10 Important Things All Physicians Should Know About Disability Insurance

 

Have you ever thought about what would happen to your income if you became completely disabled?  Statistically, if you’re young, that’s far more likely than an untimely death.

Would your family be protected?  Would you have a way to provide for your family?  This is where long-term disability insurance comes in.  Disability insurance is one of those things that not enough people get but everyone needs.

I authored this post, but I’m proud to partner with Matt Wiggins and the team over at Pattern Financial Consultancy to bring you this information.  He and his team have a real heart for educating people on how to get only the right kind of insurance to fit your needs.  Pattern is a truly independent disability and life insurance broker.  I trust them to give you good information and help you find the coverage you need to protect yourself during a financial crisis.  

Click here to fill out a simple questionnaire to determine your disability insurance needs.  It’s a no-risk, no-cost survey. 

Full disclosure: If you fill out the questionnaire, even if you don’t end up buying insurance using Pattern, The Scope of Practice earns a small commission at no additional cost to you.  You’ll be supporting the mission of this site: to help physicians and dentists learn to manage their businesses successfully and master their personal finances.  Thanks so much!

Why do you need to get disability insurance?

Insurance protects you from financial catastrophes.  If you suddenly become disabled and are unable to do your job, that qualifies as a financial catastrophe!  Long-term disability insurance offers a replacement for your income in the event you’re no longer able to do your job.  

This is really important!  If you can’t work, you need an alternate way to provide for your family.  Unless you plan on hoping the government will take care of you, long-term disability insurance is your answer! 

So, let’s go through the 10 things all physicians should know about disability insurance.

1. Do I need short-term and long-term disability insurance?

In general, my answer is no.  I’m a big proponent of self-insuring through smaller risks and using insurance to cover huge financial risks.  

Short-term disability insurance will cover you if you’re temporarily disabled.  This is typically for terms less than 180 days.  This is where your emergency fund comes in.  

You should have at least 3-6 months’ expenses saved in a savings account for emergencies.  Instead of paying premiums for short-term disability insurance, self-insure through this risk by saving ahead of time.  See this post  for a full discussion on the emergency fund.  

2. Who do I buy disability insurance from?

The short answer is that you need an independent insurance broker.  Beware of captive agents!  

There are six companies that offer true “own-occupation” insurance for physicians: Mass Mutual, Ohio National, The Standard, Principal, Guardian, and Ameritas.  You want someone who doesn’t have a financial incentive to get you to buy a specific product.  If you go directly to the company that sells the insurance, they’ll try to get you to buy only their insurance product.

A truly independent agent will give you quotes from multiple companies for you to compare and pick the best choice.  That way, you’re getting a broad range of options to choose from.  

You should also get quotes from multiple agents.  I recommend getting quotes from at least three agents.  Compare each of the quotes from each of the agents, and go with the best ones.  

Also, don’t forget to ask for a discount!  A good agent will know to look for discounts for you, but it’s good to ask.  You may be eligible for steep discounts through professional associations or your employer.

3. When should I buy disability insurance?

This probably seems obvious, but the answer is “before you become disabled.”  Since no one really knows when that’s going to happen, the real answer is “now.”  

Your cheapest time to buy it will be during residency.  Many companies give 10-15% discounts for residents.  Plus, you’re likely young and healthy, so that will help keep your premiums low. Consider buying a cheap policy early in residency and then increasing the policy just before you graduate.

4. How much disability insurance do I need to buy?

Remember, you’re trying to replace your income if you become disabled.  Make sure that you buy enough insurance to replace a significant portion of your income, sufficient to maintain your expenses and save for retirement.  

For example, let’s say you’re making $300,000 per year, and your after-tax income is $180,000.  In this example, your monthly after-tax income is $15,000.  If your maximum benefit is only $10,000 per month, you’ve only got enough coverage to replace 2/3 of your income!

Also, make sure that your policy will cover all parts of your income!  Increasingly, physicians receive a significant portion of their income from “non-salary” sources.  This might include incentive pay, bonuses, dividends, and ancillary services.  Make sure you know what your policy actually covers. 

Insurance companies are happy to sell you the biggest possible policy, but you shouldn’t buy more than you’ll realistically need.  You’ll end up spending a lot more in premiums that way.

You may also be able to buy smaller policies through two different companies and combine them to get more coverage at a lower cost.  Be careful with this strategy, though.  The smaller the policy is, the more expensive the rate is per $100 of benefit.  In other words, it may be cheaper to get one large policy using the company with the best rate than to take two smaller policies with different companies.  However, getting two policies may give you a higher combined limit to increase up to in the future, which may be prudent for higher income specialities.

Try to get coverage for as long as you can.  Lifetime or “retirement age” policies are ideal.  However, if you can only get 2, 5, or 10 years’ worth of coverage, that’s better than nothing.  

5. How much does it cost, and do women really pay more?

As a general rule, disability insurance is more expensive for women (although life insurance is typically cheaper).  This is because women are statistically more likely to leave the workforce due to injury or illness.  

On average, men may pay 1-3% of their income and women may pay 2-6%.  Depending on how much income you’re trying to replace, expect to pay $200-600.  A good independent agent may be able to get you a unisex policy, which can significantly lower your premiums.  

