For the FITs | Insuring Against Financial Catastrophe
If you own a car, you probably pay for car insurance. If you own a home, you probably pay for home insurance. So, why wouldn't you insure the time and debt it cost to obtain your most important asset – your medical degree? The premiums for disability insurance may seem high for a house staff salary. But with growing medical school debt and a salary too low to make any meaningful payments, the consequence of disability will be the highest at the beginning of your career.
As you age, you're more likely to acquire medical problems or injuries that will either increase the cost of your insurance or result in certain disabilities being excluded from your benefits. For instance, an MRI obtained for back pain showing a small, herniated disc may lead to future policies refusing to insure any back-related disability. Starting medications for depression or anxiety during residency may also create restrictions on your policy. Buying disability insurance at a younger age, even though it may entail paying premiums for a longer duration, can result in a lower lifetime cost by securing a lower rate when you have fewer pre-existing conditions. The rate remains in effect for the duration of the policy.
After deciding to buy disability insurance, how do you purchase the right policy? All policies should be non-cancelable and guaranteed renewable. When considering policies, look for the following riders (optional additions to the policy):
True Own Occupation: This is the most important definition of total disability that should be obtained in your policy. This will consider you totally disabled even if you are gainfully employed in another occupation so long as, solely due to injury or sickness, you're not able to perform your duties within your specialty. For example, if you have a hand injury and no longer can perform surgery, disability can be claimed while remaining employed conducting telemedicine visits or as a medical consultant.
Future Increase Option: This rider allows physicians to increase their coverage as their income increases, without any medical underwriting. The amount of additional coverage depends on the policy and its stated maximum. It's incredibly important for residents and fellows to have this rider given the expected substantial increase in salary after becoming an attending. There are two main options for this rider. One involves paying a premium and is generally considered to be more flexible. Typically, this allows an opportunity every year to maintain or increase the coverage. Generally, as you exercise the future increase option, the cost of this rider is proportionally reduced. The other option is at no additional cost to the policy, but has more stipulations, which if not met, may lead to the rider being dropped for the remainder of the policy. Stipulations could be, for example, not being able to increase coverage every three years or having to increase coverage by at least 50% of the qualified increase amount to keep the rider active for another three years. Note the rider will drop off the policy if you forgo an eligible increase.
Partial Disability Benefits: This is an important rider for everyone. It provides partial disability benefits when a disability causes a loss of income of 15-20% or more. This is most commonly used when gradually recovering from a disability. For example, if you sustain a back injury and can only work 20 hours a week, this rider will reimburse the income lost during your recovery period.
Cost of Living Adjustment Rider (COLA): This option will adjust your benefit on an annual basis to help keep pace with inflation. A 3% COLA is commonly chosen, especially for younger and newer physicians who may not have other means to adjust their income against inflation while disabled. This rider (and other riders) can be removed later when you're more financially independent.
Graded vs. Level Premiums: Not all policies will have this feature. Graded premiums start low and increase annually, making it easier to pay early in your career, whereas level premiums have the same annual cost. If you plan on keeping the policy until it expires (often at age 65), the lifetime cost may be higher with a graded policy. Importantly, a graded premium can be switched later to a level premium.
Finding the right insurance agent can be crucial when it comes to securing the right disability insurance policy. It is recommended to work with an independent licensed agent who specializes in disability insurance. The agent should present policy options from multiple reputable companies and assist with comparing pricing and features. Ask for recommendations for an agent from friends and colleagues, or reach out to the representative at your institution. At times, certain firms may offer large residency/fellowship programs Guaranteed Standard Issue (GSI) Disability Insurance policies. GSI coverage typically features discounted unisex rates and does not require medical underwriting, resulting in potential savings for both women and individuals with pre-existing conditions.
Finally, how much disability insurance should you buy? Most insurance companies have a maximum benefit of approximately 60% of your annual income to prevent disability benefits from becoming more attractive than working. For house staff, most policies will start around $5,000 per month which equates to around 100% of your salary after accounting for the fact that your payouts are tax-free. Due to the limit on the amount of disability insurance that can be purchased on a house staff salary and the favorable income to benefit ratio, it is generally recommended to purchase as much coverage as you are eligible for and to increase your benefits through future increase options as your income grows.
In summary, look for a policy that is non-cancelable, guaranteed renewable, and specialty specific (true own occupation). If these basic things are not included in the policy, consider working with a different agent or company. As a fellow buying disability insurance, consider all the riders mentioned here. Notably, the premiums are not typically deducted on a tax return, but the premiums are paid using post-tax dollars, meaning the disability benefits received are tax-free.
This article was authored by Robert S. Zhang, MD, a second-year cardiology fellow at NYU Langone Medical Center with career interests in advanced cardiac imaging (CT/CMR). Reach out to him using @robertshiuzhang.
Disclaimer: The author is not a financial expert and is not engaged in rendering legal, accounting or other professional financial services. This article should not be considered as professional or personalized financial advice. Consult the appropriate professional for specific advice relating to your situation.
Keywords: ACC Publications, Cardiology Magazine, Internship and Residency, Preexisting Condition Coverage, Consultants, Intervertebral Disc Displacement, Depression, Salaries and Fringe Benefits, Costs and Cost Analysis, Occupations, Anxiety, Physicians, Policy, Magnetic Resonance Imaging, Telemedicine
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