WCI Financial Boot Camp Step # 1 Disability Insurance

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Step One Sponsor

Step One is sponsored by Insuring Income, an independent agency focused on specialty-specific own occupation disability insurance and term life insurance for Physicians. Protecting your income is a critical component of your overall financial plan and path to financial independence. The team at Insuring Income will ensure that your proposals for disability insurance are in keeping with your needs & wants and that each carrier puts their best foot forward in terms of contract quality, price, and quoting all available discounts. The average agent has over 10 years of experience building these contracts and works with all carriers in the physician disability marketplace. Joe, Rick, Steve, Rob and the team at Insuring Income will answer all of your questions, review all of your options, and work with you to get this important coverage in place in the shortest amount of time possible.Click on their sponsorship, drop them an email at info@insuringincome.com, or feel free to give them a call at 781-613-2104, you will be glad you did.

Step 1: Disability Insurance

Can I Skip This Chapter?

Ask yourself a question: Do you have to work at some point in the rest of your life for financial reasons? If the answer to that question is yes, then you need disability insurance. If the answer is no, you can skip the rest of this chapter.

Why You Need Disability Insurance

Disability insurance gives you an income to live on if you become so disabled that you can no longer work. Essentially every high-income professional in their first decade or two out of school should own a policy. If you don't own one, you need to go get one, now. Well, I don't mean RIGHT NOW. You can finish this chapter first. But then you should put this down and go get one. Here's how you do it.

Items to Gather

First, you need to gather up a few things. You need to know your income (check your last W-2 or 1099 form provided by your employer), you need to know about how much you spend (if you're like most, it's a very similar number to what is on that W-2,) you need to know if your employer offers any disability policies (check with Human Resources,) and you need to get a copy of the group policy offered through your specialty society or the American Medical Association.

Take these items with you and call an independent insurance agent who specializes in disability insurance for physicians and other high-income professionals.

Choose an Independent Agent

By independent, I mean this agent can sell you a policy from dozens of different companies, not just one. If it were just one, she would be a "captive" agent, not an "independent" agent.

Northwestern Mutual, for instance, is a company that uses captive agents. You can't get a Northwestern Mutual disability policy from an independent agent, and you often won't be offered a policy from any other company from a Northwestern Mutual agent. That's okay, their policies aren't so hot anyway, so you can afford to just ignore them if you like. It beats having to deal with two different agents, doesn't it?

It's not like shopping for disability insurance is fun. If you can't find an independent agent on your own, come by the website (using the links at the end of the chapter.) I keep a list of good ones that hundreds of my readers have used in the past. Yes, they are paid advertisers on my website, but they'll treat you well. If they don't, let me know and I'll take them off the site.

From Application to Policy in Hand

Now, when you go to the independent agent, you'll need to provide her with a little bit of information, like your age, gender, health status, specialty and state of residence. She can then discuss with you the various policies available from the various companies. She can also help you compare them to your employer's group policy, your specialty association group policy, and the AMA group policy.

If you buy a policy from her, she'll be making thousands of dollars off of you in commission, so now is the time to get your money's worth. Ask every question you can think of and really educate yourself on the pluses and minuses of each policy.

Then you can decide which of the "bells and whistles" you're willing to pay for. Take the time to do this right, and hopefully, you won't have to ever do it again for the rest of your life.

Once you select the policy you like you will need to fill out an application, have a paramedic physical (usually just vitals, blood, and urine) and then in a month or so, you'll have a policy.

Agent's Conflicts of Interest

There is quite a bit more to learn about disability insurance, which I will discuss below, but a good independent agent can teach you most of this. Just keep in mind she is incentivized to sell you an individual (instead of a group) policy, to sell you as large of a policy as you can qualify for, and to sell you as many of the bells and whistles as possible.

The rest of this chapter will give you an unbiased opinion on those questions. Take my opinion, combine it with your agent's recommendations, spend some time thinking, and you'll get to the right place. In the end, any disability insurance is better than no disability insurance, and if you go through this process, you will almost surely end up with a good policy.

Be sure of the following to secure that good policy:

1. Read every word in the policy and have your agent explain to you what they mean.
2. Take notes, right in the policy, to remind you later what you've been told.
3. Be sure to ask for a discount. If you buy from an agent who has worked with hundreds of doctors, she should be able to offer you a "preferred producer multi-life" discount because she has already sold several policies to doctors working for your employer.
4. Be aware that disability insurance is more expensive for women then men, so men should generally buy a "gender-specific" policy and women should generally buy a "unisex" policy.

Individual Versus Group Policies

There are a number of benefits of an individual policy.

