QUESTION. I kept hearing that I should buy some disability insurance, so I got a quote on a policy that will cost $500 per month for a $10,000 per month benefit. That seems really expensive. My employer offers a group policy, and it is a lot cheaper. Is this disability insurance policy too expensive? I want the coverage, but I don’t want to be ripped off.
ANSWER. Unlike term life insurance, which can be ridiculously simple to evaluate and purchase, disability insurance is a very complex financial product. This is primarily because deciding if someone is dead is a rather black-and-white process compared to evaluating a disability, where there are at least 50 shades of gray. The contracts are necessarily complex because disabilities are complex and often temporary. Disability policies also tend to be more expensive than a term life policy primarily because a young, working physician is far more likely to become disabled than to die. Term life insurance is only necessary if you have someone else depending on your income, but nearly every physician who is not yet financially independent should have disability coverage.
I hear variants on this question frequently from physicians. This is not only a result of the sticker shock most doctors get when they first obtain a quote on a solid individual disability policy but also because these physicians have not followed the appropriate process in purchasing their policy. It is impossible for me to say if this particular policy is too expensive for you, but I can describe the process to follow so you can find out for yourself if you’re paying too much. There are five steps involved in this process.
You should purchase an amount that will provide for your expenses, not necessarily replace any particular percentage of your income.
Figure out how much income you want in the event of disability, realizing that it will cost real money to protect this income (about 2–5 percent for docs in their early 30s, or up to $500 a month to provide a $10,000 a month benefit). You are usually limited to a maximum of 60–70 percent of your current gross income. However, because this benefit, at least for non-employer-provided policies, is tax-free [unless you write off the premium cost as an expense, making the proceeds taxable], that is usually plenty of coverage and sometimes far more than is needed. You should purchase an amount that will provide for your expenses, not necessarily replace any particular percentage of your income.
A disability policy cannot be legally purchased without the assistance of an agent (and indirectly paying a commission for that assistance), so you might as well get the maximum value out of that commission. Use an independent disability insurance expert who can sell policies from any of the “Big Six” companies: Berkshire, The Standard, Principal, Ameritas, MassMutual, and MetLife. You also want an experienced full-time agent. This means someone with years of experience who has sold at least 30 policies to physicians in the last year. Another benefit of that experience is that these agents are aware of and have access to significant “multi-life” discounts that a less experienced agent may not.
Find out if you are eligible for any group policies through your employer or specialty society. Get copies of sample contracts and quotes, and take them with you to your meeting with the independent agent.
Have the independent agent pull the best policies for your specialty, state, and gender, including any possible association, hospital, or multi-life discounts available for you. Now, ask about the differences between each of these policies, including the group policies, and the price for them. This is where the agent earns a substantial commission. Have the agent explain why one policy costs more than the others and whether the extra cost is worth it. Every line and term in the multi-page contract is important; be sure you understand what they all mean. Ask the agent for recommendations.
Some policies will cost more than others. Sometimes this is because the policy has a broader definition of disability or has more bells and whistles, but other times, it is simply a reflection of your state, specialty, gender, or health status. Be aware that a cheaper policy with fewer bells and whistles is not necessarily worse for you. The premium saved could be used to invest, pay down debt, or even purchase a larger amount of coverage rather than less coverage with more features.
Now that you have all the information you need, you can make a rational decision about which policy to purchase and which riders (policy additions) to pay for. A group policy is generally much cheaper than a solid individual policy, but it often comes with a weaker definition of disability and cannot be taken with you when you change employers. A group policy, however, may be a much better deal (or the only policy available) for a doctor with health issues or dangerous hobbies such as rock climbing, scuba diving, skydiving, and flying. Remember, the agent’s bias is not only to sell you an individual policy, but also to sell you as much coverage as possible with as many riders as you will purchase.
Find out if you are eligible for any group policies through your employer or specialty society.
I generally recommend purchasing a residual disability rider, which provides coverage for a partial disability and for a gradual return to full-time work. Residents and attendings anticipating a large jump in income in the future should strongly consider a future purchase option rider, but attendings in their peak earnings years can simply purchase all their needed coverage now. I also recommend a cost-of-living adjustment rider if you are under age 50. Graded premiums (lower when you are young, then higher when older) rather than level premiums can be useful for those who plan to become financially independent and cancel their policies relatively early in their careers.
If you follow this procedure, you will not have to wonder if your policy is too expensive or if you purchased the wrong one. If you did not follow this procedure, there is no reason to despair. You can always start over at any time—just be sure to also compare your current policy to those now available.
If you’ve had your policy for a few years already, it may very well still be the best one for you and will almost certainly be the cheapest. Remember that the agent’s bias will be for you to replace your policy because that is the only way to get paid.
A Few More Pearls
Women should generally look for a unisex policy because female-specific policies are usually more expensive. Most companies will also offer a significant discount if you pay your premiums once per year instead of monthly. Also keep in mind that you do not need to keep your policy right up until the date of your retirement. Once you are financially independent, feel free to cancel it. Even if you plan to work well into your 60s, remember that these policies usually only pay to age 65 or 67. The closer you are to that age, the less total benefits you will receive in the event of a long-term disability.
Long-term disability is a financial catastrophe that most physicians should protect against with an appropriate disability insurance policy. Following the steps outlined in this article will allow you to purchase the policy that is best for you.
Dr. Dahle is the author of The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing and blogs at http://whitecoatinvestor.com. He is not a licensed financial advisor, accountant, or attorney and recommends you consult with your own advisors prior to acting on any information you read here.