If you are a dual-income family, you may be planning on your spouse’s income to be your “insurance policy.”  In general, I don’t recommend that.  What if you end up in a car accident and are both disabled simultaneously?  Disability insurance is cheap enough that it’s worth it to cover the risk of being disabled.  Once you become totally financially independent, you can drop the coverage and be self-insured.

6. Is my employer’s disability insurance plan enough?

You should read your employer’s plan, but generally the answer is no.  Your employer’s plan likely doesn’t cover bonuses, incentive pay, and non-salary compensation.  Also, it’s typical for the plan’s maximum benefit to not cover a sufficient amount of your income.  This isn’t always true, so it’s worth comparing your company’s plan to the quotes from the independent agents.

Make sure you read the employer’s policy to know what their definition of “disability” is.  If you’re an orthopedist and you break your hand in a way that makes you unable to swing a hammer, but you’re not wheelchair-bound, your policy may not cover that.  Just be sure you read the fine print to know whether your disability insurance actually covers you in the event that you can’t do the job you want to do.

Another reason to buy supplemental insurance through an independent agent is that your employer’s plan is not portable.  If you switch jobs or join a new practice, you can’t take that coverage with you.  If you’ve had a major health issue like a recovered heart attack, you may now be uninsurable.  Having your own independent policy ensures that you’ll have disability coverage even if you switch jobs.  Also, the benefit paid by the employer’s policy is often taxable. In that case, you’ll only receive a little more than half of what their policy says it will cover.

7. What is “own-occupation” insurance?

“Own-occupation” or “own-occ” insurance covers you in the event that you can’t do your specific job.  Even if you could get an alternate job, you’ll still receive your disability benefit.  

This is critical!!!!

This is one of the biggest mistakes physicians make when it comes to disability insurance.  If you are disabled in a way that prevents you from doing your job the way you used to, a policy that is not “own-occ” will not pay as long as you’re able to be gainfully employed in some other way.

This becomes particularly important when you consider what your job actually entails.  Let’s say you’re a highly compensated surgeon and you lose several fingers in a car accident.  You can’t do surgeries anymore, but you can still see people in clinic.  Your policy may not pay you because the insurance company will say, “You can still see people in clinic as a surgeon.”  Your biggest source of income is now gone, but you’re not getting paid.

Read through the fine print of the policy.  Some policies will have specific language about covering you even if you can do part but not all of your job.  Make sure that you are clear on whether or not you’ll get paid in the event that your practice changes dramatically due to an injury.  

8. What does “non-cancelable” and “guaranteed renewable” mean?

You want a policy that is “non-cancelable” and “guaranteed renewable.”  That means that your policy can’t be canceled, have the premiums increase or change the terms of coverage as long as you pay the required premiums.  

If your policy doesn’t have these protections, the premiums can be raised without warning.  The policies can even be canceled.  Get a policy that is “non-cancelable” and “guaranteed renewable” to offer you the greatest degree of protection as a consumer.

9. Which riders should I get?

Insurance companies always want to sell you riders, and many of them are useless, but here are a few that you should definitely consider having.

• Recovery benefit: This offers a partial payment as you are in the recovery period from your disability.  When you’re working but not yet up to full speed, this benefit kicks in.  This is worth getting.
• Cost of Living Adjustment (COLA): COLA isn’t as necessary.  It’s a marginal increase in benefit.  If you can afford it, go for it, but this is a reasonable one to drop if you’re looking to save on premiums.
• Future Purchase: This allows you to buy additional coverage in the future, without regard to changes in your health.  You might do this as your income increases over time.  
• Partial/residual disability: This offers a benefit if you become disabled to the point of losing some but not all of your income.  If you have a disability that drops your income 15-20%, this rider activates.  This is worth considering.

10. What about taxes and savings on the disability insurance?

Make sure that you’re buying your insurance with after-tax dollars.  If the disability insurance is deducted from your income taxes now, you’ll have to pay income tax on the insurance benefit when it gets paid out.  That would be a massive tax bill!  

Ways to save:

• Compare quotes: Get quotes from at different brokers, compare them, and pick the cheapest one.  A note of caution: agents are good at finding out if doctors have spoken with another agent and what the other agent recommended.  Then, it’s in their best interest to recommend something else, even if it’s not in your best interest.
• Get a discount: Ask for discounts associated with professional associations or bundling with other types of insurance.
• Increase the elimination period: The elimination period is how long into the disability before the benefits start to pay out.  The longer the elimination period, the lower your premiums.  Standard elimination periods are 90-180 days.  If you have a healthy emergency fund, you can use it to cover you for a longer elimination period and save on premiums in the meantime.

Final thoughts

Long-term disability insurance is one of those things that costs you money, but you have to get it.   Uuse cash reserves to protect against small risks.  Use insurance companies to protect against catastrophic financial risks.  

Know what you’re getting, do your research, then pick the best options.  Don’t buy anything you don’t understand!  Make sure your broker is teaching you about your policy so you know what you’re getting. 

 

Click here to fill out a simple questionnaire to determine your disability insurance needs.  It’s a no-risk, no-cost survey.

 

 

Further Reading

• You’re Doing Your Insurance Wrong!  Here’s how to fix it!
• The Emergency Fund: The Account You Need That Won’t Make You Money

Leave a comment below!  What questions do you have about disability insurance?