Protect a physician’s most valuable asset with disability insurance
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Key takeaways:
- Lack of or inadequate disability insurance coverage can be more costly to an orthopedist’s family than death, divorce or a lawsuit.
- Physicians should periodically review their disability insurance policies.
Given the substantial investment to become a practicing physician, it should not be surprising that the most significant asset of most physicians is their ability to practice their profession.
Because the future income stream from this valuable asset is significant and quantifiable, physicians in all phases of their careers should take steps to protect it.
Disability insurance is a fundamental tool utilized by physicians to protect the value of their future incomes for themselves and for others dependent on them. Young physicians should consider securing disability coverage early in their careers, and established physicians should regularly review existing insurance policies to ensure they are maintaining the necessary level of protection. This article focuses on a physician’s need for disability insurance, what to look for in a disability policy and reasons to periodically review—and possibly update—your disability coverage.
Need for disability insurance
The reality is that a lack of or inadequate disability insurance coverage can be more costly to a physician’s family than death, divorce or a lawsuit. When a physician is unable to work due to a disability, medical care alone can cost hundreds of dollars per day, causing expenses to significantly increase while income is reduced or eliminated.
No one ever plans to become disabled, but half of 25-year-olds will have a disability of 3 months or longer at least once in their lives. Responsible financial planning includes working toward the best possible future while protecting against the worst possible events.
Employer-provided coverage
If you are an employee of a university or other large corporation, your employer may provide long-term disability coverage. Group disability often limits either the term of the coverage or the amount of benefits paid. For instance, benefits may last only a few years or benefit payments may represent only a small part of your annual compensation.
As this is most commonly an employer-paid benefit, the money received during your disability will be income taxable to you. In addition, employer or group disability coverage can be terminated at any time for any reason, leaving you without coverage.
Individual disability
Because many physicians do not have access to group disability insurance and group coverage can often prove lacking, many physicians will obtain individual disability insurance to protect the value of their future incomes. When evaluating options for an individual disability insurance policy, it is important to work with a reputable and experienced insurance advisor, who can help you with answers to the following questions:
What is the benefit amount? Most policies are capped at a benefit amount that equals 60% of income. You must ask yourself how much money your family would need if you were to become disabled. Generally, you want to find companies that offer at least 60% of pre-disability after-tax income with maximums of at least $7,500 or $10,000 monthly. There are additional monthly benefits of $5,000 to $25,000 per month available through specialized channels for high earners who want more monthly income than is available with traditional policies.
What is the waiting period (elimination period)? This is the period of time that you must be disabled before the insurance company will pay you disability benefits. The longer the waiting period before benefits begin, the less your premium will be. Essentially, the waiting period serves as a deductible relative to time—you cover your expenses for the waiting period, then the insurance company steps in from that point forward.
How long will coverage last? It is a good idea to get a benefit period of coverage that lasts until age 66 years or 67 years, at which point Social Security payments will begin. Unless you are so young that you have not yet had time to qualify for Social Security, a policy that provides lifetime benefits, at costly premiums, is generally not worth the added expense.
What is the definition of disability? Definitions vary from insurance company to insurance company, and even from policy to policy within the same company. The definition of disability used for a policy is of the utmost importance. The main categories are own occupation, any occupation and loss of income. The own occupation policies, which pay a benefit if you cannot continue your own occupation (even if you can and do work in another occupation after the disability), are the most comprehensive.
Does the policy offer partial benefits? If you can work only part-time instead of your previous full-time hours, will you receive benefits? Unless your policy states that you are entitled to partial benefits, you will not receive anything unless you are totally unable to work. Also, are extended partial benefits paid if you go back to work and suffer a reduction in income because you cannot keep up the same rigorous schedule you had before you became disabled?
Is it noncancelable or guaranteed renewable? The difference between these two terms is important. If a policy is noncancelable, you will pay a fixed premium throughout the contract term, and your premium will not go up for the term of the contract. If it is guaranteed renewable, the policy cannot be cancelled, but your premiums could go up. Ideally, you want a policy that is both noncancelable and guaranteed renewable.
How financially stable is the insurance company? Before buying a policy, check the financial soundness of your insurer. If your insurer goes bankrupt, you may have to shop for a policy later in life, when premiums are more expensive.
Review existing policies
Even if you already have some type of disability insurance in place, that does not mean you should “set it and forget it.” In fact, here are three of the many reasons you should periodically review your disability policies:
Increases in income. If your income increases, you should consider bumping up your coverage to reflect the previously mentioned 60% target. In a prior article for Healio’s Residency to Retirement column, we covered how physicians can increase their disability coverages beyond traditional limits.
Increases in expenses/debt. An increase in disability coverage may be justified if you take on greater debt because of a new or second home purchase, or an additional mortgage or home equity loan. Additional children or other dependents, or increased family expenses are also good reasons to have existing coverage reviewed.
New policies may provide additional coverage. Because of changes in the insurance marketplace, certain exclusions from coverage in older policies are now covered in new policies. Furthermore, exclusions in older policies can sometimes now be removed.
Conclusion
Because the value of future income is likely to be among a physician’s most significant assets, young doctors are encouraged to secure disability insurance early in their careers to protect it. Physicians should review their disability policies regularly throughout their careers to ensure that they are maintaining adequate coverage for the most cost-effective premiums.
An experienced insurance advisor can assist you in evaluating your options and selecting policies that fit your needs and long-term financial goals.
Reference:
Mandell and OJM Group partners are pleased to announce the 2024 publication of our newest book, Wealth Strategies for Today’s Physician: A Multi-Media Playbook. The Playbook’s innovative format features more than 90 links to videos and podcast episodes to enhance important financial topics for physicians. To receive a free print copy or ebook download, text HEALIO to 844-418-1212, or visit www.ojmbookstore.com and enter code HEALIO at checkout.
For more information:
Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon practicing at Northwestern Medicine in Warrenville, IL. He can be reached at sanjeevbhatia1@gmail.com or @DrBhatiaOrtho.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com, where Jason O’Dell, MS, CWM, is the managing partner and a financial consultant. They can be reached at 877-656-4362 or mandell@ojmgroup.com.
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