During your training years, you probably have often dreamed about the day when you'll finally earn the paycheck that your training has allowed you to achieve. These future earnings are usually a young physician’s most valuable asset. Imagine a $250,000 annual income paid over your working career…let’s say 40 years. Without a single raise, that would equate to $10 million! You can adjust the numbers to something that more accurately reflects your scenario, but the bottom line is that your income is THE most important aspect of your financial picture. Unfortunately, many physicians do not adequately protect themselves and their families from financial hardship that may be brought on by a loss of income caused by an accident or illness.
As a doctor, you certainly understand the importance of health insurance and what kind of financial hardships could befall your patients if they don’t have it. And you probably understand the importance of life insurance if you were to pass away with others relying on your income. But did you know that you are statistically far more likely to become disabled over your working life than you are to die during this time? What would happen if you became seriously ill or disabled? Remember that your bills, debts, and other expenses don’t go away just because you aren’t able to work. This is why protecting yourself financially against disability should probably be one of the first steps you take towards a solid financial foundation.
There are two main categories of Disability Income Insurance (often called “DI”) – Short-term (usually 3-6 months) and Long-term (anything beyond short term). For purposes of this article, we will be focusing on the most catastrophic scenario – a long-term disability.
What is Disability Income Insurance?
DI is designed to replace a majority of your income if you become disabled. Like most insurance products, you hope to never need it, but if you don’t have it when you need it, it could turn into a bad situation very quickly. Imagine your current lifestyle (or maybe your ideal future lifestyle) while no longer having the income to support it. This could be caused by a serious illness or an accident that we hope never happens to us, but the bottom line is that it could. Having a DI policy in place would alleviate most of the financial burden if something like this were to ever occur.
To get us started with the conversation, here’s a look at a few little-known facts about DI Insurance according to Guardian (a popular DI Insurance provider for young physicians):
1 out of 4 people will become disabled over the course of their working lives
90% of disabilities are caused by illness and only 10% are caused by accidents/injury
The average duration of a long-term disability is 2.6 years
Follow this link for even more bullet points surrounding DI https://disabilitycanhappen.org/disability-statistic/
What Benefit Could I Receive From a DI Policy?
With Disability Income Insurance, you generally will never be able to replace all of your income because insurers want you to still be motivated to come back to work if you are physically able (although some companies offer special exceptions for medical residents and doctors with substantial medical debt). However, a DI policy will allow you to replace most of your income. Depending on the company and how they calculate their benefits, you typically could replace 70-80% of your income. Many times, employers will provide short-term and long-term disability policies inside their employee benefit packages, but these typically only cover 60% of your income AND this benefit will be taxed as income. So even if you do have an employer-sponsored plan, it most likely will not even replace half of your income if you were to become disabled. Not to mention that you can’t take this policy with you if you leave your employer, and many employers have a benefit cap that discriminates against higher income earners within their organization. This is where an individual policy would come in. Your policy would cover the gap between whatever you receive (after taxes) from your employer-sponsored policy and the maximum income replacement threshold (again…70-80%). So let’s run the numbers. For a physician making $250,000/year who becomes disabled:
Original Income $250,000
Employer-Sponsor DI Benefit (60% income replacement) $150,000
Minus Income Tax on that benefit -$38,000
Actual Income Replacement $112,000
In this example, you would only take home about 45% of your original income. If your income is higher than this or if your employer has a benefit cap, you can expect your take home benefit to be an even lower percentage. So let’s take a look at the math on an individual policy benefit:
80% of Original Income (maximum income replacement) $200,000
Minus Employer-Sponsored DI Benefit (after taxes) -$112,000
Income Gap Replaceable w/Individual Policy $88,000
This comes out to about $7,500/month of income. Again, if your income is higher than $250k, these numbers can all balloon quite quickly. Now imagine that you are 35 years old and you became permanently disabled and your policy paid out until you turned 65. That’s 30 years of getting paid $7,500/month, which comes out to a total payout of over $2.5 million! It’s scary to think what life would be like without that kind of protection.
Special Policies for Residents
But what if you haven’t reached attending status yet? Can you still apply for a policy based on your expected future income? The short answer is YES!!! Companies that specialize in offering DI policies for physicians also have special rates and benefits for residents that could actually provide a benefit well in excess of your resident’s salary. They can do this because they know that your income is likely to increase substantially as soon as you graduate residency. And this is just another example of how financial planning for physicians is so unique.
