We use insurance to protect many things in our lives – from jewelry to cars to homes – but many of us don’t think about protecting our most important financial asset: our ability to earn an income. As a resident, disability insurance should be given serious consideration.
During medical school, residency & fellowship your earning potential will skyrocket. If you earn $50,000 a year starting at age twenty-five and your salary increases by 3% each year, you would earn over $3.7 million by age sixty-five. If you earn $250,000 in the same scenario, your total income would be over $18.8 million. That is a huge sum.
You rely on that income to create the life you dream of now and in the future – but what happens if you lose the ability to earn it?
None of us like to think about the idea of suffering a serious disability, but it happens more often than you think. More than 1 in 4 of today’s 20-year-olds will face a disability of some degree before reaching retirement age.
How would your family fare if you lost your ability to earn an income while also incurring significant medical bills? Even though many disabilities are not permanent, they can last long enough to cause significant financial problems.
This why you need to protect your ability to work and earn an income. Start by insuring your income with disability insurance.
What is Disability Insurance?
Disability insurance is very much what it sounds like: a type of insurance that provides protection against the potential loss of income due to a disability. It’s simple on the surface – you pay a premium and if you become disabled, the insurance company replaces your income.
However, disability insurance contracts can be very complex. The cost and quality of coverage can depend on a large number of factors, including your occupation, what is considered a qualifying event, and what types of disabilities are covered.
Insuring Your Income: Where to Start
When it comes to disability insurance, it’s important to discuss how long you’ll continue to receive the replacement income.
Short-term disability insurance is available, but it only replaces income for a few months. Since you can protect against short disruptions in income with an emergency fund, short-term disability insurance is often not necessary.
The real risk to your financial well-being is a long term disability. You may be able to survive several months without your income, but several years or a permanent loss of income will cause financial catastrophe for most without proper planning. Long term disability insurance becomes your life preserver in this scenario.
Different Types of Disability Insurance
This will serve as an overview of common types of disability insurance, but we recommend working with an insurance professional to determine exactly what works best for you.
Social Security Disability Benefit Social security benefits provide a form of long term disability insurance, however, benefits are often difficult to collect and may be offset by other plans. As a physician, you must be unable to perform any occupation to collect on social security disability benefits and, often, the claims process can take a lot of time.
Additionally, many group long term disability plans require that you apply for social security disability benefits, and then when you begin receiving the SSDI benefits, your group disability will decrease to offset these benefits.
Employer- Supplied Group Disability Insurance Group disability plans are the most common type of disability insurance. They are typically provided by an employer as a part of a benefits package. Residents and fellows can usually expect a benefit amount of 60% of their residency salary, and the hospital will generally pay for the policy. As a result, if you ever collect on this benefit, it will be taxed fully as income to you.
These plans often provide benefits after 180 days of a qualified disability, and the payments normally continue to age 65. For most residents, this would amount to around $30,000/yr of taxable income in the event of a total disability. This equates to 60% of your $50,000 income, or 15% of your $200,000 income potential, or 7.5% of your $400,000 income potential. Moonlighting or bonus income is rarely covered.
This plan will normally not require any medical qualification for employees, however, most cannot be taken with you if you leave the company.
Further, the definition of disability (how they determine if you are disabled) is usually not occupation-specific in the long term. For example, the plan may provide benefits if you are disabled from YOUR occupation for 2 years.. but after 2 years, you must be unable to perform ANY occupation. Key word: ANY.
Some plans do not allow for inflationary increases in benefits or partial disability payments. As many claims begin as a partial disability, this can cause major issues. For most residents and fellows, this plan is not going to cut it all by itself.
Individual & Supplemental Disability Insurance Fortunately, most residents and fellows are able to purchase individual disability insurance to help bridge the gap between earning potential and actual coverage. Some hospitals even provide residents with a disability stipend to help them purchase this.
With individual disability insurance, there are many variations and options to consider. We suggest looking at multiple companies and options with your disability insurance agent.
For starters, these policies are owned by the individual and, therefore, can be taken with the owner wherever they go. The process of obtaining coverage includes two types of underwriting: medical and financial. Medical underwriting typically includes health history questions and a basic exam. Obtaining coverage can be difficult or impossible if unfavorable health conditions exist. Financial underwriting is an analysis of your income and finances that the company uses to determine the appropriate amount of coverage to offer. Normally, you can expect to obtain total disability coverage of up to around 70% of income, but many insurers provide residents with special additional benefit amounts to help insure future earning potential.
Different insurers have different financial and medical underwriting standards. Further, company financials and claims paying history are extremely important for a long duration contract like this. Working with an agent licensed with multiple insurers is essential so you can identify the best fit for your circumstances.
Your pricing will be based on your health, specific occupation, age, gender, company, issue state, contract terms & riders. Many companies offer special plans to residents that provide gender neutral pricing (same cost for male/female) and additional discounts. Make sure you inquire with your agent about resident discount plans available with all companies under consideration.
We typically suggest obtaining a contract that is non-cancellable and guaranteed renewable. This means, as long as you pay for coverage, the insurance company cannot increase rates above what is illustrated and they cannot change the contract terms. This contract is essentially locked-in and provides maximum flexibility. If your goal is only to lock in the contract terms and you are not concerned about potential increases in pricing, you should look for a contract that is just Guaranteed Renewable. These contracts cost less, but you take on more risk for potential pricing increases.
Some companies offer you the option to choose level or increasing premiums without changing the other contract terms and conditions. Often, if you choose increasing premiums now, you can later change to level payments without going through financial and medical underwriting again.
Inflation protection is important to include in coverage. You want to make sure your benefits increase with inflation whether you are disabled or not. Some companies require additional riders to ensure this occurs.
Partial disability definitions are also very important and should be understood clearly. A partial disability occurs when sickness or injury causes you to scale back hours. At minimum, we suggest making sure your plan covers a partial disability. Contracts vary between what requirements must be met in order to receive full benefits versus partial benefits. For example, one company might say you must be 80% disabled and the other might say 50% in order to receive full benefits.
Lastly, make sure to pay attention to the policy exclusions. All policies have some exclusions and limitations. Some occur because of your specific circumstances, others exist because of your specialty, and many are just specific to a certain contract or company.
The Bottom Line
If you are not yet financially independent, then you rely on your income to pay the bills and provide for your future. A major sickness or injury can strike at any moment, and often when you least expect it. Disability insurance allows you to insure your future earning potential and provide a lifeline in the event of a worst case scenario. It should be a top priority for all residents and fellows to secure individual coverage as soon as possible.
Great Resident Disability Insurance Resources
White Coat Investor Blog – This blog offers disability insurance comparisons if you are wanting to learn more about the topic before speaking with an agent. Northwestern Mutual Disability – Northwestern Mutual will not show up favorably on White Coat Investor or other disability insurance blogs & forums. These online discussions are dominated by independent agents and Northwestern Mutual does not allow independent agents to sell it’s products. They also prohibit their agents from online posts or discussions of this nature. Nonetheless, they are a top provider of disability insurance and should be under consideration. Dell Schaefer Law Firm – This law firm specializes in lawsuits against disability insurers – This is a link to their Company Claims Reports Database NAIC Consumer Information Company Search – An objective tool to review company financials and claims history of insurers.