Income Replacement Planning – What You Should Know About Disability Insurance

March 18, 2013

By Lauren Law, Financial Advisor

Around this time of year, I get more questions about disability insurance than anything else. My goal here is to shed some light on what is important when it comes to devising an income replacement plan for your family. First, I think we need to answer the question: “Why do I need disability insurance coverage?” A surgeon that I work with took a bad spill on a bicycle ride a few months back and was laid up (thankfully – it could have been much worse) for a couple of months, unable to be in the OR. His first note to me after this happened said, “I was so thankful to know that I didn’t have to worry – if the worst happened, my family would be taken care of.” This is why physicians purchase disability insurance in the first place – so that you could put dinner on the table and keep the lights on if something happened to you and you were no longer able to earn your income as a physician.

Think about the money it will cost you and your family to live every month once you come out of training. Think gas, groceries, student loan payments, mortgage on your future house, kids’ school, and the list goes on. I would say the physicians I work with on average (and obviously there is a wide range here) spend around $14k per month. This is the minimum monthly “salary” you would need to be able to draw from disability insurance if you were not able to work.

Once you know your number, then we need to construct an income replacement plan in order to be sure you would have that monthly income down the road should you be unable to work. There are two pieces to an income replacement plan:

  1. Group disability coverage
  2. Individual disability coverage

Group Disability Coverage

Almost all of you are going to have some sort of disability insurance coverage through your employer. Though this coverage is dirt cheap or free for you as an employee, it leaves a bit to be desired. Generally this is structured so that it will pay you 60% of your salary if you are unable to work, up to a cap of somewhere between $2500 - $30k/mo, depending on the group. If, after receiving benefits for two years, you are able to go back to work in ANY occupation, you will have to go do that. So you would be forced to go from having made $500k/year as a urologist to making $30k/ year working in the back office for your practice. Be sure you understand how your group coverage is structured. Also be aware that if your employer is paying your premiums with pre-tax dollars, then you will have to pay tax on the monthly benefit that you receive.

Individual Disability Coverage

Because the group coverage is either not enough money or wouldn’t pay adequate benefit over the long term, most physicians choose to have their own individual coverage to work in tandem with that group coverage. I separate individual coverage into two different categories – “Speciality Specific - Either/Or” and “True Specialty Specific”.

  1. Specialty Specific - Either/Or: You can either collect your monthly disability benefit or you can collect employment income. Let me elaborate. You lose sensation in your hand to the point that you can no longer perform surgery, but you are able to teach at the local medical school. You have individual Either/Or disability insurance totaling $15k/mo of benefit. You have the choice – you can choose not to work and collect the full $15k/mo disability benefit, or you can choose to take the teaching position. If you choose to teach, then you are no longer totally disabled according to the Either/Or contract, and you cannot receive full benefit. This becomes a problem if your monthly expenses total more than the income you can draw from your policy – you have no way of supplementing that disability income, because working in another occupation reduces your benefit. Unfortunately, I encounter many physicians that have this Either/Or coverage and do not realize that they wouldn’t collect full benefit if they worked at another job. Many carriers on the market, including one big name carrier that works with many physicians across the country, mask their Either/Or coverage as True Specialty Specific. You need to read the definition of total disability in your policy to ensure there are no restrictions on you receiving your benefit, or get a second opinion to be sure that your coverage is as strong as you think it is. I cannot stress how important it is to understand the coverage you have.
  2. True Specialty Specific: If you can no longer work as a urologist, you will collect your full monthly benefit. Period. No restrictions. You could be Donald Trump making millions in real estate each year and still be collecting your full disability benefit. To compare it to the example above, if you choose to teach, you will be collecting your $15k/mo disability benefit plus your salary from your teaching job. Depending on the state you are in, there may be a maximum of six carriers that offer this True Specialty Specific coverage. The good news is that while you are associated with a university, you can get up to a 30% discount on these True Specialty Specific policies. That often means that it is less expensive than the Either/Or policies, and you’re getting a stronger contract!

While you’re still in residency/fellowship, you should look into locking in True Specialty Specific coverage at a base benefit of $5k-$7500/mo, depending on where you are at in your training. You lock in your health rating now, and the policy can be structured so that you can increase your coverage to a maximum of $15k/mo of benefit on that same policy without having to go through underwriting again. You also get the in-training discounts, which are great for males but huge for females, and group coverage will not be counted against the benefit you are eligible for like it would if you were in practice. Some physicians choose to use a combination of two policies to have greater maximum benefit potential.

Bottom line is everyone’s individual income replacement plan will be different because no two physicians are the same. It is vital to find an independent agent to help you decide which of those six True Specialty Specific carriers is right for you. In other words, you want an agent who does not just work for just one company or doesn’t get bonused for selling policies with one specific carrier. I just got an email this morning from a physician who wanted me to review his income protection plan – and one of his disability policies was good Specialty Specific coverage, but really expensive. I looked into the agent that got the policy for him, and low and behold that firm is owned by the expensive insurance company. Again, not bad coverage, I would just be asking questions in the situation to ensure the policy was really better for me for some reason than others that I could get from other carriers.

I go through premiums for all six of them with my physicians and point out the perks and nuances between them, then ultimately it is up to the physician and his/her spouse to decide what policy is going to be the best for their family now and in the future. If you would like help designing your personal plan or just a second opinion on what you already have in place, feel free to reach out to me at [email protected].

Enjoy your weekend!