Disability insurance - when to stop

[RosieQ]

I really like the graded premium structures. In the proposal that I got they are far less expensive to start, and the total monthly/anual premium doesn't exceed the level price for 12 years! It takes about 20 years until I would have paid more under the graded plan. I'm planning to be financially independent about 10 years or so out of residency, so the graded premium makes a lot of sense. Maximal protection when you need it the most at a more affordable price when you need it the most, plus a growing premium for a little extra motivation to get off the policy as soon as possible. After I drop the graded plan I think I'll either keep a small level plan I also have vs an inexpensive group plan to help smooth out any bumps if I were to become disabled but without impacting the budget nearly as much.

[Faithful Steward]

Antares wrote:

It is true that the cost of the policy is constant, and the number of years of potential payout diminishes, so your premium is no longer purchasing protection of the same value. But if you need it, you need it. Incidentally, I have an old policy that will pay me for life if I become disabled before age 65.

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Premium Structures

Most disability insurance companies offer both level and graded premium structures.

With a level premium, you pay the same amount for the life of the policy. Assuming you have non-cancelable and/or guaranteed renewable policy, your premium obligation will remain constant for as long as you own the policy.

A graded premium structure, on the other hand, begins with a lower initial premium payment that gradually increases over time.

Which Structure Should You Use?

A level premium is is appropriate if you can afford the amount due at policy issue. In addition, some folks like the fact that a level premium is easier to budget for.

A graded structure is often preferred by students, residents, or physicians just beginning their practice. This option provides a premium that will increase as your income increases. So, it's a friendlier option for those still dealing with large student loan payments or who have not yet reached their full income potential.

Finally, you many prefer to utilize a hybrid approach. Some physicians begin with a graded premium structuer, then switch to a level premium structure once they have increased their income or reduced/eliminated their debt. If you choose to pursue this option, keep these points in mind:

• You can only make the switch at your policy anniversary.


• When you make the switch, your new level premium will be based upon your age at the time of the switch - not your age at the time of policy issue.

[Antares]

hatton1 wrote:

Antares before I dropped disability insurance I took a hard look at my numbers and spending.  Before you drop it you need to be as certain as you possibly can that you are Financially Independent and then some.  I thought about it at least a year before I did it.  I was in my mid to late forties and I thought I would use the saved premium to buy long term care insurance in my 50s.  I educated myself on LTCI and decided I had enough money to self- insure.  I know several physicians who continued disability insurance until 65.  I think some people don’t run the numbers and look to see if they can eliminate this expense.  I think every situation is unique and for some there is a point where you don’t need it any more.

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You're entirely right hatton. The decision rests on being confident that you have achieved financial independence. It sounds like you were by your late forties. At that point, the insurance is unnecessary. I guess we agree then that this decision really isn't that complicated. It's simply Are you there yet?

[Hatton]

Antares before I dropped disability insurance I took a hard look at my numbers and spending.  Before you drop it you need to be as certain as you possibly can that you are Financially Independent and then some.  I thought about it at least a year before I did it.  I was in my mid to late forties and I thought I would use the saved premium to buy long term care insurance in my 50s.  I educated myself on LTCI and decided I had enough money to self- insure.  I know several physicians who continued disability insurance until 65.  I think some people don't run the numbers and look to see if they can eliminate this expense.  I think every situation is unique and for some there is a point where you don't need it any more.

[Antares]

I'm 58 and still have several years until I reach a point where I'll feel financially independent. I can't see dropping my disability policy until I no longer need to earn an income from working. I still need protection from not being able to work.

I actually have never understood the discussion of this issue. Maybe I'm missing something, but it seems to me that if you need to protect your ability to earn an income, you need disability insurance. If you'd be ok financially if you lost your ability to earn a living, then you can stop the disability policy.

It is true that the cost of the policy is constant, and the number of years of potential payout diminishes, so your premium is no longer purchasing protection of the same value. But if you need it, you need it. Incidentally, I have an old policy that will pay me for life if I become disabled before age 65.

[Mminter]

Discussing disability insurance is even less fun than discussing life insurance. But it's important. For most of us our income is our single greatest financial asset, and disability insurance protects the loss of that asset.

If the purpose is to replace income in the event of a disability and you have already done so in other ways, such as  personal investments then to my way of thinking, there really isn't a reason to continue, at least not at the same level.

[pg59]

triad wrote:

Does the premium go down as your age approaches 65 since your payout decreases with age?  not that premiums are too high to begin with.  My policy is for 10 years at $9k for $300/month

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No - the premium is constant.

[VagabondMD]

triad wrote:

Does the premium go down as your age approaches 65 since your payout decreases with age?  not that premiums are too high to begin with.  My policy is for 10 years at $9k for $300/month

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No, presumably because the likelihood of a disabling condition increases with age.

[triad]

Does the premium go down as your age approaches 65 since your payout decreases with age?  not that premiums are too high to begin with.  My policy is for 10 years at $9k for $300/month

[pg59]

Thanks for the responses.  I also have a policy through my group which pays ~12K/month.  I'm likely going to drop my personal policies.  They are not expensive (200/month) but I could be FI now so it doesn't make sense to keep paying.

[Molecularblonde]

 

Pg59-

 

Excellent question! Thank *you* for asking it!

hatton1-

It's good to know you dropped the disability. Might do that too.

Physicainonfire:

Thank you for the link to the disability article from the archive. I printed it out. It was very informative.

Thanks!

MB

 

[Hatton]

I dropped mine in my mid fourties.  I had several million dollars and was financially independent.

[RosieQ]

I also am thinking about it from two levels.

 

1) Do you need to save more for retirement? If so then you will likely need more in terms of monthly coverage so you can both hope to retire as well as meet your monthly living expenses.

2) There is a point in the path to financial independence where you will have "pre saved" for your retirement assuming you delay it to a certain point and have reasonable expectations. If you have that amount in your retirement accounts and expect them to grow to the age of 65 and be at a satisfactory level then you can likely carry a lower disability insurance amount in order to meet your monthly expenses and nothing more.

For me I have a 12-15k monthly limit to cover for situation number 1 and would likely be able to drop down to 4-5k in coverage once I reach situation 2 in a few more years.

[Peds]

if you have enough money to survive a disability...then you dont need to insure it.

[PhysicianOnFIRE]

It has little to do with your retirement date and everything to do with your financial independence date.

Once you are no longer dependent on paychecks to live your life, disability insurance (and term life) are essentially redundant. Self insurance is much cheaper. Jamie Fleischer wrote a quality guest post in this exact topic.