When it comes to disability insurance most physicians are either woefully underinsured or their insurance agents sell them policies without considering the most important features.
In a previous article (see link here) I discussed the single most important feature of disability insurance for physicians—the definition of disability.
But there are multiple other features of disability insurance you need to think about before you buy additional insurance or if you are buying a policy for the first time.
Before I discuss those features, why exactly do you need disability insurance to begin with? Here are some sobering statistics to think about:
1. Almost 20% of working age people have a disability—half of these are severe
2. There is a 1 in 8 chance of becoming disabled before age 65
3. Only about 25% of working people with a severe disability are employed
4. It is much more likely (nearly ten times more likely) that you will become disabled than die during your working years
Let’s take a look at the key features you need to think about your disability insurance policy:
Benefit Amount. Next to the occupational definition of disability this is the next most important feature of your policy. Your benefit amount is related to your specific occupation. So higher risk specialists such as emergency medicine physicians will qualify for a lower benefit amount than lower risk physicians such as internists.
The benefit amount also depends on the income you make since the insurance company won’t pay out more benefits than your current income. Typically you won’t be able to buy insurance greater than about 60-70% of your gross income.
But one common mistake I see most financial advisors and physicians make is that your benefit amount should be correlated as close as possible to your current monthly expenses. If you don’t know what you’re spending today, then how do you know what amount of disability insurance to get? So sit down and figure out what you’re spending before you buy a policy. I know physicians who spend $20,000 per month or more and have disability policy benefits of less than $10,000 per month. Will you be able to get by on disability benefits that are significantly lower than what you’re spending right now?
Elimination Period. This is similar to a deductible in the sense that disability benefits typically don’t kick in until several months after you are totally disabled. In effect you are paying for your disability out of pocket until benefits kick in. The most common elimination periods are 90 days and 180 days. So if you become disabled today and you have a 90 day elimination you won’t receive your first check until the 4th month of being disabled (7th month for 180 day elimination period). So this again gets back to the issue of what you’re spending. How long can you get by with your current savings before you need income? If you can’t get by very long, your disability policy should have a short elimination period but if you have adequate savings, choose a longer elimination period to save on the premium.
Next time I'll discuss other essential features physicians need to have in their disability insurance policies.