced protection, they should complement, not replace, traditional disability insurance policies. Always consult a professional insurance advisor, like Hollowtree, to help guide you through the process and ensure you have the most suitable coverage for your unique situation.

High limits and lump sum disability insurance can be vital parts of a comprehensive financial protection strategy, offering peace of mind and financial stability when it's most needed. Don't let a disability derail your financial plans—protect your income with the right insurance coverage.