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how much disability insurance?

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  • how much disability insurance?

    How much disability insurance is "enough"? Are there any guidelines for this?

    I'm in the market for getting a policy, but have gotten a lot of bad advice previously, and am wary.

    I get the feeling that insurance agents want to sell me as much as I can afford, but is that the "right" thing to do? Like when realtors try to make you buy the biggest house that you can afford?

    Or, is that the right thing to do -- get as much as someone will cover you for?

    I'd be curious to hear other peoples opinions about this. Either as a set amount (ie. $10k/m) or a prcentage 60% of gross pre-disability income.

    Obviously a personal finance issue that is more personal, but wondering about the finance part of it.

  • #2
    Each company has their own Issue and Participation (I &P) limits as to how much of your income they are willing to replace on their own or in conjunction with other individual, group or association plans that you might have.

    At the lower incomes, the replacement ratio will likely be around 60% of salary. At the higher incomes, this can drop to 30% or less.

    The amount of coverage that you should purchase is based upon your individual needs, goals and budget. However, in the event of your disability, you would want to have as much base coverage as possible. Unfortunately, many approach this topic on an academic basis and don't really understand the impact of what a disability could mean to them financially.

    A few tips:

    Ideally, you want a policy with an "Own-Occupation" definition of total disability. This will allow you to receive benefits of you cannot perform the duties of your medical specialty - regardless of the income you earn elsewhere.

    Your policy must include a Residual Disability Rider to take away the "all or nothing" associated with "Own-Occupation". This will pay you benefits proportionate to your loss of income if you can still work in your specialty or a limited basis and have a loss of income of 15-20% or more compared to your pre-disability income.

    A Cost Of Living Adjustment (COLA) Rider is important - especially if you are young and don't have much on the way of assets. It will generally increase your monthly benefit after one year of disability. However, if you are not purchasing as much as you qualify for based upon your income, take the money you would have spent on the COLA Rider and purchase a larger monthly benefit initially.

    The premium rates are based upon your age so the more you purchase now, when you are younger, the less it will cost you over your career.

    Always "shop" the market as different companies may treat your medical specialty differently in terms of occupation class. This can impact the premium rate substantially.

    Always look for discounts either through your hospital affiliation or professional association. Most of the carriers offer these and access to them can vary from one agent to another.

    If the premium rates are not significantly different, a policy with no limitation for claims related to mental/nervous and/or substance abuse disorders is preferable to one that has a limitation.

    Finally, if budget is an issue, you can also consider a graded or annually increasing premium to potentially further reduce your premium outlay.
    Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF


    • #3
      What LBKCLU above wrote is all accurate and the info you may except from an insurance salesman. Unfortunately it does not tell you how much you need to buy.

      I believe most physicians over insure themselves. They see insurance as a possible windfall. The best advice I can give you is to figure out what your expenses are now, subtract out the things you would stop spending money on if disabled, Add in extra health care costs, consider spousal income and that is how much you should have.

      Disability insurance isn't cheap so buy what you need for the projected amount of time you will need it. For example let's assume you have been managing your wealth properly and after 5 years you are debt free and built up a reasonable nest egg. You definitely need less disability insurance at that point as compared to $300K in debt with no assets.

      I hope this helps.


      • #4
        Another way I suggest people look at the benefit amount needed is to average withdrawal from your bank account each month (add up the past 12 months of out bound money, divide by 12) that will give you the average expense you have had.  That is what you need, anything over that is simply a want.


        • #5
          If you are a saver (and let's face it those that read this and similar forums likely are), I would strongly consider a graded premium policy if you are still early in your career.

          I think most physicians are better served paying very small premiums early on and using the extra savings to pay off loans and max retirement and later in your career as you approach financial independence, you can drop the policy before the larger premiums kick in.

          Same advice for level vs annual renewable term life insurance.

          If I had it to do over if probably go with a 10k/month benefit, graded premium, own occupation policy with residual but no COLA, and hopefully supplement with the cheaper, inferior group coverage offered. I hope to drop my portable DI by age 50, job security and health willing.


          • #6
            If someone is wary of completely dropping DI at a relatively early age d/t financial independence, is there anyway of downsizing the DI... ie., go to a lower benefit coverage? Thanks



            • #7
              Yes. You can always reduce the monthly benefit, increase the elimination period and remove riders such as the COLA Rider. Since you are taking the company "off the hook", there is no medical underwriting required. All of the things I mentioned can easily be done with a change form.
              Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF


              • #8
                WCICON24 EarlyBird
                BTW, I intentionally did not answer the question as I don't know the answer. Insurance is a very individualized purchase based upon one's individual needs, goals, budget and risk tolerance.

                How does Dr. Frank spend his money? What are his fixed expenses? Is he married? Is his wife a physician as well? Does he have children? Do others depend upon his income?

                While my answer is what you would expect from one in my profession, it also comes from my experience of having a substantial number of claims submitted and paid to physicians that never expected and never wanted to use the disability insurance that they purchased.

                Almost every physician that I speak with at some point in the conversation tells me that "I am never going to use my policy" or "I am never going to become disabled". To a certain extent, they are almost purchasing their coverage as a right of passage from medical student to resident, resident to fellow or fellow to attending and not really thinking about what they are actually protecting.

                Nobody expects to become disabled - especially physicians. If they do, they expect that they will not be able to work in their specialty but can easily work in another occupation or profession and earn an income. Unfortunately, all too often this is not the case. We can look at expenses, determine where money is going and try to purchase that amount of coverage but a the end of the day, most people, are working because they need the money and not simply because they love what they do. Whether they are putting the money they earn into lifestyle or savings, it is being used for something. Once the savings is enough to support the lifestyle and they no longer need to work, the need for disability insurance is reduced or eliminated.

                Since everyone is different, I simply present the options available to the best of my ability, discuss the pros and cons of each policy available, and ultimately help the client make a decision that they can feel very good about.

                Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF