Disability insurance is an essential part of overall financial wellness for anyone that earns an income. For physicians, dentists, and other high-earning doctors, it is something you shouldn't be without.
Most physicians are told in medical school that they need to purchase disability insurance, and again, they are reminded as residents. However, being told about it and understanding the basics are two different things. It can be difficult, time-consuming, and just plain overwhelming to find the policy that best fits your needs, mainly because doctors have unique coverage needs.
At Spaugh Dameron Tenny, we have the expertise to help guide our clients to find the plan that best suits their specific situation. We also have the experience to offer advice on what doctors should and should not look for when comparing disability insurance policies. In this article, our goal is to give new physicians a better fundamental understanding of disability insurance.
Let's start at the beginning:
Disability insurance protects your biggest asset, and that is your ability to earn an income. If you cannot work due to an accident or sickness for an extended period of time, disability insurance can replace a portion (typically 60% to 65%) of your income.
As a physician, it is crucial to protect the most important asset you have – You!
You have a tremendous amount of time, education, and money invested in yourself, and don't get us wrong, this is a good investment. However, you need to take care of the investment and make smart decisions to ensure that your investment is covered if an accident or illness affects you.
Doctors need disability insurance because 'life happens' and many injuries and illnesses happen outside of work. To only rely on Social Security Disability Insurance (SSDI) is not going to work for those that fall into the bucket of being a high earner or that have high earning potential. The SSDI benefits are significantly less than most physicians will need to maintain their lifestyle, pay back student loans, and pay other bills.
By purchasing disability insurance (more than likely long-term) from an insurance company, you have a contract. You, the purchaser, are expected to make regular premium payments to the insurer. Based on your contract, you can pay by the month, quarter, or year. In exchange for regular payments, the insurance company agrees to pay you benefits if you suffer an injury or illness that prevents you from working.
Typically, you will hear about individual disability insurance and group disability insurance.
Group disability insurance - More than likely, group disability insurance is offered through your employer or a trade association like the American Medical Association. These plans are guaranteed issue, meaning if you apply for coverage, you will be automatically enrolled, and there is no underwriting. It is important to note that group disability insurance only offers basic benefits with few optional features. They may not adequately cover those like physicians with larger incomes.
Individual disability insurance – To purchase an individual disability plan, you go through the marketplace. You own it for as long as you pay the premium. The amount you pay is generally set, not changing unless you decide you need more coverage. Another benefit is that you do not lose coverage if you change jobs or stop being a member of an association.
First, some disability insurance is better than no disability insurance. With that said, there are several things to consider when you ask yourself whether or not to add an individual disability insurance plan to that of your employer.
As mentioned above, Group Disability plans are available through employers.
At Spaugh Dameron Tenny, our financial professionals give our clients unbiased advice about what policy best fits their current situation. Disability insurance is not one size fits all, and carriers do not have all the same options.
Ideally, but not necessarily early on in your career, your disability insurance plan needs to be integrated into your overall comprehensive financial plan. We know and understand the importance of disability insurance and how it protects your greatest asset, but we also recognize that it is just one piece of the puzzle.
The day before you become disabled is the best day to purchase disability insurance. All kidding aside, since most of us cannot predict the future, the earlier in your career you can purchase disability insurance, the better.
As you age, disability insurance becomes more expensive because the cost is in part based on your health and people are generally healthier when they are younger. With that said, now is the best time, especially when you are a young physician. However, that is not to say that you purchase the biggest plan to incur loads of credit card debt.
For most doctors, the purchase of disability insurance is only made once or twice in their life. We encourage young professions to purchase a policy that fits within their budget. A good idea is to find a small policy as you enter residency and then upgrade to a more robust plan just before leave residency. Initially, the policy may not give you a ton of coverage today, but finding one that allows you to grow as your income expands without going through medical underwriting is a good option.
Remember, insurance is merely transferring risk. Think about how much risk you want to take on personally and how much you wish to transfer.
Broadly speaking, the most important feature is having a policy and being protected. There are two features specifically that are crucial to the majority of physicians.
One key provision that is essential for anyone considering the purchase of disability insurance is to make sure the plan is non-cancellable and guaranteed renewable. It provides you with the greatest degree of protection as a consumer. As long as the required premiums are paid, the policy cannot be canceled, and the premium rates cannot be changed. The policy provision will remain unchanged until the policy's expiration date (generally age 65).
2. "Own-occupation"
You can purchase disability insurance coverage that protects your specific occupation – an "own-occupation" policy – the second feature we recommend. As a physician, you want to buy a plan with a true "Own-Occupation" definition of total disability. "Total disability" or "totally disabled" means that due to an accident or illness, you are not able to perform the "material and substantial" duties of your job.
A good way to look at it is, if you cannot perform your original profession (what you have been trained for or what your specialty is) but can still work, you still get paid a claim.
When you are young and healthy – get as much as insurance companies will offer and that you can afford. It is a challenge to afford as much coverage as you need as a resident, but once you are an attending, the cost should feel less of a burden on your budget.
Think about it; you need to purchase enough insurance coverage to cover both your living expenses and your retirement saving if you were to work to age 65, but not your taxes. Individual disability insurance plan payouts are generally tax-free, as they are usually paid with post-tax dollars.
Something else to keep in mind is that plans typically do not cover your entire salary. This is because the insurance company wants you to go back to work.
Premium rates are based on the risk of an applicant filing a claim, how long, and how much a person may collect in benefits. When determining the cost, insurance carriers look at factors like the insured's age, gender, health, hobbies, medical specialty, financial underwriting, location, length of benefits, and the elimination period.
Riders you decide to add to your policy can increase the cost. Likewise, certain behaviors like smoking or hobbies like base jumping will also drive up the cost.
As much as the cost seems daunting, there is also a cost in doing nothing and suffering the consequences if you are injured or become ill.
Typically, this is a 30 to a 360-day waiting period for disability insurance policies, commonly known as an elimination period. It is the length of time between an injury or illness occurring and when the benefits are paid.
The shorter the elimination period, the higher the cost of your premium. The sweet spot is a 90-day benefit.
Buying disability insurance may seem overwhelming as there are many moving parts. We touched on the fundamentals of disability insurance today, but there is much more to cover. That is why it is helpful to work with a financial professional that routinely works in this area and can help you understand and explain your options to make a well-informed decision based upon your unique situation – needs, goals, and budget.
If you have questions about disability insurance, our financial advisors at Spaugh Dameron Tenny are happy to help answer them based on your individual needs and guide you through the process. Please reach out to contact us when you are ready to access your coverage and create a plan. We look forward to helping you meet your financial goals.
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John Dameron has been a financial planner and partner with Spaugh Dameron Tenny since 2002. With the help of the SDT team, John created a lecture series called Physicians Financial Focus, authored a book entitled The Residents and Fellows Financial Survival Guide, and has coached hundreds of physicians from residency/fellowship into practice. His expertise has also been featured on KevinMD.
