Take a moment and consider your biggest asset. What is it? Most people think their biggest asset is their house, 401(k), or car. In reality, those assets make up a majority of your net worth, but your biggest asset is actually YOU and your ability to get up every morning and go to work. How will you protect it?
With most of your education behind you and a future full of potential earnings ahead of you, you need a plan to protect your future income. Let’s look at a visual example of your future earning potential to highlight this point:
If you were involved in an accident or diagnosed with a disease, you couldn’t work for an extended period of time; however your mortgage would still need to be paid, you would still need to eat, your car would still need gas, and you might have increased medical expenses. If your family relies on your income and you were to pass away, you would probably still want them to live in the same neighborhood, go to the same schools, be able to attend college, and so on. If you were involved in a personal lawsuit, you wouldn’t want it to drain the money for which you’ve worked so hard. Or, even worse, if the verdict were against you, you would not want to be obligated for more money than you have. So… how do you protect your assets?
The most common and economical way to protect your assets is with disability income insurance. Your defensive plan protects your future and current income if you can’t work due to an accident, illness, death, or if you are involved in a personal lawsuit.
One of the most economical ways to protect yourself is through disability income insurance. Disability income insurance provides supplemental income if you should become disabled and no longer be able to work. This benefit is used to help maintain your standard of living and pay your living expenses. The two most common types of disability income insurance are short term and long term. Let's take a look at the differences between short-term and long-term insurance.
Let’s focus on long term disability insurance. Most people reading this guide will likely have a disability policy that protects 60% of their income up to a max of $5-10k per month. Most hospitals or larger groups that you will join after training offer this type of coverage as well. Most of the time, disability carriers will cover up to 60% of your income. There is a key factor that determines how much benefit you’d actually receive if you became disabled. If your employer pays premiums for your group long term disability coverage (LTD) or individual disability income insurance, then any benefit you receive if you become disabled may be taxable income.
General Surgery Resident Group Disability Example:
In this example, Dr. Smith thought she had all the disability coverage she needed or could get, but in fact – because her employer paid for her coverage – any benefit she would receive if she became disabled would be taxed. (Note: This hypothetical example assumes a 25% tax rate.)
Let’s consider another example after Dr. Smith is in practice and earning $200,000 a year. In this case, Dr. Smith may wish to consider applying for an individual disability policy separate from her group policy to make up the difference.
Keep in mind that Dr. Smith’s group DI policy covers 60% of her income, but is capped at $6,000 per month. So, instead of her disability policy covering her for $120,000, Dr. Smith is insured for $72,000. (Note: This hypothetical example assumes a 30% tax rate.)
• Income Dr. Smith thought she would receive from her group LTD policy while unaware of the $6,000 maximum benefit: $10,000 per month (60% of her income).
• Income Dr. Smith thought she would receive from her group LTD policy after learning of the $6,000 maximum benefit: $6,000 per month.
• Approximate after-tax amount of benefit Dr. Smith would actually receive from her group LTD policy: $4,200 per month.
So, if Dr. Smith becomes disabled and relies solely on her group LTD policy for coverage, her approximate income will decrease from $11,667 (after-tax) to $4,200 (after-tax). That’s not just a painful shift in income; that’s an enormous change in lifestyle.
Because of your future earning potential, there are currently several disability carriers that will issue up to $7,500 per month of individual coverage while you are in training regardless of your current income. This would be used in addition to any group policy to help ensure that you receive the most benefit possible should you become disabled.
As long as the policy holder continues to pay premiums on time, the insurance company cannot cancel this policy prior to a certain age. Premium rates are level and guaranteed; they cannot change the premiums even if your health changes.
These are additional features that may not be included in the base disability policy. Optional Riders will vary by provider and may be available at additional cost.
"I told myself that it would never happen to me."
Dr. Jones* is a well-respected surgeon in North Carolina. Throughout his years in practice, he helped many people recover the quality of life they would have lost without him.
Dr. Jones purchased disability insurance while in residency, but hadn’t needed it in the 13 years he’s been practicing, until last month.
While playing basketball at the YMCA, Dr. Jones broke his finger. For many people, this would be a painful but minor inconvenience. For Dr. Jones, it would cost him his livelihood. He could no longer perform delicate and complex surgeries.
Because he made sure his disability policies were current, he now collects disability insurance, which supplements his part-time work. He currently earns just about the same amount as he did when he was performing surgeries full time, except now he works just 15-20 hours a week.
*This is a true story, but the name and specialty have been altered for confidentiality.
In the event of an accident, sickness, death, or lawsuit, the last thing you will want is to lose your hard-earned income. No matter what stage of your career you are in medicine, you will face risks that can affect you and your family. I definitely don't intend to encourage you to stop working out or avoid a simple pick-up game at the YMCA so you don't injure yourself. Unfortunately, there are often gaps in disability income coverage from your employer. As you can see, there are ways to supplement those gaps if you put a solid plan in place so you can live your daily life without fear.
* This blog was originally published on December 4, 2019, and has be updated for accuracy on December 14, 2020.
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.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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