Which of these three assets would you believe is the most important to protect – A, B, or C? A is showing a negative value, B a small value, while C dwarfs them all. What if we gave them labels?
“A” represents your estimated net worth after residency. With the average medical student entering residency with sizeable debt amounts, having a negative net worth is not uncommon and puts you in good company with your cohort. “B” perhaps represents your personal possessions. Maybe that’s your vehicle, or furnishings, or even some accumulated savings. So, what is “C” that makes it so much larger than the other two? It’s what you’ve been betting on since before you entered medical school. It’s your ability to earn a very attractive income throughout your practicing years. It’s an enormous number and represents the single largest asset you own and it is very much worth protecting.
How exactly, other than looking both ways when you cross the street, eating a well-balanced, healthy diet, and making sure you get plenty of water, exercise and sleep, do you protect your ability to earn an income. First, you don’t discount everything above – you should do all of those things since they are largely within your control. You should also have a pragmatic view for many things that aren’t in your control and have contingency plans in case you need them. In the event you become ill, get injured, or experience a disability that prevents you from practicing medicine, adequate disability insurance is a must for any physician.
Disability insurance, also referred to as disability income protection, provides a monthly predetermined replacement income should you find yourself unable to work or generate an income, all in exchange for an insurance premium. This monthly income benefit will continue until you recover and can resume working, a set period of time, or until you reach a certain age depending on the policy you choose. There are a dizzying array of definitions and options that can make the decision-making process confusing and cumbersome so let’s start with some of the basics.
Premiums for disability insurance can be expensive and you should consider this as an indication of how often it may be needed. Some statistics suggest that individuals between the ages of 25 and 65 have a 1 in 9 chance of experiencing an illness, injury or disability that interrupts their ability to earn an income. For physicians, we have seen statistics that indicate that number may be closer to 1 in 7.
When you experience an event such as this, it can be incredibly unnerving and fill you with tremendous anxiety. Financial anxiety, wondering how your patients will be cared for, the impact to you and your family’s financial future, can overwhelm any physician. Under those conditions, you are not at your decision-making best. Protecting your ability to earn an income with sufficient disability income coverage allows you time to get your bearings and chart a new course with confidence.
Insurance companies limit the amount of disability insurance an individual can have – usually, to around 60–70% of your gross income. The answer to how much you need will be heavily influenced by your standard of living. If you are living beyond your means, 60–70% will be insufficient to cover your expenses and obligations. So pro tip #1 is – live within your means. If you are already doing this, well done. In many cases, the taxes you pay can be 20–30 percent or more of your income, making the 60–70% limitation from insurance companies in line with your budget for expenses other than taxes. As a physician, you should look to maximize the amount of disability coverage available to you relative to your income and with your standard of living in mind.
Insurance companies, in order to classify and cover similar risks together, and in an effort to keep premium payments appropriate for the risks they are covering, have two types of policies – short- and long-term. Short term disability coverage is just that – it is intended to cover you for a short period of time, typically 3-6 months, following an illness or injury that prevents you from working. With long-term disability coverage, that period is longer, and usually stated in years: 5, 10, 20 or a certain age, like 65 or retirement. Short-term coverage usually pays a higher percentage of your income, such as 60-70%, and long-term coverage usually replaces a lower percentage of your income, such as 40-70%.
As you are probably already thinking, these two types of coverage are designed to work together. Short-term disability covers you immediately, or soon after, a serious illness or injury, and then long-term coverage is intended to maintain adequate income replacement if your condition keeps you from working for a long period of time. If you have both in place, your short-term policy will pay you during the waiting period for your long-term policy, at which point, you’ll transition from one policy to the other. This is why it makes sense to have both policies in place.
Short-term disability insurance payments typically begin within a couple of weeks, while long-term disability insurance requires a longer waiting, or “elimination” period before you would start receiving benefits. The length can vary by policy, but is commonly 90 days. Having an emergency fund is a staple of any solid financial plan, and having one that can cover an unexpected emergency of 3 to 6 months or more is ideal, especially as a means to weather any waiting period associated with a disability policy benefit.
The operative word here is “yet” – you won’t be a resident forever, and you’ll be making “real money” soon. If you calculated the net present value of your career, which is just a fancy way of saying “the value today of all of your future years of earning a physician’s income”, the number would represent several million dollars and would be the largest value it will ever be, just as you enter residency and start your earning years. That number is worth protecting.
