Should Medical Residents and Fellows Purchase Individual Disability Insurance?
Client Question: Should medical residents and fellows purchase individual disability insurance?
Advisor Answer: Residents and fellows should at least request individual disability insurance quotes (i.e. premium costs and benefits of a given insurance policy) to evaluate their options. Obtaining individual disability insurance may be a smart financial move given the relative attractiveness of the policies I have seen when advising residents and fellows.
How is disability insurance for residents and fellows different than traditional disability insurance?
In general, it’s better. Several insurance companies offer unique programs where residents and fellows can secure sizable insurance benefits despite the fact that they have low incomes. Normally, insurance companies provide disability benefits up to 70%-80% of an applicant’s current income; however, residents and fellows can receive preferential treatment. For example, an insurance company may offer a monthly benefit of $5,000 ($60,000 per year) even though a resident may be earning a salary of only $60,000 per year in his or her residency. In this case, the $5,000 monthly benefit would actually represent over 100% of the resident’s after-tax income given that the salary is taxed whereas the insurance benefit would not be taxed. To further illustrate this point, medical students can also receive disability insurance benefits even if they generate zero income.
Another unique benefit for residents and fellows is that some insurance companies may not even require residents and fellows to take medical exams (e.g. blood and urine tests) to qualify for coverage. Normally, an insurance company seeks to understand how healthy an applicant is so they can set premiums (prices) accordingly. For example, someone who is obese or has a family history of a certain disease would generally be required to pay a higher premium. Insurance companies can also offer increased coverage (a higher benefit amount) after a resident and/or fellow becomes an attending physician without requiring a medical exam to be taken. So, if a resident and/or fellow becomes sick during residency or fellowship, he or she can still obtain adequate insurance coverage without being charged significantly higher premiums to compensate for the higher insurance risk.
Why are the insurance companies offering such advantageous programs?
The insurance companies may believe serving residents and fellows now (perhaps unprofitably) will increase the likelihood that these medical professionals will become long-term customers and purchase additional disability insurance when their incomes increase upon being hired as attending physicians. In many cases, the policies can be designed so the monthly insurance benefit increases as a physician’s income increases.
Why is it important to have disability insurance?
Young physicians are often those who are most in need of disability insurance. There’s an old saying that says one’s weaknesses come from one’s strengths. This can be the case for physicians. Their strength is they tend to have very high paying jobs; however, they often obtain very high levels of debt in their early years to gain the necessary education and training. Also, physicians are often afforded favorable mortgage terms, which can incentivize them to purchase expensive homes and take on relatively large amounts of mortgage debt. Everything can work out great, if the physician maintains the high-level of income. But what if the physician becomes disabled and can no longer practice and earn an income in his or her area of expertise? Unfortunately, the student loans and mortgage will likely still need to be paid off. Disability insurance can replace a substantial amount of the income a physician’s financial independence is predicated on. For example, a physician could receive 70%-80% of his or her after-tax income (every month) until the age of 65. This income can also be increased with the cost of living so purchasing power is not lost.
Many people feel they won’t be the ones to become disabled; however, the statistics suggest to take more caution. According to lifehappens.org, a 30-year old is 4X as likely to become disabled than to die before age 65 and just over 1 in 4 of today’s 20-year olds will become disabled before reaching age 67.
How do I obtain individual disability insurance?
I would recommend going to an independent insurance agent when looking to purchase individual disability insurance. Independent agents “shop the market” to select the most optimal policy for you from the best carrier. If you purchase insurance coverage from an agent who works at a particular insurance carrier, that agent is all but guaranteed to recommend one of that particular carrier’s policies. And as I have seen, there can be major differences depending on who the insurance carrier is.
As a fee-only financial planner, I am not able to collect a commission by selling you disability insurance. For this reason, I refer my clients to an independent insurance company that partners with fee-only advisors, like me, to provide insurance. Many clients have found that having an extra set of eyes to review the insurance policies can be helpful. Below are three issues I found in the insurance policy presented to my client that he did not notice prior to my review. For client confidentiality purposes, we will call the client “John.”
- Unnecessary Riders: The insurance policy offered to John included a “rider” (i.e. benefit) that would specifically help offset the burden of student loans if John were to become disabled. It is important to note that there was an additional cost to this rider. The insurance company may have assumed that John would want this rider because he is a fellow; however, John did not have medical school loans, which made this rider unnecessary. Eliminating this rider reduced the cost of John’s premium.
- Graded vs. Level Premiums: John was initially presented with a “graded” premium (instead of a “level” premium) that would start out low and increase once John were to become an attending physician with a higher income. Again, this may make sense for many fellows with low incomes, but it did not make sense for John. He actually had additional sources of income to cover the cost of the level premium. By choosing the level premium instead of the graded premium, John is estimated to save over $39,000 during the life of the policy.
- Unnecessary Medical Exams: After a phone conversation with the insurance agent, John was left with the impression that he would have to take medical exams (blood and urine tests) to apply for the individual disability insurance. I followed up with the agent to confirm whether or not John needed to take these exams and the agent confirmed it was not necessary.
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