Today’s post is by Ryan with Financial Residency.
As human beings, we’re hard-wired to feel invincible. Young people tend to be more guilty of this, but even the middle-aged and elderly need a reminder of their own mortality from time to time. Taking risks is an important part of being successful, so a little fearlessness is never a bad thing.
But if physicians know one thing, it’s that humans are anything but invincible. One wrong move while driving a car, riding a bike or even walking down the street can lead to a lifetime of crippling disability. In some cases, the disability is genetic and unavoidable.
What You Need to Know About Physician Disability Insurance
There are a million different ways you can lose the ability to work. That’s why disability insurance exists – to give you peace of mind in a risky world. Here’s what physicians need to know.
1. There’s a Difference Between Short-Term and Long-Term Disability
Disability insurance comes in two forms: short-term and long-term. Short-term disability insurance pays for nine to 52 weeks worth of coverage, and kicks in one to 14 days after the disabling event.
Long-term coverage pays for anywhere between several years to when the policyholder turns 65. This coverage becomes active after short-term policies end.
Coverage lengths depend on what kind of policy you purchase and how much of a monthly premium you can afford.
You should have both short-term and long-term coverage. Most disability claims last about a year or more, so long-term coverage is vital. Many women use short-term disability when they give birth and need to take time off after a pregnancy.
2. You Don’t Need it Forever
Disability insurance is temporary, because you only need it while you’re working and reliant on your income. Unlike car and health insurance, you only need disability insurance until you retire or become financially independent.
Once you stop working, you can cancel the policy.
3. Research Different Riders
There are many types of disability insurance riders. Familiarizing yourself with each kind is crucial, because buying the wrong rider can affect how much you actually receive.
Here are a few of the most common.
This rider means disability benefits only kick in when you’re completely disabled and unable to work at all – a rare situation. More often than not, you can do some sort of work when you’re disabled, even if it’s not in the same field.
If a doctor’s disability simply prevented them from working as much as before, an “any occupation” rider wouldn’t cover them.
This rider is more appropriate for physicians and surgeons, since it provides benefits for those who can’t work in their previous field.
If you’re a neurosurgeon and develop a chronic tremor in your hands, own occupation insurance will allow you to maintain a similar lifestyle while you find a new career.
Only a handful of companies offer “own occupation” disability insurance for physicians, so be aware of what kind of policy you’re buying and read the fine print carefully.
A partial or residual rider pays out benefits if a disability renders you unable to work full-time hours, or if you worked part-time and are now unable to work at all.
Many doctors earn money based on how many patients they see or procedures they perform, so this rider protects their income if productivity drops.
Practice Overhead Coverage
Another important rider for physicians who own private practices is the practice overhead rider, which pays for the expenses of running a private practice if you become disabled.
Benefits from this rider only last between one to two years, after which you’ll be expected to sell or close your practice if you’re still disabled.
Cost of Living Adjustment
This rider increases the monthly benefit by a certain amount each year to account for inflation. Unfortunately, the higher cost associated with this kind of insurance can be oppressive.
If you’re 40 or older, you can avoid this rider because the difference in cost of living won’t be enough to justify the higher premiums.
4. Buy Coverage Independently
Employers will sometimes offer disability insurance in their benefits package, but it’s often not enough coverage. If you switch jobs, the policy will end and you’ll have to buy a new one.
You can buy more insurance through their provider, but it’s always best to purchase through an independent agent.
An independent broker is your best bet for finding reasonable disability insurance. A broker aggregates all insurance companies and lists their offers for you to choose from.
Brokers make money off commission, but they make the same no matter which company you choose.
You can also search for disability insurance through an association you’re a member of like the American Medical Association. Those policies will be less expensive than the choices offered by an agent, but you may be limited in your options.
5. Every Doctor Needs It
According to the Social Security Administration, which also pays out disability benefits, one in four 20-year olds will become disabled for a year before retirement.
Qualifying for government disability benefits is challenging, time-consuming and often provides very little in the way of benefits.
According to the SSA, only 34% of disability claims filed were approved.
In 2015, the average monthly disability benefit was $1,165. For doctors used to making six figures, that number won’t come close to paying their bills – especially if they still have student loans.
Most doctors are the breadwinners of the family, which means their spouse and children won’t be able to survive without that income.
In the same way that life insurance exists to support your family after you’re gone, disability insurance provides support when your ability to work is gone.
In this way, paying for disability insurance is like buying peace of mind.
6. Disability Insurance Won’t Replace Your Salary
Some doctors mistakenly believe that disability insurance will replace their salary entirely if they can’t work. At best, disability insurance will cover between 60-80% of your salary, with long-term plans covering less than short-term ones.
That’s why it’s so important to have an emergency fund with somewhere between six months to one year’s worth of expenses, held in a liquid account that’s easily reachable.
Don’t try to invest your emergency fund to earn more money, as a dip in principal could be disastrous when you actually need the cash.
Disability benefits usually aren’t taxed, so they can go a long way with proper planning. If you don’t live paycheck to paycheck and save a good percentage of your income, disability insurance coverage should be plenty.
7. Extreme Sports Can Get You Disqualified
Insurance companies are a nervous bunch, and seeing their clients participate in dangerous sports or activities makes them hesitant.
That’s why disability insurance policies frequently prohibit or overcharge people who participate in extreme sports such as scuba diving, auto racing, mountaineering, bungee jumping and skydiving.
If you love participating in one of these sports, it will be harder to find a company to successfully underwrite your policy.
The good news is, companies tend to be more forgiving when you’ve been practicing the sport or activity for a long time. The more certifications and experience you earn, the better luck you’ll have.
If you’re a mountain biker, for instance, take a few classes before you apply for a policy.