A Guide to Disability Insurance - With The White Coat Investor

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Guide to Physician Disability Insurance

I have been collecting disability questions from you for several weeks. I brought Matt Wiggins from Pattern Insurance on this episode to help answer questions and give some additional information as an insurance agent. We start by talking about the basics of disability insurance. About one out of every five doctors over the course of their career use a long-term disability policy. If you don’t protect your income, what really is protected? If you get disabled and you can’t actually earn your income, then all of that effort you put into your financial plan goes out the window. You can have the fanciest financial plan or FIRE plan and it all goes out the window if you get your large income cut off early.

It is really foundational to your financial plan. You need to have a policy in place that will replace a large portion of your income if you get disabled so you can continue moving forward with your plan. Disability Insurance is the first chapter in my Financial Boot Camp book. If you are not financially independent, you need to have a disability policy in place.

Typically people pay their disability insurance policy premiums monthly. That premium entitles you to receive a certain amount of money each month in the event you become disabled. Generally, you have to be disabled for three months before a long term disability policy kicks in. From that point on, until you recover from the disability or until age 65 to 67, depending on the policy, it will pay you that benefit. А really good policy will pay you that benefit no matter what else you’re doing in your life. А less good policy may pay you less if you are able to do something, even if it isn’t going back to practicing medicine.

Three D’s of Disability Insurance

Matt says there are really three D’s in disability insurance. There’re definitions, discounts, and deadlines. There is a lot to know about this type of insurance. It is not an easy form of insurance to get your head around. But he would say if you know the definitions and if there are any deadlines or discounts, you’re doing pretty well.

Knowing the definitions in your policy really makes a difference between a bad policy, an okay policy, and a great policy. Part of the issue is that disability is so gray. Life insurance is such a black and white thing. You’re either alive or you’re dead, but disability is 50 shades of gray. There are just so many ways to be disabled, and there is a continuum of how disabled you are. Because of that, the contracts have to be much, much more complicated. Also, because it is so much more common to be disabled during your career than it is for you to die during your career, it’s much more expensive. A lot of people get sticker shock when they go to buy these policies. They don’t realize that it’s pretty typical to be paying 2% – 6% of the amount that you are protecting. That means if you have a $10,000 a month benefit, you might be paying somewhere between $200 and $600 a month for that benefit. It’s not cheap stuff. But Matt reminds us that you have to think about the lifetime benefit of this insurance. If you’re getting $10,000 a month, that’s $120,000 a year that they would pay you tax-free if you become disabled. And a lot of these contracts are 20 or 30 years out.

There are also all deadlines and discounts to know about when you get your policy. Ask about what discounts are available to you and about deadlines for getting certain types of coverage.

“You’re not going to have a psychiatrist paying the same rate as a surgeon. If you do it early on in your career, there are discounts. Those discounts typically are based on your employer. Is it a big employer or not? Can you go in with several people to get it? There are all sorts of things you can do to get discounts. We find them for residents, for fellows, for attendings, who’ve been attending for 20 years. I mean, there are discounts out there for you most of the time.”

What Happens When Insurance Companies Go Bankrupt

A listener asked about getting a policy from a company that has been downgraded three times in a row in its bond rating. What happens to your policy if the company goes bankrupt? There are really 5-6 big disability insurance companies, The Standard, Guardian/Berkshire, Principal, Ameritas/Union Central, Mass Mutual, and +/- Ohio National, depending on who you talk to. Each of these offers a strong “own-occupation” disability insurance policy appropriate for physicians.

Matt said if an insurance company goes bankrupt there is a whole process by which their block of business gets transferred to a solvent company. It is an auction process and the government oversees that. While you don’t want to go dumpster diving for an insurance company, all 6 of those companies are well within the safe range.

“Now, if you can land with a company, that has much stronger ratings and the prices are pretty close and everything else. Absolutely. That could be maybe a deciding factor for you. If you’ve already got an Ohio National policy, or if you’ve got a quote that it’s 10% – 15% cheaper than the others, we absolutely think they’re one of the six and one you should consider going with.”

