Most physicians do not create a large amount of tangible wealth until their 40s and 50s. Prior to this point, their greatest asset is the immense amount of education, medical knowledge and training in their specialties, and the earning ability this translates into.
A physician coming out of a residency/fellowship with roughly 30 working years ahead and a potential salary of $250,000 a year (not factoring in cost of living raises, potential increases in production, partnership track, etc.) has $7.5 million-plus in earning potential.
When you think about all of the things we insure in life (cars, homes, jewelry, boats, etc.), it would not be a catastrophic set back if one had to replace, say, a car — putting aside sentimental value, of course — out of pocket in the grand scheme of things. But if a physician were unable to work in his or her specialty, it would be quite a different scenario to replace that $7.5 million in another occupation (if the physician were able to work at all).
The best way to protect your greatest asset of income potential is with true own-occupation, specialty specific disability insurance. There is not a “one size fits all” company or policy for physicians in the current market place, but yet there is a top tier of approximately a half dozen companies that tailor their policies for physicians.
A disability insurance policy is built from the ground up depending on what each particular physician wants to cover. A huge part of a physician’s disability income protection plan is protecting you in your exact job and duties within your specialty.
Be sure to reference the legal definition page to review when exactly you would qualify for a claim. There are some companies out there that market Medical Occupation specific coverage, but when you dive into the legal pages, it does not guard your greatest asset nearly as much as you would hope. When reviewing a definition of what a particular company defines as when you qualify for “total disability” the shorter the definition, the better — the less loopholes and “outs” the company gives itself, the better.
A close-to-perfect definition for a physician would be similar to: “If you cannot do the material and substantial duties of your own occupation due to any sickness or injury, you qualify for claim.” Where a physician can begin to drastically minimize their coverage is when extra sentences are added on, such as “...And you cannot be gainfully employed or receiving income from another source” or “and you cannot be employed in something you are reasonably educated for.”
Other riders and language that should be strongly considered on a disability plan
Future Insurability Options
A medical specialist looking to protect his or her income but unwilling or unable to afford a large disability premium at the present time could purchase a disability policy that protects their current income with a future purchase option or future insurability agreement (different companies have different names) that gives them the guaranteed ability to increase coverage in the future. Once you have your initial policy locked in, you will never have to undergo health underwriting to be able to increase your coverage, which in most cases is allowed up to $15,000 a month in net income coverage.
Residual/Partial Disability Benefits
Many disabilities are not total and complete. The residual disability benefit feature would pay a monthly benefit should you suffer a partial loss of income. There are very few, if any, group long-term disability plans that have such a feature. Under most group plans, you must be completely and totally disabled and under the constant care of a physician in order to receive a disability benefit. Most policies in the market place begin to cover you starting at just a 15% to 20% loss of income.
I recommend securing a disability policy that is non-cancelable and guaranteed renewable. This means as long as you pay your premium on time, the company cannot cancel your coverage or raise your rates. Given the importance of disability coverage and knowing it will be a policy you own for many years, no change in your premium cost or coverage can provide real peace of mind and should always be a feature of your disability plan.
Cost of Living Adjustment (COLA)
This particular feature becomes extremely beneficial for disabilities that last longer than a year. This feature protects the benefits net purchasing power against inflation once one qualifies for claim. A common COLA on a physician’s disability policy is 3%.
Ideally, insurance policies would not have loopholes, exclusions or preexisting exclusion riders. Coverage would be guaranteed under any and all circumstances. This is not always the case. If there are any past issues in your health history, it may be excluded or given limited benefit options. Be sure to know the extent the coverage is limited and if/when the limitations are reviewable if no further issues arise.
The first consideration is to go with a company that is highly rated by the major rating agencies (Standard & Poor’s, Moody’s, A.M. Best). This is a good predictor of a company’s longevity and ability to pay in the event of a claim.
Disability insurance rates are based off a number of factors: the quality of the definition of disability; the insured’s health, gender, age, state of residence, specialty and sub specialty; and what riders are added to strengthen the coverage.
Most companies will give gender neutral rates to physicians in training, which is an added benefit to obtaining coverage prior to going out into practice. It is best to use an insurance agent or financial adviser who is product and company neutral, who can take their clients out to the market place and help them shop around without being biased towards a particular company.
One thing that has been constant in the last decade in the disability insurance market has been change. The top tier of companies are constantly jockeying for position to be more and more competitive against one another. The main players in the industry are currently Guardian, Met Life, Principal, The Standard, Union Central/Ameritas and Mass Mutual. One year, Company X might be the best for a certain specialty, and the next year, all variables equal, a completely different company would be more affordable and suitable for the same individual.
For quality coverage, disability insurance typically costs 1% to 2% of your income to cover the other 98% to 99% of take-home pay — a reasonable concession for assurance and peace of mind that your greatest asset and millions of dollars of earning potential are protected.
Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource group is not affiliated with Securian Financial Services, Inc. The answers provided are general in nature and are not intended to be specific recommendations. Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax or legal advice. Please consult a tax or legal professional for information regarding your specific situation. 360678(IR)/ DOFU: 4-2012