In the financial services industry, May is disability insurance awareness month. On the face of it, that may seem a little self-serving. But the problem is, most of us who have helped clients with financial matters over decades have seen heartbreaking scenarios play out—ones that could have been greatly eased had disability insurance been a cornerstone of a financial plan.
In my case, I’ve focused my career on serving doctors and other medical professionals. I know all about residents saddled with heavy debt loads finally reaching the point of receiving a substantial salary. I’ve seen many times over what goes right and what goes wrong.
When young doctors start thinking about financial planning, they’re likely to think first and foremost about (a) home ownership and (b) saving and investing. That’s all good, but don’t leave out protecting. You’ve just dedicated tremendous time and resources to earning an education. You are on the brink of an income stream made possible by that dedication.
Just as you wouldn’t leave a home uninsured, you must not leave your income uninsured. And disability insurance is the cornerstone. Getting it in place now can give you peace of mind and may also get you a discount, since insurance companies may offer a discount of 10-25% if you lock in a policy while you are still in training—whether that’s medical school, residency or a fellowship.
Disability Insurance Basics
Disability insurance is an often overlooked yet integral part of financial planning, particularly for younger income earners. It provides a safety net, replacing a portion of your income if you’re unable to work due to illness or injury.
Disability insurance comes in two main types: short-term and long-term. Short-term disability insurance covers a portion of your income for a short period, typically three to six months. Long-term disability insurance, on the other hand, provides coverage for an extended period, often until retirement age or until the disability ends.
A crucial variant of disability insurance is the “Own Occupation” policy. This coverage insures you specifically for your profession—and even within your sub-specialty. So, if you’re unable to perform your job due to disability but can do other work, you’ll still receive benefits. By contrast, “Any Occupation” policies will only pay benefits if you are unable to do any paid work.
For the most part, disability insurance available through workplace benefits packages are of the “Any Occupation” type. You may benefit by declining coverage through the workplace in order to purchase “Own Occupation” coverage on your own (insurance companies generally won’t insure you if you have coverage elsewhere, too).
For this approach, be sure to talk in depth with an experienced professional. You must be absolutely sure the coverage you buy independently is non-cancellable by the insurance company. That way, you can revisit your workplace coverage in a subsequent year to further augment coverage.
Putting Disability Insurance Cost Into Perspective
Though disability insurance may seem like a higher-priced item, its value becomes evident when you consider the potential payout. A premium of, say, $2,000 a year, could potentially deliver millions of dollars over a lifetime of disability.
Most people can insure a very nice automobile for $2,000 a year. And after shopping around, if that’s the rate, you’re unlikely to think a whole lot about it. After all, if you drive the car, the law requires you to have insurance.
No one is requiring you to have disability insurance. But think about what that $2,000 gets you, in terms of protection, in both cases. For the car, it will pay out—as an example, $50,000—if you total the vehicle. But if you have a long-term disability that makes it impossible for you to work, your disability coverage may pay out millions of dollars up to your retirement age.
In that sense, the insurance dollars are much more highly leveraged with disability insurance than with auto insurance.
How To Determine The Appropriate Coverage
Determining the right disability coverage involves considering your lifestyle, debts, and dependents. If you’re earning $10,000 a month but only require $5,000 a month to sustain your lifestyle, then insuring for $5,000 could be sufficient. But if you’re spending your entire income or expect your expenses to rise, insuring for your full income amount is advisable.
Be sure to shop around and compare options. You may find coverage that’s virtually the same going for twice the premium in one context versus another. Also, as I mentioned earlier, if you lock in a policy while still in medical training, you may receive a discount.
Happy Graduation
It sounds grim, but as you plan for the future, recognize that not everything will go according to plan. Protect your most valuable asset—your ability to generate income through your specialized skills.
Without disability insurance, an injury or illness has the potential to derail all other financial plans. You wouldn’t leave a house uninsured. So, speaking bluntly, don’t buy a house—and furniture, and anything else that calls upon your newly expanding cash flow—that precludes your ability to also protect yourself and your financial future.
