I have been providing it financial education to physicians for nearly 12 years, and without a doubt the area that I have received the most questions about is disability insurance. Here are four of the biggest mistakes that people make when deciding how to purchase and maintain a great disability insurance policy.
The policy is not purchased with a discount. Physicians use buying power all across the board when accessing key goods and services. However, more often than not, a physician’s disability insurance policy is purchased at individual rates. This error can cost you tens of thousands of dollars over your lifetime. That is not a misprint. Women especially are affected by this price discrepancy between discounted group policies and individual disability insurance policies. In some cases, women are paying a 40%-50% higher rate by purchasing an individual disability policy. Do not confuse your group disability insurance policy with a discounted individual policy. Individual policy rates are priced by age, sex, and occupation class. All other things equal, women pay more than men for the same coverage. These costs are driven by actuarial data from years and years of claims. Regardless of whether you are a man or a woman, if you can participate in a group discount when you purchase your policy, this can result in a huge savings for you.
Another opportunity to save on your disability insurance premiums is gained by leveraging your employer-sponsored disability insurance plan more effectively. If your employer is paying your disability insurance premiums for you, then your disability income benefits will be taxable should you ever go on claim. A consideration here is to have your employer include any premiums paid for your coverage in your taxable income for tax purposes. You may be saying to yourself, “How does this save me money, Seth? You just increased my tax bill.” Simply stated, most physicians need both group disability coverage and supplemental individual coverage to protect as much of their income as possible. Group disability insurance rates are typically much lower than individual rates, so if you can keep more of your employer-sponsored benefit in the event of a claim, then your need for individual coverage should decrease. The downside to this equation is that your group coverage is not portable if you leave your job. If you believe that this strategy would work for you, I suggest not totally dropping your individual coverage, but rather scaling your individual policy benefits back. You will still have an individual policy that you can take with you if you ever need to leave your employer.
Another error that physicians make, despite their increased net worth, is to maintain the same level of disability insurance coverage that they had when they were young and had little or no net worth. Disability insurance is a risk management tool. If the risk no longer exists, then there is no reason for maintaining insurance. If you can self-insure your loss of income or even a partial loss of income, why are you paying for insurance that you don’t need? Disability insurance in most cases is a pure cost. As the insured, you have the ability to cut benefits if you do not need them. For example, let’s say that you purchased a policy years ago with a benefit of $10,000 per month. At that point in your career you had no emergency cash reserves, and you had a mountain of debt. Years later, you have the necessary emergency reserves, little or no debt, and you have accumulated a significant amount of assets toward it financial independence. Why would you not decrease your disability insurance benefits? Maybe you could decrease the monthly benefit, or discontinue paying for some of those costly riders. If you have accumulated assets throughout the years, now would be a good time to review your policy to determine what you actually need versus what you originally purchased.
Many individuals purchase policies with too many bells and whistles. There are many riders, or add-ons, available in addition to the base coverage on a disability insurance policy. Riders such as residual disability, return of premium, COLA (cost of living adjustment), own occupation, and guaranteed purchase options can be very expensive. Though many of these are important, and in some cases essential, each policy should be designed to your specific needs. If you do not understand the purpose of the riders and additional costs to your policy, now might be a great time to get up to speed.
DISCLOSURE: Seth Cohn is a financial planner and Founding Partner of WealthMD, specializing in representing health care professionals and their practices in the design, implementation, and maintenance of their comprehensive financial plans. He is experienced in working with physicians in all stages of their careers and has served as a guest educator at numerous teaching hospitals, IPAs, and medical associations throughout the Southeast. Seth currently lives in Atlanta, Georgia, with his wife, Valerie. For more information, please contact Seth at 404-926-1317 or firstname.lastname@example.org.