1. You control all of the details.
2. You choose how much insurance you want to pay for.
3. You choose which of the bells and whistles you are going to get.
4. The policy is "portable" meaning you still have it if you change employers (or if your employer just decides to change the policy.) As a general rule, the policy is also "stronger," meaning it is more likely to actually pay you if you get disabled. As I'll discuss below, disability isn't always black and white.

There are two main benefits to a group policy:

1. The first is that they may be dramatically cheaper than an individual policy. A typical individual disability insurance policy will cost you 2-6% of the amount of income you are protecting. That is to say, if you want a benefit that pays you $10,000 a month if you become disabled, your premiums will likely be $200-600 per month or $2400-7200 per year. That is a significant budget item for most high-income professionals, and looking at ways to decrease the cost is wise. A group policy might be ¼ of the price, and if it is good enough for your needs, then it is good enough.
2. The other benefit of a group policy is that it is easier to qualify for. They don't ask as many pesky questions about your health or risky hobbies. They probably don't require an examination at all. So a group policy from your employer or association is a great option if you are having trouble qualifying for an individual policy.

Personally, I have one of each type of policy. I bought the individual policy years ago as a resident (so I'm closer to the 2% price) but it excludes any disability caused by rock climbing (one of my many bad habits.) So I also purchased the policy offered by my partnership, which does not exclude rock climbing injuries (which is good, since many of the partners climb!) The group policy is much cheaper but does not have as strong of a definition of disability. It also has the irritating habit of going up in price each year and occasionally changing the terms of the policy.

The Definition of Disability

The most important part of any disability insurance policy, and which you must go over word for word with your agent, is where it defines what a disability is and what it isn't.

Life insurance is much easier in this regard. Life and death are pretty much black and white. Now, I'm an emergency doc, so I get to see all the shades of gray between life and death, but I can assure you that within an hour or two, it is all going to be sorted out.

Not so with disability. Getting disability payouts is an entire niche within law and it all comes down to how the contract reads. The strongest definition is one that states if you cannot work in your chosen occupation (defined as your specialty) that the policy will pay out its full amount. Specialty-specific, own occupation. Those are the words you're looking for.

Weaker definitions include "modified own occupation" and "any occupation." It's possible, for the right price, that you should purchase a policy with a weaker definition. Just realize that the weaker the definition, the more circumstances there are where you could become disabled, but not receive payments from the insurance company.

Residual Disability Riders

Most good policies also include a provision for a partial disability. That means if you can still work part of the time, or you can still earn some money, that the insurance company will help make up the difference. This is also an important aspect if your disability is only temporary. As you gradually recover from the disability, the residual disability rider will ensure you get some financial assistance to make up for the lost income.

I see little reason to buy a policy without this type of protection. I consider this rider mandatory. But be aware that the rider with each company is slightly different. Some are better than others and the better ones usually cost more. You will generally get what you pay for in this regard.

Cost of Living Rider

All individual policies, and some group policies, will offer a Cost of Living or Inflation rider of some type. This ensures that your payments will go up with inflation as the years go by. Again, the rider is different with each company. Be aware that this rider does not increase the initial disability payment you receive.

If the policy you buy in 2016 says it will pay you $10,000 a month if you get disabled, it will only pay you $10,000 that first month you get disabled whether that is in 2026 or 2046. But once it starts paying it will gradually adjust upward.

For this reason, I think this rider is mandatory in the first half of your career. However, since most policies only pay until age 65 or 67, I don't see much reason for someone in their 50s or 60s to be paying for it.

Future Purchase Option Rider

This rider allows you to buy more insurance later when your income goes up without having to prove you are still insurable (i.e. no questions or exam.) It does not lock in the low price you received when you first bought the policy.

I think this is a smart rider to purchase when the company does not allow you to buy as much insurance as you need. For example, most residents and fellows are limited (by insurance company policy and by their inability to afford it) to buying less benefit than they really want to live on for the rest of their life.

So for a resident, it makes sense to buy a future purchase option rider. But if you're an attending in your peak earnings years? Just buy the amount you need and save money on the rider.

Catastrophic Disability Rider

Many companies now offer a catastrophic disability rider. This basically says if you're really, really disabled (i.e. can't do at least 2 activities of daily living such as dressing or bathing), it will pay you extra. Sometimes this rider is just a part of the policy (meaning you don't have the choice to reject it and save some money.) But as a general rule, I think you are better off using the money the rider would cost to just buy a larger benefit to start with.

Retirement Riders

Some companies allow you to buy a rider that, if you become disabled, not only pays you a monthly benefit to live on, but also puts some additional money into a separate account for your retirement.

