Written by Ben Kirchner, AAMS© / Financial Advisor
Most of the doctors that I meet with don’t jump for joy when I bring up the topic of insurance. This is understandable, as it’s one of the few items you pay for and hope to never use. In many ways, it’s simply a piece of paper with a promise, and that sounds as thrilling as watching paint dry. However, like a house, a financial plan needs a solid foundation, or life can get interesting in the worst kind of ways. The foundation of any financial plan is income and it’s vital that it doesn't go away. Protecting the specialized income you make as a doctor, is fundamental for developing a good wealth building strategy. This is done by putting in place a quality disability insurance policy. Let’s look at how to do this successfully.
When to Buy
Putting disability insurance in place at a young age is ideal. The premiums or monthly/annual costs of the coverage largely depend on two variables: your age and your health. For many of us, that means getting coverage today. The older you get, the more the premiums will cost. As we age, our health history tends to get more complex. In those instances, the disability insurance company may exclude coverage of specific conditions that show up in your medical records. For example, if you recently had knee surgery, they may exclude covering any loss of work due to further issues caused by that knee.
Another advantage to putting the policy in place early is that premiums lock-in after the coverage is finalized. As an example, if you’re paying $100/month for the new coverage you acquired, that will not increase unless you change the terms of the coverage (increase or decrease the coverage amount).
An added benefit to placing your policy early is that doctors in their training tend to have discounted premiums of 15-30% based on the insurance carrier. This is an advantageous time to put coverage in place as those discounts stay on the disability insurance policy for the entire period of holding the coverage. This includes when you increase the policy coverage in your later years in practice. If you finished your residency this year (or even have already finished in the last few months), reach out soon to evaluate your coverage and find out if you need more so you don’t lose out on this discount.
Where to Buy
Doctors should look for disability coverage with an independent broker who can shop with multiple companies to find the best option. Find a broker who can quote with the top carriers for doctors. These can change over time but tend to include the following companies:
Principal
Ameritas
The Standard
Guardian
MassMutual
What to look for
Any insurance policy you buy should be centered around the most important factor – its ability to pay you at the time of claim. For this reason, I recommend looking for the strongest definition of coverage available on the market. In other words, we want coverage that protects the income you make as a doctor. Thankfully such coverage exists and even is specialty specific based on your area of practice. The insurance industry calls this “Own Occupation” coverage. To use an example, let’s say Dr. Bob, a successful orthopedic surgeon, gets in a car accident and loses feeling in his right hand. He’s no longer able to work as a surgeon but can still teach medical students at the local University. His disability insurance is going to cover him for the loss of clinical duties and he will be able to receive income as a professor in addition to the insurance money. This coverage we’re looking at is long-term disability coverage, so it has a “waiting” or “elimination” period before it starts to pay (we typically recommend 90 days), and this coverage will pay out for the pre-selected time you’re considered disabled (we typically recommend looking at coverage until age 67). If this were the case for Dr. Bob:
Coverage would start paying on the 91st day he is unable to work
He’d receive a monthly benefit payout based on his coverage
The monthly payments continue until he’s fully back at work as an orthopedic surgeon or until the end of his policy period when he reaches 67 years old.
What riders to look for
Besides the basics mentioned above, there are optional features that can be added to enhance a policy called “riders”. Some of the most beneficial riders include:
Own Occupation Rider: Covers the loss of income in your medical/dental specialty even if you’re able to work in another job and earn an income.
Residual/Partial Benefit: This allows the policy to pay out if you’re only able to work at your job part-time due to an injury or illness. Part of the monthly policy benefit will then pay to fill in the gap in lost income.
Catastrophic Benefit: This pays out an additional monthly benefit on top of your base benefit in the event you are unable to do 2 of 6 activities of daily living.
Cost of Living Adjustment (COLA): When out on claim and on a fixed income, you don’t want inflation to eat up your benefit’s value. The COLA allows your benefit to increase with inflation while out on claim. Typically we see these with a 3% cap per year.