Furthermore, in your residency, fellowship years, or even in your early practicing years, you will likely not have much wiggle room in your budget. Meaning, your reliance on your paycheck is at a peak and any disruption to that flow can be very detrimental to your long-term goals and objectives.
One of the other benefits of getting disability income coverage early is that premiums are based on age and health. Getting coverage while you are healthy and before you accumulate any medical conditions will be cheaper earlier than later. Of course, if you have underlying medical conditions already, you should consult your Forme Financial Advisor before you apply so you understand your options.
As the names imply, individual disability policies cover an individual while group policies cover many people, most often offered as a benefit from your employer. Here are a few of the key differences.
One of the most important and relevant aspects of a disability insurance policy is the definition of what constitutes a disability. The two ends of the spectrum, with many additionally confusing ones in between, are “own-occupation” and “any occupation”. Social Security Disability Income (SSDI) is an example of any occupation. If you can work at any job, regardless of its income potential, it will not pay. As a physician, you should avoid this definition like an F5 tornado, which would have the same destructive power to your finances. Own occupation, on the other hand, would provide income replacement if you are disabled and cannot perform the majority of the duties you have been trained to perform. Many group policies are not own occupation so carefully read your documents. Individual policies more frequently have stronger definitions of disability than group policies.
If you have a group disability policy and your employer is footing the bill, or some portion of the bill, for that coverage, it is likely that any disability benefit would be taxable to you. When you are paying the freight for the premiums, like in an individual policy, the benefit you receive is usually not taxable.
This answers the question of “can I take it with me anywhere I go?” When any group coverage you have is provided through your employer, it will typically stop if you leave that employer. Some group policies allow you the option of converting those benefits to individual coverage, but not always under favorable terms. Individual policies, by definition, follow you wherever you go.
Group policies are often less expensive than individual policies. Because the policy is covering a group of individuals, the risk to the insurer is spread out more and often results in a lower premium. Additionally, because many group policies are provided as a benefit, a portion or all of the premium may be paid by your employer, but beware of the tax consequence of that as we’ve already mentioned. With individual policies, the cost is usually level or may increase on a schedule you were shown when you purchased it. With group policies, the cost can change more unexpectedly due to any number of reasons so don’t be surprised if that happens.
As with many strategies in wealth management, the best option is usually a combination of both individual and group policies. The most important aspect of this strategy is careful coordination of the two and regular monitoring and adjustments as your situation and career as a physician evolves over time.
We’re nearing the end of our overview so hang tight as we highlight just a few more of the most relevant options – called “riders” that a physician should consider.
This option, called a future purchase option (FPO) or sometimes, a future increase option (FIO), provides you with the opportunity to add more coverage as your income rises over time. As a resident, this is almost always a solid choice since your earnings will likely rise rapidly over the next phase of your career. This allows you to pay less while your income is growing and add – without another health exam if you added the option when you started the policy – coverage later, usually when you become an attending, and again later during your peak earning years.
If the last 18 months have been any indication, inflation is a constant nemesis that can disrupt the most solid financial plans. A cost-of-living adjustment may be an attractive option to consider especially if you are under age 50 and could be impacted by higher inflation over long periods of time.
Again, as with individual and group policies, there are many other options and choices when picking the right coverage for you and your family. It can, and is, overwhelming. We’re here to help – contact your Forme team to explore your options.
Overwhelmed with your options? Consider talking to our team to help you – Contact Forme. In the meantime, here are a few starting points.
One of the things you can expect with 100% certainty is the unexpected. An illness, injury or disability that interrupts your ability to earn an income is one of those possibilities. Think of your emergency fund as the first line of defense and the ultimate in short-term coverage allowing you valuable time to coordinate your options and other forms of coverage. A rule of thumb for residents is to start with a simple $1,000 emergency fund in an online or bank account with ready access. You aren’t aiming for high rates of return here – you’re aiming for flexibility and resilience. For practicing physicians, we recommend aiming for a cash reserve or emergency fund equal to 3 to 6 months of committed expenses, the stuff you have to pay for each month, not the optional things. Where you sit on that spectrum of 3 to 6 months is largely dependent on your feelings towards risk. If the unknown spooks you, tend towards 6. If it doesn’t, 3 may be just your speed.
As we mentioned several times, coordination is key and the beginning of that process is taking an inventory:
Well done! You’re asking the right questions and taking solid steps to secure better outcomes custom designed for you – if we can help you navigate any of this, please reach out to us.
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