By Michael Torney, CFP, J.D., LL.M.
As physicians finish residency and start their life in practice, planning for long-term financial success should become a top priority. For most physicians, this is the point where they command a respectable paycheck for the first time and can begin to make progress on their financial goals:
- Long-term savings and retirement plans
- Saving tuition for kids
- Reviewing insurance options
- Preparing a will
- Figuring out taxes
These are all important, but they’re not easy things to understand from online research alone. There’s plenty of conflicting advice out there, and most of it isn’t tailored to the unique financial needs of physicians.
If you’re looking for financial security, you’ll get the best results from working with financial planners who provide personalized consultations—though there’s no harm in learning a little more about possible issues that may disrupt your goals.
Financial Planning and Disability
Financial planning is all about preparing for the future. When you think “financial planning,” you likely imagine building out your retirement portfolios, or maybe finding the best life insurance that guarantees your family will be covered in the event of your untimely death.
But life insurance shouldn’t be your top insurance priority. At least, not at this stage. Something far more crucial to your long-term financial goals is insurance that protects you from emergencies that may prevent you from providing for yourself.
In other words, disability insurance.
Protect Yourself from Disaster
Did you know you’re far more likely to develop a disability than you may realize.
The Social Security Administration publishes research on this periodically, and it’s not good news. For 20-year-olds, more than 1-in-4 of them becomes disabled before reaching retirement age.[1]
Of course, we all like to think we’re invincible or that nothing that bad will happen to us. But as medical professionals know well, there’s just no telling what the next day will bring.
Someone could carelessly crash into your car, you could trip over your son’s toy (for the 15th time) and break your hand. You could get injured playing a sport. Someone might drop a dumbbell on your foot during your morning gym workout. You could even develop a chronic illness that wears you down over time, inhibiting your occupational performance when it matters most.
The long and short of it is that bad things happen to good people, so you need financial protection—both for your sake and for your family’s! Which brings us back to disability insurance. It’s not something you’ll need forever, but it’s a great tool to keep you protected until you’re financially independent.
Figuring out the type and amount of coverage is where things get tricky.
Different policies have different qualifications, limitations, reductions and riders. On top of that, different policies may define “disability” in different ways, and you may also need to consider how any employer-sponsored disability policies factor into your overall coverage. Taken together, these variables can make the insurance planning process overwhelming for anyone.
But here’s the good news. As long as you understand all the details, your disability insurance purchase will be a one-time event.
Amount & Type of Insurance
Let’s start with the amount of insurance you need. You need enough to cover your monthly expenses plus any extra you may need to put away for your kids’ college tuition or your own retirement. Notice that we didn’t say you need enough to cover your income. All you need is enough to cover your expenses, and only until you reach retirement age.
(A quick note on shared financial planning: If your spouse earns a respectable income that can cover your family’s expenses during emergencies, you won’t need to worry as much. Provided you have sufficient shared income, you may not even need disability insurance.)
Of course, on the other side of this coin, you’ll have to consider how possible disabilities will affect your closest loved ones. A serious illness or injury can take a huge toll on a family, particularly when the family relies on a shared income. Every hour spent driving to medical appointments or caring for children is an hour detracted from the secondary earner’s income potential. And because these issues can drastically influence a family’s pre-disability earning capacity, it’s a responsible choice to purchase disability insurance—even if you’re living comfortably off your income.
As far as the type, you should purchase “own-occupation” coverage instead of “any-occupation.” What’s the difference? In general terms:
- “Own-occupation” covers you when you suffer a disability preventing you from working your current occupation.
- “Any-occupation” coverage means that, as long as you can work a different occupation based on your training, education and experience (it doesn’t even have to be in the same industry), you aren’t considered “disabled” as far as the policy is concerned.
When looking at “own-occupation” policies, understand that insurance companies define the term differently amongst providers.
Generally, the looser the definition in the policy, the more you’ll be paying for coverage since the policy will provide benefits under more circumstances. You’ll also want to keep an eye out for any additional riders that you may or may not want, such as addiction or psychiatric exclusions for disability.
What’s a Rider?
Riders are the insurance term for policy add-ons. These are used to better customize your policy benefits for strategic financial planning purposes.
Just as disability is defined different across providers, not all riders are the same. Before you select a policy, you’ll need a detailed understanding of their usage, maintenance requirements and options.
Residual Disability Riders
Residual Disability (a.k.a. partial disability) is a critical rider to include in your policy.
This rider allows you to qualify as disabled while still working part-time if you have one or more job duty restrictions and/or have a specific loss of earnings (typically between 15% and 20%) as a result of your illness or injury.
This is an important protection for physicians. Without this rider, you’ll need to demonstrate total disability prior to starting your elimination period or qualifying for any benefit payments. And because 90% of disability claims are caused by illness, it’s quite difficult to demonstrate a complete loss of ability unless your illness is severe or completely debilitating.
Other Protection Riders
On the other side, there are riders—like the inflation protection rider—which increase benefit payouts commensurate with inflation after a person receives disability benefits for 12 months. This can make a big difference in your payout if you end up disabled at a young age.
Other riders, such as the future purchase option riders, let you buy more insurance without the hassle of medical underwriting approval in the future.
Think of it as a strategic resource as you attempt to determine your ultimate career path. Not only will it help you cover your increased living expenses, but it’ll allow you to replace any reduced employer insurance you may encounter when changing jobs in the future.
The value of this for physicians cannot be overstated. If you’re looking 20 or 30 years ahead, it’s reasonable to expect that you’ll change employers several times. The future purchase option rider protects you in these cases, and even in cases where your current employer suddenly changes your disability coverage without your approval.
Although this may not be that appealing for attending physicians whose income won’t change dramatically, it still may be worthwhile for long-term career and income protection. Exploring these options in detail will help you make informed and accurate decisions. But if you’re unsure, don’t be afraid to reach out to a qualified insurance consultant for help—particularly where complicated riders are concerned.
What If My Plan Already Offers Insurance?
Yes, most hospitals or private practice groups offer disability insurance. If they offer to pay the premiums, sign up! But keep in mind that a review and detailed understanding of the program’s limitations are also important in financial planning, as not all employer insurance is made the same. Consistent review of employer coverage is strongly recommended because the employer can change insurance companies from year to year, which results in different coverage qualifications.
If you’re paying as part of a group plan (as most do), you need to carefully review the plan and compare it to what’s available in the market.
- What is the group plan’s definition of disability?
- What riders are included?
- What is the amount of income covered?
- What are the limitations, exclusions and benefit reduction provisions?
- Can you expect a tax withholding from your benefits?
- Is your specialty of medicine protected over the long term?
Generally, group policies are not as favorable to you. They offer lower costs, but they tend to lack the extensive coverage of individual policies. Don’t sweat paying a few extra hundred dollars a year. Your income is stable, and there’s no point in buying a policy if it doesn’t provide the exact coverage you need.
Eventually, you won’t need disability insurance because you will have built a large enough portfolio to be financially independent. The power of using individual disability insurance as part of your income protection solution is that these policies can also be reduced strategically as you approach financial independence. That’s a goal for tomorrow.
In the meantime, you’ll be well served by getting in the weeds with disability insurance and how it affects your overall financial planning strategy. Get this out of the way and get back to healing those who need your help!
1: https://www.ssa.gov/disabilityfacts/facts.html
©2023 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment adviser does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.
