When you’re helping a client apply for disability insurance, one of the most important steps in the process is financial underwriting. This is how the carrier determines how much coverage your client qualifies for and ensures the benefit amount accurately reflects their true income exposure. The goal is simple: match the benefit to the income that would be lost in the event of a partial or total disability, while preventing over insurance.
Because disability benefits are based on a percentage of income, underwriters focus heavily on two core questions:
- What does your client earn today?
- What is their future earnings potential?
This becomes especially important for physicians and medical professionals, where income structures are often complex and may involve ownership in a practice.
How Disability Insurance Underwriters Evaluate Financial Risk
From an agent’s perspective, financial underwriting centers on four primary areas:
- Earned income
- Unearned income
- Net worth
- Bankruptcy history, if applicable
Your client will be required to provide personal tax returns and, when applicable, business tax returns. If they own or partially own a business, carriers typically request:
- Income statements
- Balance sheets
- Profit-and-loss statements
Most carriers look for at least one year of stable income and employment history. However, physicians in residency, fellowship, or just beginning private practice can often qualify with a strong explanation of income trajectory and future earnings potential.
What Counts as Earned Income
For underwriting purposes, income is considered “earned” if it would stop or be significantly reduced due to disability. That means:
- Salary and professional earnings are included
- Passive income, such as investments or business income that does not require active work, is excluded
If a disability would not materially impact that income stream, it does not need to be insured.
Employment Income: What You Should Document
If your client is a W-2 employee with no ownership interest, underwriters will typically include:
- Base salary
- Wages
- Regular overtime
- Bonuses and commissions (net of expenses)
In many cases, employer contributions to qualified retirement plans (401(k), 403(b)) may be included as earned income, up to IRS limits. However, fringe benefits such as the following are usually excluded from earned income calculations:
- Parking allowances
- Car leases
- Subsidized meals
- Non-cash perks
Business Ownership: How Income Is Determined
If your client owns all or part of a medical practice or business, underwriting becomes more nuanced. The carrier will evaluate:
- The legal structure of the business
- The ownership percentage
- The business’s total earnings
- The client’s role and compensation
For owners in corporations or LLCs who also work in the business, earned income typically includes:
- Salary
- Wages
- Bonuses and commissions
- Plus their proportionate share of business profits
Example:
If your client owns 50% of a practice earning $100,000 annually, $50,000 is attributed to them as earned income, in addition to their salary.
Some policies also offer a Business Owner Allowance. This may increase earned income by up to 20% for clients who are at least 20% active working owners. This can significantly increase allowable benefits and is an important design consideration.
For sole proprietorships or partnerships, earned income is generally:
- Net profit after expenses
- Before taxes
Most carriers will not allow personal expenses or depreciation to be considered as income.
Retirement Contributions
Some carriers allow pension or profit-sharing contributions to be included as earned income, up to specific limits, unless those contributions continue during a disability. Documentation is required.
Income Fluctuations and Bankruptcy Considerations
When income fluctuates, carriers usually apply a weighted average over two to three years to determine the maximum monthly benefit. If income increases by more than 20% year-over-year, expect underwriting to request:
- A written explanation
- Supporting financial documentation
Bankruptcy history is another underwriting concern. Multiple filings, Chapter 7 bankruptcies or pending bankruptcies raise red flags because of the perceived risk of benefit misuse. Most carriers require:
- Bankruptcy to be fully discharged
- A waiting period (often several years) before coverage is issued
Agent Takeaways
As an agent, your role is to:
- Prepare clients early for financial documentation
- Understand how income is classified
- Identify ownership structures that can increase or limit coverage
- Position business owner allowances and retirement contributions correctly
- Anticipate underwriting concerns with fluctuating income or bankruptcy history
Strong financial underwriting preparation leads to:
- Faster approvals
- Fewer benefit reductions
- Better-designed policies
- Higher client satisfaction
This is where knowledgeable agents create real value in the disability insurance process.
Do you have questions or need more information? Reach out to your Local Sales Rep. Do you already have a client in mind? You can submit quote requests, view underwriting case status and much more in our Advisor Portal.