Since the investment options the company is likely to use are generally poor compared to what is available on the open market, I recommend you skip this rider. Of course, you need to make sure the benefit you have purchased is sufficiently large that you can not only live on it, but also save for retirement on it, since the policy will only pay until you are in your mid 60s.

Guaranteed Renewal Versus Non-Cancelable

There are a few more weird terms used in the insurance world you should be aware of. A policy is one of three things - conditionally renewable, guaranteed renewable, or non-cancelable.

Conditionally Renewable

This is when the insurance company can cancel the policy whenever it likes and is very rare.

Guaranteed Renewable

The insurance company can raise your rates, so long as it raises the rates of everyone else that is like you with regards to age, state, or specialty, but cannot cancel the policy if you pay the premiums.

Non-Cancelable

The insurance company cannot raise rates at all and must renew the policy so long as you pay the premiums.

Obviously, the non-cancelable policy is the best option, but it is pretty rare for a company to raise rates, so if you are offered a substantial discount for a policy that is only guaranteed renewable, consider taking it and put the money toward another good cause.

Choosing a Waiting Period

Policies will often give you a choice of a waiting period, that period of time between the date of disability and the date when payments begin. You should have an emergency fund consisting of at least 3 months of expenses sitting around in a very safe place. In the event of disability, use that money to live on for the first three months. This will allow you to choose a 90 day waiting period for your disability insurance policy rather than a more expensive 30 day period. There is not much of an additional discount for a 180 day period.

How Much Disability Insurance Do You Need?

As a general rule, insurance companies will allow you to buy enough insurance to replace 60% of your gross income. Since most high-income professionals are paying 15-35% of their income toward taxes, that is usually MORE than enough income to live on. Remember that disability insurance benefits, unless the premiums were paid for by your employer, are completely tax-free to you. If you already have a nest egg that by age 65 will be sufficient to provide your desired retirement, then you may need even less.

As a general rule, decide how much to buy based on your actual expenses, not some percentage of your income. If you are spending $8,000 per month, and need to put $3000 per month toward retirement and $1000 per month toward college, then you need a disability benefit of $12,000 per month whether you are earning $20,000 per month or $40,000 per month.

When to Buy A Policy

My general recommendation is to buy your coverage as soon as you get out of school, although it is possible to buy a very small policy even as a medical student. Then upgrade your policy (either by purchasing an additional policy or exercising a future purchase option rider) upon completing your training.

When To Drop Your Policy

There are two times to consider canceling your policy.

1. When you no longer need it. If you become financially independent, such that you no longer need to work for money, ever, then cancel your policy.
2. When it is no longer a good deal. When you are 30, if you become disabled your policy will pay for the next 35 years. If you are 60, it will only pay for 5 more years. But the premiums are the same. At a certain point, you're paying a lot of money for not much benefit. If you are in that situation, consider dropping your policy and putting the money toward retirement to hopefully help you become financially independent even faster.

If you anticipate early financial independence, allowing you to cancel your disability policy by your early 50s, ask your agent about a graded premium policy. With graded premiums, you pay less now and more later for the same benefit rather than one flat rate over the years. But if you are able to cancel the policy at a relatively young age, you never have to pay the higher premiums.

Summary

In summary, unless you are already financially independent, or can live off of your spouse's income in the event of your disability, you need to buy disability insurance. Policies vary, both in features and in price. Shop carefully the first time, put your premiums on autopay, and move on to other financial matters.

Your Chore List

1. If you do not already have disability insurance, gather up your W-2, your spending, and the group policies available to you and make an appointment to meet with a good independent disability insurance agent. Do it today.
2. If you do have disability insurance already, go get your policy out of your filing cabinet. Does the benefit amount still make sense? Do you have enough? Do you have too much? Are there riders you would like to drop to save some money? If it all still looks okay to you, put it away and know that you're done with your homework for the next week. If it doesn't, schedule an appointment with a good independent disability insurance agent and go meet with her to discuss your concerns.

Other Resources

List of good independent agents
Original series on disability insurance on the WCI blog
A personal story of a doctor living off the proceeds of his disability insurance policy
Another personal story from a disabled doctor
Great calculator for estimating your personal chance of being disabled
Details of the American Medical Association group policy
Details of the American Academy of Family Practice group policy
Details of the American College of Physicians group policy
Details of the American Academy of Pediatrics group policy
Details of the American College of Surgeons group policy
Details of the American College of Emergency Physicians group policy

There. That wasn't so bad, was it? 11 more steps to go. See you next week. Also, and this is important, take a moment now and add my email address to your contacts or whitelist it. For some reason, many email providers randomly send bulk emails like these to your spam box if you don't do this.

Jim

James M. Dahle, MD, FACEP
Founder, The White Coat Investor

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