If you’re like most physicians, although you spend your time helping others to prevent or overcome illnesses, or to recover from injury, you probably don’t think about becoming disabled yourself. But imagine you’re in a room of 100 people, and 26 of you are randomly “chosen” to become disabled.
This would be consistent with statistics from the Social Security Administration that show slightly more than one in four of today’s 20-year-olds will become disabled before reaching retirement age. Those are sobering odds. So, you need disability insurance to protect yourself and your family, but what, exactly should the insurance cover, and how should you buy that coverage?
This article covers important aspects of disability insurance, including what your policy should cover, when and how you should buy it, and when you may no longer need it.
1. Work with an Independent Agent.
While you can buy disability insurance directly from an insurance company, we recommend working with a licensed independent insurance agent. Independent agents can sell policies from a range of insurers, whereas a “captive” agent represents only one insurance provider.
It’s also important to work with an agent who has experience working with physicians, someone who understands the hardships that would result if you were no longer able to practice in your specialty and can guide you in selecting different features and “riders” that are right for your situation (more on this below).
Know that you’ll almost certainly need to undergo a physical exam (called a paramedical exam) that checks for certain conditions such as high blood pressure, diabetes, back injury and others. The exam will likely include drug testing, and requires you to disclose whether you smoke or use other nicotine products. The results of the exam can affect the price you will pay for a policy.
2. Determine How Much Coverage You Need.
One of the biggest questions most physicians have when evaluating disability policies is “How much coverage do I need?” A simple answer is “replace 60%-70% of your income.” A better, more complete answer is, “it depends on your life situation.” We think it is important to go with a more complete answer.
Group policies – Find out whether you’re covered by an employer-sponsored policy, or other group disability insurance. If so, is the policy portable (can you take the policy with you if you change employers)? Have your agent review the policy documents to make sure. You very well might then decide to purchase additional coverage to supplement what your group policy provides.
What about Social Security? If you have been working for several years, you are already covered by the Social Security Disability program (check your annual Social Security Benefits statement). However, to qualify for Social Security benefits you must be unable to work in any occupation for which you are otherwise qualified based on your education, training and experience.
Consider your expenses, current and future. How much income would it take to cover your current expenses, for yourself and your family, and to meet future financial needs? You’ll want a policy that would allow you to continue making your mortgage payments (or pays off the balance), investing for retirement and setting aside money for your kids’ college education if you were to become permanently disabled.
Understand that you will not be able to insure your entire income stream with a single policy. In most cases, you are limited to protecting between 60-70% of your gross income; however, benefit payments from private policies (non-employer and non-Social Security) are generally not taxable. So, 60-70% of your gross income may be sufficient, or even more than enough. If not, you could purchase more than one policy, if you feel strongly that you need more coverage.
Increase and decrease your coverage over time – As a resident physician, you may not be able to afford a high level of coverage, since premiums can cost from 2% - 6% of the benefit (so, a policy that pays $10,000 per month would cost from $200-$600 per month). You might start with an amount that is less than ideal and when you become an attending physician you can increase the benefit. A policy that includes a future purchase option allows you to apply for additional disability insurance coverage, regardless of your health, as your income rises. When you are in your mid- to late- 50s, your mortgage is largely paid off, your retirement savings are ample and your kids are grown, you can reduce your coverage.
3. Features and Riders.
Why the big difference in premiums? There are many choices that affect the cost of a disability insurance policy. Your independent agent can be particularly helpful in sorting through these options.
What constitutes a “disability”? If you are unable to work as an M.D. in your specialty but you could do another type of work, some policies will not pay a benefit. Most M.D.s buy a policy where “disability” is broadly defined, covers their specific occupation and specialty (the term is “own occupation”), and includes disability due to psychiatric conditions or addictions. You can buy a residual disability rider that covers a partial disability and pays a partial benefit as you recover. It is definitely worth considering.
Length of coverage. Disability insurance policies can provide coverage for the short-term or the long-term. Short-term policies that cover you for a period of months rather than years are cheaper than long-term coverage. However, choosing a short-term policy simply because it's cheaper would be a costly mistake if your disability lasts longer than the maximum payout period under your policy. It is worth noting that the average long-term disability claim is for slightly less than three years, while short-term disability insurance is for up to two years.
Elimination periods. Different policies offer different “elimination” periods, the length of time you have to wait before coverage starts – this could be as short as 30 days, or as long as 180 days, with 90 days being the most popular. Choosing a longer elimination period lowers your premiums but also means you need to have enough savings to cover your expenses during that time.
Cancellable? Under what circumstances, if any, can the insurance carrier cancel your plan once it is in force? Understand this before buying a policy.
Inflation Protection. With this rider, your benefit increases with inflation. This can be particularly important if you are disabled at a young age. If you are in your 50s and only need coverage to age 65, you probably don’t need it.
Future Purchase Option. This rider allows you to increase your benefit later, without having to answer questions about your health or activities. If you cannot afford as much coverage as you would like – perhaps you’re a resident, or just started your practice – purchase this rider.
Retirement Benefit. In the event of disability, this rider causes the insurance company to invest in some type of retirement vehicle for you, in addition to paying your monthly benefit. In general, we do not recommend this. Instead, we recommend you buy a larger primary benefit with the money that would have been used to buy this rider. Then if you do become disabled, use some of those higher benefits to continue saving for retirement.
No one plans to become disabled, but having insurance in place can provide you and your family with great peace of mind, knowing that you could continue meeting your financial obligations even if you weren’t able to continue working. We hope this article provides useful guidance about disability insurance for physicians, as a first step in obtaining that security.
Gold Medal Waters is a fee-only financial planner based in Boulder, Colorado that specializes in serving the unique needs of physicians and high net worth clients. Coordinating a great financial plan isn’t easy. Learn more about what sets us apart or talk to an advisor at no cost to see if we are the right firm for you.
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