Increase Riders: These allow you to increase your monthly benefit after your policy is in place by showing the insurance company new financial records. This allows them to adjust the benefit of your policy to fill in any gaps in coverage without adjusting the original terms of your policy due to a change in health. Many policies also contain a yearly benefit increase to keep pace with inflation for the first 5 to 6 years of owning the policy without additional underwriting required.
Group coverage
If you’re a doctor of a major hospital or medical system, it’s not uncommon to have long-term disability provided by your employer. This is a nice benefit to have provided but there are typically two issues with the policy type:
The coverage may not be enough to cover your current lifestyle
The coverage’s definition of disability is weak
Let’s look at the first issue with our internal medicine friend, Dr. Suzy. Let’s say Dr. Suzy makes $300,000. She wants to be sure that her estimated take home income of $18,000 per month remains unchanged in the event of a disability. Her employer pays to cover 60% of her salary up to a cap of $10,000. If she went on a claim, she’d receive a benefit with taxes withheld that only pays her $7,000. Thankfully, Dr. Suzy has an Individual policy she purchased in residency, and she increased her benefit to $11,000/month. Now Dr. Suzy would receive her full $18,000 per month if she was unable to do her job in internal medicine.
The secondary issue is that Dr. Suzy’s employer coverage has a different definition of disability. Unlike her personally owned policy, the coverage through work only covers her as an internal medicine doctor for two years and then if she’s able to work any job, the insurance company stops paying her. Additionally, if she earns income from another job in the first two years, her employer provided coverage will be reduced. This is unlike her individually held policy which will continue to pay until she’s able to be restored to the previous income in her specialty.
What if I’m unhealthy or uninsurable?
There are situations where an individual carrier like the ones listed above will not cover you due to your health history. We understand this may seen unfair. Insurance companies are risk adverse and sometimes will not cover you depending on your health history. In that situation, it’s important to consider alternative options. The primary two options are:
Supplemental disability through your job
Guaranteed standard issue (GSI) policies
The supplemental disability is straightforward. This is going to be additional coverage that you can purchase through your employer on top of what they provide to you. It’s typically going to have similar terms as the coverage provided by your employer.
GSI policies are more uncommon but very appealing. These are policies provided by an individual insurance carrier that allow you to apply and skip the health portion of the underwriting process. This comes in exchange for a higher premium than a traditionally underwritten policy but can ensure that you get top tier coverage without any exclusions. The GSI offerings are typically only available in select residency programs or hospitals. They do have some caveats for applications if you’ve previously been declined for coverage, so it's advised to speak with an independent agent prior to applying.
Next Steps
Now that you have a gameplan for acquiring coverage, the next step is to act. Here’s what the next steps look like:
Contact an independent agent like MD Financial Advisors
Provide them the correct details (current employer coverage, your income) to run a quote with multiple top-rated carriers
Review the best option for your situation based on income and health history
Apply with the right company and complete the necessary health underwriting
Review the final offer with the agent and implement the coverage
Finalizing this piece of your financial plan is a must do item for any doctor. This allows you to move onto other parts of your financial plan with confidence. Reach out to us today to learn more!
Ben Kirchner, AAMS© / Financial Advisor
After starting his career at two Fortune 100 companies, Ben joined MD Financial in May of 2018. Ben advises over a hundred doctor households, helping them achieve their financial goals. He is passionate about serving. Ben enjoys making sure all of our doctors thrive financially and have a great experience every step of the way. He can be reached at Ben@mdfinancialadvisors.com.
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
Please note that disability insurance policies may have limitations and benefits depend on specific policy terms and conditions. Guaranteed Standard Issue (GSI) policies may have limitations and are not guaranteed for all applicants. Additionally, GSI policies may come with higher premiums and limited availability. It is important to review all policy details carefully and consult with an independent agent to understand the full scope of coverage and potential risks.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, here. Past performance is not a guarantee of future results.