You worked your fingers to the bone in college, sacrificing your Friday nights while everyone else was at the party so you could wake up fresh for the library Saturday early morning. You don’t remember your 20s because you were slaving away in medical school and residency. Now you’re finally a physician, but it’s not as euphoric as you thought. As you’re just starting out, your income is barely enough to cover your cost of living given the 6-figure debt sandbagging you.
It’s a tense situation. You can’t even shoot a round of hoops without the fear of incurring some irreparable damage to a limb that will render you unable to do the work you labored over a decade for. You know you need to put some protection in place, but you don’t know how much or where to get it from.
Here’s your dilemma. Being over-insured is a waste of money. But is throwing away more than you need in premiums worse than not having enough if you were to suffer a catastrophic event and need the coverage?
This is a constant battle that our physician clients face, and here are five clarifying questions that we use to help them figure out if they’ve got enough, a little less, or a lot less than the proper amount of disability coverage.
Q1: What exactly do you want to cover—some or all disabilities?
Said differently, are you worried about not being able to do anything at all for work, or just not being able to be a doctor and earn a high salary?
Let’s take, for example, Marie the surgeon. Marie earns $350k a year and wants to get herself some disability coverage. If she damages one of the tendons in her wrist and can’t perform surgery anymore, she’ll be out a large salary and will need to find a way to support herself.
If she can find a job that doesn’t require fine motor skills in her hand, then she may be able to earn enough to support herself. Let’s say she goes and becomes a sales representative at Pfizer. This work entails person-to-person meetings, some phone work, some light typing here and there but, for the most part, she’ll be okay with limited hand abilities. She may not be that badly off—do you know how much those salespeople make? Heck, she could be earning even more than $350k a year if she does well. But even if she weren’t killing it financially, the fact that Marie can still work means she’d only need to replace a percentage of her income.
However, if Marie were to become injured to the point of not being able to work at all, she’d need a sizable policy to replace all of her income.
Physicians should consider what they are willing to protect themselves against. If you’re willing to live with the risk that you could become totally incapacitated and hope that you’d still be able to work after suffering an injury, then partial coverage is for you. If you’re more conservative and want to be protected from the worst case, full coverage is the best option.
Don’t assume that all physicians are created equal. Physicians should be aware that disability coverage has to be sufficient for your specific specialty. Payout rates and amounts can vary greatly by occupation.
Q2: How would things REALLY change if you were to suddenly become unable to work?
Projecting your finances isn’t like balancing your checkbook. It’s not an exact science, especially when you have to model so far out into the future and assess a variety of possible outcomes. Sitting down and creating a plan can give you a starting point to work from and help you protect yourself from these risks as best possible using the information you currently have.
Not a foolproof method, but it’s the most scientific approach you could possibly take. Nobody can predict the future.
Ask yourself hard questions that probe deeply into how your disability would impact everyone else involved in your life. That is why we included the word “REALLY” in the wording of this question; because it’s got to be validated.
We commonly see that sometimes talking to the people in your life (parents, spouses, business partners) about what would happen if you were to become disabled spells out a different reality than what you thought they would say.
Our planners help our clients consider scenarios such as the following:
- If my spouse had to increase his or her income in order to compensate for my lack of income, would he or she be able to do it? How much more money could he or she conceivably generate?
- Is my spouse insured for a possible disability?
- If I am a physician who owns a practice with other physicians, are they insured for disability as well? Would they want me to be insured for disability?
- If I am cosigning anyone’s debt, are they insured for disability?
- Would anyone who has cosigned my debt want me to get disability coverage?
- What other levers could we (my independent practices, my household) push to generate more money if we had to?
- What services would we have to pay for (housekeeper, driver, etc.) if I were incapacitated?
- What is the worst possible outcome we could envision financially in this scenario?
- What is the best possible outcome we could envision financially in this scenario?
- How much of my assets are tied up in liquid investments such as cash or money market instruments vs. being in a 401k, IRA, or invested in a property that will be hard to liquidate?
- What would be the tax consequences of liquidating these assets if I had to do so?
- Would there be any penalty fees I would have to pay for doing so?
All of this leads to the larger question of overall financial strategy. Disability coverage and income are just one piece of the puzzle. Other factors, such as tax, liquid assets, savings, etc., should be taken into account. Without seeing the bigger picture, it is hard to understand any one piece of the puzzle.
Q3: How long could you get by without the benefits?
The way insurance typically works, the longer you can delay receiving benefits, the lower the premium. As is the case in Q2, the answer to this question depends on your financial makeup.
If you have an “emergency fund” of 3-6 months of cash, liquid, and ready for the taking, then maybe you can live with a delay. Or, if you have a spouse that supports you or other sources of income such as rental properties, then you may be able to get by for a while.
Q4: How long do you need coverage for?
Again, this goes into the bigger question of your overall financial plan.
Let’s say that Marie has three small children. She needs high income for the next 18 years or longer if she intends to put them through college and/or graduate school. The coverage period would be longer.
Or, let’s say that Marie expects to receive a large inheritance within the next five years. In this case, the coverage period would be much shorter.
Longer coverage period, higher premium.
This question also has implications for where you get the coverage from. If you get it through your work, you may or may not be able to take it with you if you change employers. Getting insured when you are younger means lower premiums (as does being female vs. male, by the way). Being forced to get insured at 50 could be much more expensive relative to at 20, especially if you have any health conditions that may have materialized over those 30 years.
Summing it up
Once you determine the coverage amount, the next step is to figure out who you should buy your policy from. There are professional organizations that sometimes will offer these policies, and your employer may as well. Some prefer to purchase an individual policy through a private carrier. There are pros and cons to each, and this is complex enough to warrant another blog post for another time.
As you can see, determining the proper amount of disability coverage is no simple task. It’s time-consuming if you want to do it right.
For physicians who don’t have the time to DIY on an analysis like this, there are online resources as well as qualified financial professionals who can be consulted with in order to find these answers. This may require you to pay a fee, but it will be well worth it in the long run if it means you avoid not having enough insurance or the right insurance.