Financial Planning For Resident Physicians, Item #7 Protect Your Income
This is the eighth article in a series dedicated to helping the resident physician take steps to put their house (financial and otherwise) in order. My previous articles on the subject may be found here.
You are a money making machine.
Although I typically don’t like insurance sales analogies, there is one that actually makes sense.
Imagine that you have a machine in your home that produces $60,000 per year of income. You have to make sure the machine is well-oiled and not overused, and if you do so, you can expect that over the course of the entire year, you’re going to get $60,000. Knowing that it’s always possible that the machine can break down, wouldn’t you insure it? Of course you would.
Guess what. You’re the machine. And your ability to produce an income needs to be insured. You do this through long term disability insurance.
Where should you get disability insurance from?
If you’re a resident physician, or anyone who hasn’t yet achieved financial independence, you need long term disability insurance. There’s short term disability insurance as well, and you probably have some through work. But your emergency fund should help you manage a short term disability. In any case, a short term disability shouldn’t keep you from achieving your long term goals such as educating your children and grandchildren, and being able to take care of yourself instead of relying on others or the government in retirement and elderly years.
So if you know you need to buy disability insurance, where should you buy it? And who should you buy it from? First of all, if you know what you want/need and you’re confident that you’re educated enough to be able to make a decision on your own, find an independent agent or go online and buy the policy you want.
If you aren’t sure what you need to get, you need some advice. The trouble with insurance is that good advice can be difficult to come by because insurance advisors are paid on commission. In other words, the more expensive the policy is, the more the insurance advisor gets paid. Also, your advisor may have company quotas that they need to hit in order to maintain their contract or not get fined (yes, there are insurance companies that actually fine their agents for not pushing enough of their product). That doesn’t necessarily mean they’ll sell you the wrong thing, but it’s important to understand the incentives in play.
So if you’re going to go through an agent, you need to work with an independent one. But it’s not just important that your agent be independent. Your agent needs to also be acquainted with the best companies for medical professionals seeking disability insurance.
As an alternative, you can work with a fee-only financial advisor who is familiar with disability insurance planning for young doctors. You’ll pay for the advice, but the policy will be purchased through an insurance consulting company that the financial advisor is partnered with. Because your advisor is fee-only, any kickbacks or revenue sharing between the advisor and the insurance company are prohibited.
But why would you pay a fee-only advisor for advice when you can buy the product directly from the insurance agent who provides “free” advice? Remember that insurance advisors are paid commissions from the sale of the product to you. So the advice they provide is “free” because they are hoping you buy something from them. This can create a powerful motivation to sell you something, even if it’s not necessarily in your best interest. This becomes especially problematic when the advisor is captive and can only sell their company’s product. But anytime an insurance advisor has quotas to hit, whether they are captive or semi-captive, they will be incentivized to place more insurance with that company.
So it’s really a question of how much you value independent advice. When you pay someone to offer their professional opinion and their compensation doesn’t change whether you go with company A or company B, you are likely to get a more fair opinion than the “free” advice that comes with a product sale.
How much Disability Insurance should you get as a resident?
You might be surprised to learn that as a resident, it’s possible to get more disability insurance coverage than income you make per year. This is not common with other professionals who are more limited in the amount of disability insurance that they can obtain. So how much should you get? The answer is that you should obtain as much high quality disability insurance as you can afford. This means first maxing out the monthly benefit you would receive if you get disabled.
If you find that you’re in a situation where you can afford additional benefits, I recommend that you strongly consider the future increase benefit rider. This rider guarantees your ability to increase coverage when your salary increases without having to undergo an additional health screening. This is important, because some of you will experience accident, disease, or other disorders that will make increasing your disability insurance expensive, or even impossible.
The importance of contract definitions.
Not all policies are created equal. There are three general definitions of disability within contracts. The first is any occupation. This definition is the least favorable and stipulates that if you can work in any occupation following your disability, you are not considered disabled. In other words, it doesn’t matter that you spent four years in medical school and another four in a radiology residency so you could practice as a radiologist. Because you can stand in line as a greeter at Wal-Mart, or a cashier at McDonalds, you aren’t entitled to your benefit.
The second definition of disability is transitional. While more favorable than the first definition, this policy will pay a benefit if you are disabled from your job. However, if you can’t do your original job anymore and decide to be a productive human being and enter a new career, your monthly disability insurance benefit will decrease as you earn more with your new job.
Finally, the most favorable disability insurance policy definition is that of own occupation. Unlike the previous two definitions, own occupation policies pay your full benefit when you are unable to do your specific job, and the benefit doesn’t decrease or go away if you decide to enter the workforce again in another career.
Do I even need disability insurance?
As we conclude our discussion on disability insurance, some of you may be wondering if you even need it. You’re young and healthy, and you don’t think the odds are likely that you’ll get disabled anytime soon. Plus you have coverage through work amounting to 60% of your income.
Could you achieve your long term goals and remain independent on 60% of your income?
The honest truth is that if you are not yet financially independent, you need disability insurance. Life runs smooth enough until something happens that limits or eliminates your ability to produce an income. Hopefully nothing throws you off track. Unfortunately, some of us will experience these unpredictable life events.
For this reason, a solid disability insurance policy is a major defensive key in the young physician’s financial plan.
These are my opinions, unless I’ve specifically cited other material. The information and ideas I’ve presented are for information purposes only. Before you implement anything, make sure you have a thorough discussion with a qualified professional who understands your situation.