If a company goes under, there is this auction process. I asked Matt, are there ever policies that aren’t transferred or are they pretty much all transferred? And your policy’s going to work out the way you expected when you signed it?

“So that’s one of the main reasons that you buy a non-cancelable and guaranteed renewable policy. We think both of those are very, very important. If you have that kind of a contract, then when that changes hands from one insurance company to the other insurance company, the new insurance company can’t change anything. They can’t change the pricing. They can’t change the wording in the contract. It’s pretty bulletproof. I’d say every doctor should make sure they’re getting their policies to be non-cancelable and guaranteed renewable, and then you don’t have to really worry too much about that.”

Partial Disability Benefits

We had a question from a listener,

“I practice radiology. Specifically interventional radiology. However, as part of my job, I do practice some diagnostic radiology, as well. My question is if I were to become physically disabled and unable to practice interventional radiology, but still able to practice diagnostic radiology, would I still be able to receive a benefit or even a partial benefit? For example, if I were to become disabled and unable to practice interventional radiology, I may no longer have my current job.”

Matt said Guardian came out with a definition not too long ago that said, if you make 50% of your income or spend 50% of your time doing interventional procedures and you get disabled and can no longer do them, then they go ahead and consider you’re totally disabled and pay you the full benefit. They’re the only company that has really come along and drawn a hard line in the sand of the six true own occupation companies. With the other companies like Principal and Ameritas and some of the others, he says that it’s a little bit more nebulous. Sometimes that can be in your favor. Sometimes it’s not. They’re going to define it as the material and substantial duties of your own occupation that you’re doing at the time.

“If you’re kind of in that borderline 40% – 50% interventional duties procedures, and then you’re with one of those companies, they may look at you and say, since you can still do diagnostic, we’re going to pay you that 40% or 50% or whatever it may be of the benefit that equals the loss of income that you’ve experienced. That’s kind of something they could do. However, we have seen them in situations where you were doing 60% interventional, 40% diagnostic, something like that. And they went ahead and paid the full benefit. So, it really comes down to how they classify you and your duties. What percentage of your income was coming from it? The higher the amount of your income that is coming from it, the more likely they are to pay you a full benefit. But at least you know it. If you have those companies with those riders, those residual or partial disability riders, it’s absolutely important to get it on your policy, so at least you know they’re going to pay you an equal percentage of benefit to the income that you’ve lost and pay you a partial benefit, if they don’t go ahead and give you the total amount.”

Pregnancy and Disability Insurance

Let’s talk about pregnancy and getting disability insurance first.

“The way it typically works is if you are pregnant and you’re in the first or second trimester, they will go ahead and issue you a policy, but it’s going to have a pregnancy exclusion on it. Basically, any complications from pregnancy, labor and delivery, anything like that, they’re just not going to cover it until you have a normal birth, everything is healthy. And then they’ll go back and they’ll take that off after you’ve gone back to work post-pregnancy.
If you’re in your third trimester, they actually will postpone giving you a policy until you have then been back to work for a certain period of time. During those trimesters, it kind of does matter when you apply for the coverage and when you get it, whether or not you’re going to get it with a temporary exclusion or you’re going to get it postponed before they’ll give it to you.”

Matt points out that, after you have your disability insurance, it is important that you get it with the future increase options. Different companies call it different things: benefit purchase, future increase option, benefit update, etc. They all call it different things, but it’s basically the guaranteed right to increase your coverage in the future, regardless of any changes in your health. If you already have a disability policy, it doesn’t matter what happens in your health. As long as you have those riders you can increase your coverage. You could have anything happen, really, and they cannot change the pricing or the features or the definitions or anything in the coverage.

Maximum Amount of Coverage

The maximum amount of coverage you can purchase is based on your current salary. Matt said,

“When you’re in training, typically if you’re a resident, you can get up to $5,000 a month in coverage. Once you are in your final year, you’re about to transition from training to practice, you can get $6,500 to $7,500 a month in coverage. These are all special programs for you while you’re in training. Once you get out of training, the amount of coverage you can get is contingent upon two things. It’s contingent upon your amount of income and on how much other disability insurance you have, either other policies individually or group insurance from your employer.”

As your income goes up, they will decrease the amount you can get covered. At $400,000 a year in income, they might only protect 52% of your income. By the time you get to a million dollars in income, they’re only going to protect maybe 25% of your income. Once they determine the eligible amount is 50% – 55% or whatever it is, then they look at how much group coverage you have from your employer or any other policies and they subtract that. Then you’re able to get that on that next policy.

If you want more money than that, you have options. You can use some of the riders that I’m not a huge fan of, retirement riders, lump sum riders, student loan riders, catastrophic riders to maybe increase that coverage a little bit. Matt typically doesn’t recommend those unless you’re already maxing out the base benefit. I asked Matt to talk about the options for someone who actually wants more coverage than the company will sell.

“To tell you the truth, when we talk to certain specialties or subspecialties, if we’re talking to orthopedic surgeons, if we’re talking to neurosurgeons, most surgeons, interventional cardiologists, I mean, if we’re talking to the higher income earning specialties and subspecialties, sometimes we’ll recommend getting two policies. So, let’s say you’re in training and you get $5,000 a month in coverage. It might be best to get $2,500 from one company and $2,500 from another. It doesn’t really affect you much. You still have $5,000 a month in coverage. The price is going to be pretty comparable. But then you get the right to increase both of them up to a higher limit. This year, they have all gone up. They’re all setting it like $20,000 a month in coverage. Some of them will work together and get up to $35,000 a month in coverage. And again, that’s tax free.
At $35,000 a month in coverage, you pretty much have to be sitting at about that million dollars a year in income to get that with no other employer coverage. So, they can work together. You could have five policies making up that $30,000 a month in coverage. It’s not a number of policies thing. They have issuing limits and participation limits. Issuing is how much each company will issue on their own. Participation is how much they’ll work together with other insurance companies to get you up to. So, it’s absolutely a viable way to do things.

Graded vs Level Premiums

If you are planning to become financially independent halfway through your career, should you go with a graded premium? How many years does it take to reach a break-even point with a graded premium?

Matt said Guardian has a graded premium option and that is who most people go with who want a graded premium. He has found that it is typically between years 12 and 14 where the annual crossover point is. So, once you get past that 12 to 14 years, you’re paying more on an annual basis. It typically takes about till you’re 18 to 20 before the cumulative amount that you’ve paid becomes more than you would have if it was level.

He said most of his clients get level premiums. It is hard to know the future.

“It gets really steep and expensive later if it’s graded. The last thing you want to do is get there and have this thing ballooning up and getting super expensive and causing you to make a different decision than you would have otherwise. To have that kind of locked in level, the peace of mind that’s there and keep as long as you want it, it doesn’t change. That peace of mind is good. But, like I said, if you’re the kind of person, I know there are guys in my office right now who are like, “I would never buy level. I would buy graded” and they’re more detail-oriented and they kind of map things out and they’re like, I know exactly how long I want disability insurance for. I think it’s perfectly fine. You just have to know if you make a mistake in that regard, it could get really expensive.”

How Agents Get Paid

Guardian tends to have the highest premiums for disability insurance. It may have the best definition of disability for physicians, especially for those that are doing procedures. It also has among the highest commissions in the disability world. A listener wondered if the increase in the price for the Guardian policy is worth it or if this is going towards the insurance agent’s commission.

“A lot of the insurance companies are going to pay the exact same commission first year. It probably gets up to about 70% of the first-year premium that goes to a broker. What happens after that is there are renewals that kick in. So, every year they get paid a little bit of something to service your policy. You kind of want them there in case you need to increase your coverage, you have questions about the policy, you need to make a claim. It’s good to have someone there who’s not at the home office of an insurance company. So, you want to make sure you have someone on your side who is kind of looking out for you. They do pay a little something. But those can be quite different. Guardian typically pays a lot on renewals and not only that, it pays into perpetuity. It never ends.

Companies like Principal pay you close to the same amount as Guardian, depending on the level of volume that you do in selling this kind of product. But then at year 10, it literally drops to almost nothing. I think it goes from like 10%, 12%, 15% to 1%.

Now let me step in and say though, Guardian is the highest rated company of all the true own occupation companies. They have the longest tenure, the best track record in a lot of regards. But at the same time, you want to make sure if you’re talking to someone about a policy that you can ask him questions like this – “Well, how do you get paid? And are you being financially motivated in any way by this?”

Guardian has kind of a Cadillac package policy that’s super expensive. And all the Guardian Kool-Aid drinking brokers or agents out there want to sell you that because they’re saying – “You have to get the absolute, most robust top-level policy you can get.” And then they’ve got another policy that’s about half that price. It is still on par with others with a lot of features, so it’s not a bad policy. And I’ll tell you the truth. We work with a lot of doctors who take that one. They’re both still true own occupation with that 50% procedures definition. So very, very similar policies. But I would say that most of the good brokers out there are not selling it because it benefits them.

Disability Insurance for Procedural Specialist vs Non-Procedural Specialist

Does this process differ depending on your specialty? Everyone needs disability insurance. Psychiatrists, family medicine, and pediatricians get disabled just as frequently as surgeons and need to protect their income.

“But when you’re a procedural specialist, you’re relying on fine, fine motor skills that if you get disabled, let’s say you get into a car accident. And something happens where you develop some type of a tremor or you have persistent back pain or things like that. There are things that could knock you off your game. So, I think that being absolutely certain that you get a true own occupation policy is protecting your procedures specifically. And if it’s to the tune where obviously more than 50% of your money or time is coming from procedures, then you might want to think about Guardian or someone who has some very specific language about procedures in there.”

75% of disabilities come from illnesses, not injuries. Cancer is actually one of the top disabling things out there. Every doctor can become disabled regardless of their specialty. Disability insurance is a lot cheaper for a psychiatrist than it is for a plastic surgeon. They’re in different rate classes. So everyone needs it, and it will be cheaper for some specialties than others.

Getting Out of a Bad Policy

A listener asks,

“Is it better to keep an old disability policy with a good price that is not strictly own occupation or get a new one? I’m now 48 and the premium difference is greater than 50% of the premium to get a true own occupation policy?”

Matt said it depends on his financial situation.

“A lot of times the answer at that point in time is well, if you’ve got enough savings, you paid off all your debt, you’re in a good position where if you got disabled and they only pay you a portion of the benefit on top of the savings that you have along with no debt, and you could live off of that portion plus your savings with no debt. If everything’s lined up that way, then maybe it’s worth keeping and not paying more for that.
On the flip side of that, you’re also entering the years where I mentioned a statistic earlier on, that something like one out of every five doctors over the course of their career gets disabled. That’s coming from not a whole lot of doctors in their 30s and a whole bunch of them in their 60s. And so, the older you are, you’re also more likely, that’s why it’s more expensive, to experience an event where you become disabled.
It might be one of those things where you say, “Hey, my savings aren’t where they should be. Maybe I just bought a house and I’ve got some debt that I’ve taken on. Maybe now is the time to pay a little bit more, to make sure that I’ve got this true own occupation coverage. So, if something happens, I’m not dwindling away to savings that’s not even where it should be and I can’t pay this debt”. I hate to sound like a politician, ride the fence and say it depends on the financial situation, but it really does. But I hope that at least gives you some idea of things you should be thinking about. What happens if I get disabled? Do I need to have all of my income paid to me? Or can I take something proportionate from one of these policies along with what I’ve saved, if I’m in a good position with no debt? Or if that’s not the case, maybe it’s worth paying more and switching to a true own-occupation policy.”

Most importantly, never get rid of a disability policy until the other policy is in place and the first payment has been accepted by the insurance company.