How much disability insurance do I "need"?

[jlf2002]

I currently receive disability insurance through my employer.  It is $14k/month of coverage ($12k/month of which is not taxable). My stated salary is $375k, but have a decent amount of extra benefits through my employer (retirement match, bonus, majority of healthcare premiums paid, etc) and do some internal moonlighting as well.  I am 40, married with 2 young kids, and live in a high cost of living area (we would move if I were ever to become truly unable to work though).

I realize everyone's situation and needs are different, but I am trying to decide if I have enough disability coverage, a little less than I need, or a lot less than I need. Any comments would be appreciated.

[PhysicianOnFIRE]

That is a generous amount of coverage, but obviously not enough to completely replace your income.

To answer the question, we would need a lot more information.  Does your spouse work, or could she if you couldn't work?  How much do you spend each year (or would you anticipate spending if you stopped working)?  Would you find a different way to make money if you could no longer practice?  How much of a nest egg do you have now?

FWIW, I am also 40, with 2 young kids in a single income household with a similar salary as an anesthesiologist.  I used to pay for true own occupation disability coverage ($10k / month) for about $300 a month.  I dropped that coverage about a year ago because I've saved enough to provide for my family indefinitely if I were to stop working.  That's an additional $3600 for the 529 funds every year, or a nice family vacation.

[jlf2002]

PhysicianOnFIRE, thanks for the comment.

My wife stays at home with the kids (1 and 3). She used to be an account manager at an advertising agency and was making about $90k prior to "retiring".  The thing is, if I were to become disabled, we would leave NYC for a lower cost of living area and I don't know what kind of job she would be able to find outside of the city.

Congrats on being able to drop your disability coverage. We currently have about $1 million in retirement and taxable accounts, which is not enough to provide indefinitely if I were to stop working.

"How much do you spend each year (or would you anticipate spending if you stopped working)?".  This is where I don't know how to plan.  I have no idea what expenses there would be for someone who is disabled.  I would be paying a lot less in taxes (almost nothing with the coverage I mentioned before), but I would no longer have the retirement match or health insurance premiums or other benefits from my employer.

"Would you find a different way to make money if you could no longer practice?"  I tend to think that any disability that would prevent me from doing my current job would probably prevent me from doing any other job. (Perhaps that is not true, but I can't think of anything off hand).

 

 

[jlf2002]

I guess part of my problem is I don't know exactly what it is I should be insuring against.  With my current coverage I am insured against catastrophe. Nobody will be eating Alpo if I were to become disabled tomorrow.  My short-term disability covers 100% of my salary and long-term disability would replace $168k of my salary, with only $24k of that being taxable.  That is still more than most Americans make. (Also, I have plenty of life insurance if I were to die).

Do most people try to insure a higher amount to maintain their current lifestyle though?  What is the "lifestyle" of someone who is truly disabled and unable to work?  What kind of disabilities are we even talking about that prevent me from working, but don't kill me? For example, if I were to lose a leg, I could ask my employer to put in a PACS station and still work from home (if I wanted to).  With cancer, you know what is likely to happen within 5 years.  What is it that will disable me for 20+ years, but not kill me?  (I realize there ARE things that could, but in terms of probability, is it worth insuring above what I have now?)

 

 

[LBKCLU]

Using Principal's Issue and Participation (I&P) Limits, using an earned income of $375,000 (not including your employer retirement contribution or moonlighting) and $14,000 month of group LTD coverage ($12,000 month tax-free and $2,000 month taxable), you would qualify for purchase up to $7,075 month, not including the Catastrophic Disability Benefit (CAT) Rider.

I used Principal as they and MetLife will participate up to $35,000 month with employer provided/sponsored group LTD which is the highest in the industry.

Also keep in mind that employer provided/sponsored group LTD plan are less liberal in terms of contractual provision and how one makes a claim for benefits. As a result, I think it is best to combine both individual and employer provided policies - especially if you have the ability to increase your individual policy, regardless of your health, in the event you leave your current employer, the group LTD plan changes or you have a subsequent change in your health.

Short of going to Lloyd's of London, the monthly benefit amount above is what you should be considering.

[Osiris]

I agree with Physician on fire: You seem to  be very well insured ( I am in the camp of  $ 120,000 a year should let us live comfortably) and if I were in your shoes, I would be grateful  not have to shell out more money.

I was elated, when I could drop my disability insurance once I became self insured. It is worth saving agressively so I did not have to pay that premium.

 

[PhysicianOnFIRE]

jlf2002 wrote:

PhysicianOnFIRE, thanks for the comment.

My wife stays at home with the kids (1 and 3). She used to be an account manager at an advertising agency and was making about $90k prior to “retiring”.  The thing is, if I were to become disabled, we would leave NYC for a lower cost of living area and I don’t know what kind of job she would be able to find outside of the city.