Specialty Specific Own-Occupation DI
Speaking of physician-specific benefits, did you know that a DI policy can be further tailored to your occupation? Physician Own-Occupation DI policies go beyond the label of “doctor” and actually can tailor their policy to your specialty! Basically, a Specialty Specific Own-Occupation policy defines “disabled” to mean that if you are not able to continue working in your specialty, you would be considered disabled – even if you can find work in another specialty or if you take a new career path altogether. In a normal policy, if you are no longer able to work in your field, but the nature of your impairment wouldn’t keep you from working a different job (even a substantially lower paying job), you would not be considered disabled and you would not receive a benefit payout from your policy. As an example, imagine a physician who suffered a stroke that impaired some cognitive function, and they were no longer able to practice medicine. Even if they lost their job, they might not be considered “disabled” under the definition of their policy if their cognitive impairment was not severe enough to keep them from working most other jobs. Likewise, imagine a Laborist who lost use of a hand due to an accident. If she owned a Specialty Specific Own-Occupation DI policy that defined a disability as something that no longer allowed her to be a Laborist, she would be able get paid a benefit from her policy – even if she were able to continue working as a Gynecologist!
The Downside of DI Policies
Unfortunately, with the comparatively high likelihood of one becoming disabled coupled with the potential cost to the insurance company if they had to pay a benefit for a substantial length of time, these policies can seem pretty expensive. However, just like with any insurance product, the correct approach is always to consider the cost of the policy versus the potential cost of not having the policy if an insurable event were to transpire. In most cases, I believe the potential catastrophic financial loss of becoming disabled is worth insuring against.
Policy Options
Like many insurance products, DI Insurance allows for many different options and riders within the contract. This is a great benefit considering that everyone’s financial plan is going to be a little different. The downside of these options is that they can get a little overwhelming when trying to decide which fit your needs and if they are worth the extra cost. Like always, I recommend meeting with a fiduciary financial planner to review your options and decide which will work best within your planning strategy. And of course, if you do not yet have a relationship with a financial advisor, don’t hesitate to shoot me an email (info@physiciansfd.com) or sign up for your free financial evaluation by clicking on the big yellow button at the bottom of the page.
Overview
Pros:
It can replace most of your income if you become disabled and can’t work
Some insurers offer special benefits that apply only to physicians (like added student loan repayment benefit and specialty specific disability coverage)
Can potentially provide a lifetime of income if your disability is permanent
Cons:
DI is generally quite a bit more expensive than life insurance
There are many different options and companies available, which can seem overwhelming
Women will typically pay more in premiums than men
Theoretical Scenario:
Dr. Jones works at XYZ Hospital System as a general surgeon. On the weekends, she and her husband usually spend their time at their lake house where they enjoy their large boat and some tranquility. One day, a teenager driving a jet ski clipped their boat as it was coming out of the marina sending Dr. Jones tumbling. She suffered a devastating injury to her right arm and hand. After hours of consultations with surgeons and specialists, it was determined that she would probably never regain full use of that arm and her career as a surgeon was most likely over. Of course, this news alone was catastrophic enough, but it was made even worse when she realized that she was grossly underinsured when it came to her loss of income as a result of her disability. She knew she had some disability coverage from work, but she was shocked to learn that her policy had an income limit well below what she was currently earning, and she would only get paid out for three years. To make matters worse, she learned that the limited benefit she did earn would be taxed heavily, resulting in far less than half of her salary being replaced during that three-year period. This financial hardship caused by the injury resulted in the couple having to sell their lake house, drastically reduce their monthly spending, and change their long-term retirement plans altogether.
As a young doctor, it may be tough to commit the funds required to cover this scenario, but a disability income insurance policy is the only answer that will supplement your employer sponsored coverage to replace most of your income in the event of an unforeseen disability. I highly recommend all physicians who can’t afford to live on less than half of their annual income to learn more about disability income insurance. You may think you can’t afford it, but in my opinion, most young physicians can’t afford to be without it. And with special programs designed only for doctors in residency or fresh out of residency, it may actually be more affordable than you think.
Thanks for reading! For more articles geared toward young physicians and their money, click here or check out The Money Malpractice Podcast on any of the major platforms.
Until next time…KEEP SAVING LIVES AND KEEP SAVING MONEY!
Disclosures
• RichMark Private Wealth Management. LLC is registered as an investment adviser with the State of Michigan, and only transacts business in states where it is properly registered, or is excluded or exempted from such requirements.
• Content should not be viewed at personalized investment advice. Market events and other factors may affect the reliability of the potential outcomes. Simulated growth is purely hypothetical and does not represent actual performance.
• Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio.