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When would you drop your disability insurance

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  • When would you drop your disability insurance

    We as doctors spend a lot on disability insurance for the remote possibility it may actually be used (meeting the minimum criteria as well). Presently I'm spending $2100 / year for $7500 monthly income. Over a 20 year span, that exceeds 40K in insurance costs alone. According to http://www.whatsmypdq.org/, my chance of getting disabled for 3 months or longer is 13%.

    Have any of you considered an FI point (enough in your savings / taxable accounts) and/or had an age cut off where you feel you no longer need the disability insurance? While I'm not at that point yet (thinking 1.5+ million at age 40), I've also thought that if one gets disabled permanently where it affects the ability to practice their occupation, downsizing would be a must (i.e., live like a frugal resident) to reduce monthly expenses to where the non-physician spouse could help sustain the cost of living thereafter. Any ideas?

  • #2
    I dropped mine in my mid 40s when I felt I had reached financial independence.  I had about 3.5 million then.

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    • #3
      This is a great question and for most will depend not just on their retirement balance, but on their remaining mortgage, number of kids yet through college, college savings, job security, and spouse income. I'm near pulling trigger on dropping my personal Berkshire policy. My thoughts had been waiting till retirement savings of 1.5-2 mil, 529s satisfactorily frontloaded and mortgage beat down to below $200k. I do have a physician spouse as well as a group DI policy which allows us to drop personal policies earlier than most.

      I wish I could go back in time and tell my resident self to buy a graded, not a level term policy, would have saved a ton and allowed my to drop earlier.

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      • #4
        Using zdr81 as an example, let's assume a total disability at age 40.

        With a monthly benefit of $7,500 payable for 25 years (to age 65) minus a 90 day waiting period with no COLA Rider, you would be foregoing $2,227,500 of tax-free disability benefits to potentially save $2,100 year.

        Is this really worth the risk? Yes, according to that website, your odds are 13% but guess what? If it happens to you it is 100%. I just don't see how having $1,500,000 at age 40 would allow you to drop your disability insurance.

        Can you guarantee that you will not change jobs and always have your employer provided group LTD coverage in place?

        Do you know the specifics of your LTD plan and understand its limitations? The benefits might be taxable, there are likely offsets for Social Security, Worker's Compensation and other sources of income. What is the definition of total disability? Is it an ERISA plan (much more difficult to collect on than an individual policy in terms of the claims process itself)?

        OK. You have money in low cost index funds in a taxable account. At the time you need to withdraw funds during your disability, the market is down. At this point your money is still up since you made your original investment(s). In the worst case, you pay ordinary income tax. In the best case, you pay capital gains tax. Either way, you don't have the luxury of time to wait for the market to rebound. As a result, you took paper losses and realized them.

        Is this worth saving $2,500 year? I would say that hatton1 was in a much better situation with $3,500,000 than you are with $1,500,000 and you are not even there yet.

        i would want to make sure that I was at the point that I was only working because I enjoyed it and not that I still needed the income derived from it. At age 40, I would also imagine you are not there - especially as a physician where it takes so long to even complete your training and start practicing with a "real job".

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        • #5
          Using a WCI guideline. Only insure catastrophic losses that you can't afford to self insure.

          I think it is somewhat ridiculous to say that one needs 3 mil to consider dropping DI. If one has college funded, mortgage paid or to a manageable amount, some group LRT, a working spouse with an above average level of job security, or plans to work for only 10-15 more years or less, I think a strong case can be made to drop or drastically reduce personal DI at age 40 with 1+ mil in retirement accounts.

          This is a numbers game and a personal decision, but the argument that "there is a 100% risk if it happens to you" or the old adage that "you can never be overinsured" don't hold water for me.

          Also remember that if you have a policy that pays till age 65, it becomes less valuable each year.

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          • #6
            I'm all for not being "over insured" and dropping or modifying insurance policies when the need is either not there or has changed.

            Yes, it is a numbers game. All that I'm saying that it is one thing to plan for disability on a academic basis and it is another thing when it comes claim time.

            I don't know all the details but I just don't think the original poster is at the point yet where he can drop his individual DI coverage yet.

            On the other hand, I had a conversation the other day with someone that wanted coverage and I told them that it didn't sound like they needed it and my recommendation was to not pursue it any further.

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            • #7
              Good points Mr. Keller. By no means am I saying disability insurance is not needed at all .. I'm just trying to figure out when I no longer need to depend on it. My mortgage is half paid off and my student loans are paid off; I have no car loans as well. I also have a pension plan that will vest in the next 2 years and I suppose there's always social security.

              I think we've become too reliant on insurance as a safety net, considering these vehicles didn't exist probably 25 years ago or more. Not to mention that thousands of doctors outside the US don't have any disability insurance (either because it is not available or it is not needed).

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              • #8
                Thank You!

                Also, keep in mind, disability insurance does not need to be "all or nothing". You can extend the waiting period, remove the COLA Rider, lower the monthly benefit and/or remove the FIO Rider in order to reduce your premium as you near financial independence. This can also be done in stages as you get closer to being able to drop your coverage entirely.

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                • #9
                  I think there is a time when DI does not make sense.  I have never seen a drop your disability policy calculator so you have to individualize it.  When I dropped my policy I had no debts of any kind.  My house and cars were paid for and I had no kids.  I think if you have read the FI/re  sites and feel confident you could retire if you wanted too then continuing to insure your income is not necessary any more.

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                  • #10
                    Thanks Mr. Keller - I didn't realize the policy could be modified. Perhaps reducing the monthly benefit would make sense.. but I am assuming that adjustments made would result in a new policy, which may invariably be priced higher due to being older, right?

                    hatton1 - while there isn't a calculator, it would be nice to know when people dropped it - obviously no debts is a given prerequisite but I was more curious what age and what balance one felt comfortable doing so.

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                    • #11
                      Most of the time you can just reduce it without triggering a new policy since the objective would be to not have you go through underwriting or get a new policy as your age would then be dialed up to current age vs. what it was at policy issue.  Just think about it like this, anytime you want to reduce the exposure of the insurance company (reduce benefit, remove features, or extend the elimination period before benefits would be paid) then they are ok with it.  Only if you want to increase the exposure of the carrier with policy benefits would you need to ask permission.  The exception is for a Future Purchase Option then the increase is only determined by the income qualification/justification and not the then current health or avocation of the insured as those are not taken into consideration.
                      Scott Nelson-Archer, CLU, ChFC
                      303-953-0263 Direct / [email protected]

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                      • #12
                        Correct. Guardian would not require any underwriting for any of the modifications that I suggested - only a change application.

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                        • #13
                          The was a recent post on this very topic entitled When to Drop, Replace, Modify or Decrease Your Disability Insurance Coverage.

                          I dropped mine at age 38, when I was more or less financially independent. I didn't really know about the option to decrease coverage. That would have been worth exploring had I really thought about it.

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                          • #14
                            Agree with some of the comments above.  Drop if not significantly reduce once approach FI.  I have also dropped mine - at this point we would be fine financially should I be unable to work.

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