Congrats on being able to drop your disability coverage. We currently have about $1 million in retirement and taxable accounts, which is not enough to provide indefinitely if I were to stop working.

“How much do you spend each year (or would you anticipate spending if you stopped working)?”.  This is where I don’t know how to plan.  I have no idea what expenses there would be for someone who is disabled.  I would be paying a lot less in taxes (almost nothing with the coverage I mentioned before), but I would no longer have the retirement match or health insurance premiums or other benefits from my employer.

“Would you find a different way to make money if you could no longer practice?”  I tend to think that any disability that would prevent me from doing my current job would probably prevent me from doing any other job. (Perhaps that is not true, but I can’t think of anything off hand).

 

 

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Thanks for answering those questions.  Based on your answers, I would say you're in good shape.  You've got a nice sized nest egg, an educated spouse who could work if necessary, the ability to lower your cost of living.  NYC may be the best place to be for an advertising gig, but it's certainly not the only place.

 

[VagabondMD]

Osiris wrote:

I agree with Physician on fire: You seem to  be very well insured ( I am in the camp of  $ 120,000 a year should let us live comfortably) and if I were in your shoes, I would be grateful  not have to shell out more money.

I was elated, when I could drop my disability insurance once I became self insured. It is worth saving agressively so I did not have to pay that premium.

 

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One consideration is that depending on the nature of your disability and what additional medical, therapy or other support you might need, $120k per year can be eaten up rather quickly (think nursing home or round the clock aids in your house).

[Osiris]

Vagabond  is right.

Although I would hope that $ 120,000 /year plus social security /spouse's earning capability /safety net would take care of the worst of it.   My thought was that over $ 70,000 additional monies do not add to happiness and that leaves $ 50,000 + for   care.

 

[LBKCLU]

I would also keep in mind that if all your disability benefits were income tax-free, you would only be replacing approximately 45% of your income.

Your children are very young and, you are correct, that $1,000,000 would not allow you to retire, pay for you children's college educations and allow you to continue living in the lifestyle in which you have become accustomed.

You don't need a lot of additional coverage but as you asked before if you are underinsured, the answer is "yes". If you weren't, the carriers would not offer any additional individual coverage. You could also add a Catastrophic Disability Benefit (CAT) Rider in the event that you were unable to perform two or more of the Activies of Daily Living (ADLs) to further increase your income replacement ratio.

[jlf2002]

LBKCLU, I appreciate the input, but I am not sure that not having the maximum coverage offered necessarily translates to being underinsured.  Just because something is offered doesn't mean it is needed.  That being said, I may very well be underinsured (which is why I am asking everyone their thoughts), but I don't think that particular argument holds water.

As an insurance agent though, maybe you can answer another question for me.  The thing that prompted my forum post is that at my hospital we are being offered individual disability insurance through the same provider as our group long term disability plan.  For me, they are offering 2 options. For an additional $3392/month of IDI coverage (with 3% annual COLA option) and $10000/month catastrophic coverage rider, it would be $72.33 biweekly. For an additional $6784/month of IDI coverage (with 3% annual COLA option) and $10000/month catastrophic coverage rider, it would be $132.64 biweekly.  I am not sure whether I want to do either, but do those seem like reasonable prices to you?

[LBKCLU]

That's definitely true. However, I have had many clients go on claim and collecting under ERISA qualified LTD plans can be a daunting process compared to individual policies. I was just saying that the insurance companies would not knowingly put you in a position or give you an incentive to go out on disability and earn more money not working compared to when you were working.

What insurance carrier is it that you are being offered? What is your medical specialty? In which hospital do you work?  If the premium rate being offered is based on unisex rates, as a male physician, might be better off going elsewhere. You might also want to consider removing the COLA Rider (if that is an option) and you qualify for a larger monthly benefit.

You can feel free to email me directly [email protected] if you don't want to post the above information, you can also forward any illustrations of coverage that you have if you want an opinion or comparison.

[childay]

Tough to answer really.  You have to look at your current expenses.  Also I assume your spouse is not working?  That would be a consideration.  There are definitely conditions that would disable you but not kill you quickly.  Think a stroke with cognitive impairment or some horrific painful injury.  Personally hope to drop the disability and self-insure ASAP.

[The White Coat Investor]

It's all about your expenses. $14K a month tax-free would more than cover all of our expenses but would definitely decrease how much we save and give each month. I think I have $17,500 right now, but there are lots of circumstances where I wouldn't get all $17,500- such as if I could still blog and if I was disabled climbing etc.

[PenguinMD]

Good info here as trying to figure this out also.

A couple folks mentioning getting to the point of being "self-insured".

To clarify this just means relying on the nest egg so you can just retire and have all expenses paid right? What's the magical threahold people have?

Disability insurance is income replacement so it's really just the "bridge" between your working years till retirement in case of a disability happening right?

In other words once you "retire" or get the ability to retire you no longer need it? Am I understanding this right?

Thanks!