Long-Term Disability Coverage
When a Physician Should Replace, Modify, or Drop a Policy
Your to-do list is about a mile long and your time is in short supply. If I had to guess, I would say you don’t spend too much time contemplating your long-term disability coverage. But if you never give your coverage any thought, then you might not know if it’s time to replace, modify, or even drop your current disability policy.
Many of you reading have had your disability policy in place for quite some time – perhaps since you were finishing your residency or fellowship. These are fantastic times to buy your policies since you’re young, presumably healthy, and you have years of a thriving career in front of you.
But are there ever any circumstances when you should consider changing your disability coverage? Would there be an instance which would warrant dropping or replacing your current policy? The answer is yes – under certain circumstances, of course – and it’s important for you to be able to recognize when the time is right for you.
Remember, you only purchase your policy once, possibly twice, in your career – this makes it even more important to make sure you get it right based on your circumstances and specialty. Let’s take a look at when you should review your policy (or policies) and possibly need to modify it based on changing circumstances.
When You Should Replace Your Long-Term Disability Coverage
Your circumstances can change quite a bit from the time of your residency and through the years as you grow in your career. Families are created, new practices are formed, even hospitals can be bought out by larger conglomerates. All of these types of changes could influence the type of coverage you are seeking from your disability policy. There are times when a change would warrant a total policy replacement.
You can Benefit from Significant Savings
If you receive a quote from a different company and you could receive significant savings on your disability coverage, then you should go for it. Of course, you need to make sure you’re comparing apples to apples, make sure with policies and you’re including all the features you currently have (or want to add).
Be careful here and don’t let yourself be tempted by a small percentage. If you replace your plan and it’s only saving you a small percentage each month, then it’s most likely not worth the effort. However, if you find the savings are indeed significant then this could definitely be a reason to replace your current policy. It’s up to you to determine what qualifies as a significant percentage, but generally speaking, at least a 10% savings on your premium would warrant making a change.
How do you know if you’re paying too much for your policy (either your current policy or a potential replacement policy)? According to Lawrence Keller an expert in physician insurance, male physicians should plan to spend around 1% to 3% of their gross annual income per year to disability insurance. Female physicians should plan to budget anywhere from 3% to 5% of their annual gross income. Use this as a rule of thumb for your budget, whether you choose to switch plans or not.
Remember, you’ll have to complete the underwriting process again which includes an updated medical history. Pre-existing medical conditions won’t necessarily preclude you from getting a new policy, but you should be prepared to discuss your current health profile.
If You Can Secure a Fixed Premium
When you first acquired your policy as a newly practicing physician, it’s possible you chose one where the rates for the premiums gradually increase. If you have the opportunity to switch to a policy where the premium is fixed then it could be worth considering.
A fixed premium is similar to how a fixed APR for a mortgage or credit card works. You’ll never have to worry about the rate increasing, which is beneficial as you age (assuming you pay your premiums on time).
One point to make sure you’re considering is how much you’ll pay over the life of the policy. While you may not see a huge percentage of savings each month on a fixed-rate policy, you have to calculate how much you will save until the age of 65. In other words, make sure you think about this for the long-term and not just as a quarterly or annual expense.
If You’re Female and You Can Switch to a Unisex Policy
Female physicians almost always have to pay higher premiums versus their male counterparts. There are several reasons for this gap in the cost of their premiums. One of the reasons is that women face unique challenges from pregnancy or complications from pregnancy. Pregnancy-related issues are one of the leading causes of disability claims.
It’s not all bad news for women when it comes to paying higher premiums though. If a female physician can work with an experienced insurance agent – especially one who works with physicians – the agent should be able to move them to a unisex, gender-neutral policy. A unisex policy can save as much as 50% on the premiums. The agent can move them into a Multi-Life program or a Guaranteed Standard Issue plan in order to get the lower premium. In the state of Montana (and soon to be the Commonwealth of Massachusetts) all policies feature unisex rates. If you aren’t currently living in one of these two places then you could see a major benefit by moving into a new policy.
You Find a Policy Targeted to Physicians
Another reason to consider a replacement is if you purchased your original policy through an insurance provider who doesn’t specialize in physician financial services. Many physicians make the mistake of purchasing their disability insurance through the same provider as their car insurance or some other insurance provider. But you are better off working with someone who understands the challenges of finding coverage for a higher physician income as well as having access to all the carriers and options (such as riders). An experienced insurance agent who specializes with physicians will understand the dynamic marketplace for disability.
You Move to Another State
Where you live is one of the biggest determining factors for how much you will pay for your disability insurance. There are certain states, such as California and Florida, which are notoriously more expensive to purchase a policy versus other places. If you purchased your policy in either of these places and find yourself in a position where you’re moving, you should definitely inquire about replacing your policy.
If you’re unsure whether or not the state you bought your policy in is more or less expensive, then it’s worth picking up the phone and having a conversation with your insurance agent.
Deciding to replace your current policy with a new contract is not a decision to be made lightly. You have many factors you have to take into consideration. Another consideration is whether or not you would be better off replacing or simply modifying your current policy.
When You Should Modify Your Long-Term Disability Coverage
Maybe you aren’t interested in starting over completely, perhaps you think your policy needs a little calibrating. Are there any circumstances in which you should look to making modifications to your policy?
Your Finances Have Changed
Just like most everything else in life, your finances are going to change over time. Your cash flow, retirement savings, investments, and assets should look quite different later on in your career versus when you coming out of residency. So if your finances have changed significantly, then it’s time to look at your policy and evaluate what your money is going towards.
Take a look at your income requirements and determine if you need to make a change to the amount of coverage from your policy. This means both an increase or a decrease in the amount of coverage needed.
For instance, if you have several investments, have paid off your student loans, and are maxing out your retirement benefits, then you may not need as much income from a policy, should you become disabled. On the other hand, if you’re still paying your student loans, have a gigantic mortgage, and three kids who are all receiving a private education, then you’re going to need to make sure your policy provides the maximum coverage possible if you’re unable to work.
Before you make any changes because of your finances, you need to ask yourself a few simple questions:
- Are my student loans completely paid off
- Am I married with a working spouse
- What are my financial obligations with my children?
- When will my mortgage be paid in full?
If you have a confident view of your financial picture and feel like it calls for a change in your policy, then it’s worth discussing with your insurance agent.
If Your Retirement Age has Changed
Similar to evaluating as your income changes, it’s possible your retirement age has also changed. If this is the case, then it could be time to modify your policy. Most policies will cover you until age 65, however, if you’ve been working towards a number which could come well before age 65, then a review is definitely in order.
Not only would your coverage amounts potentially change (you might not need as much coverage if you have quite a bit of savings) but your needs for specific riders and features could change. The way you set up your policy in your 20s as a resident could be drastically different then what you need as you’re moving closer to retirement.
Your Savings Have Significantly Increased
Since the idea of disability insurance is to provide you with a financial supplement if you are unable to work, then a modification could be needed if you’ve built up your savings. If you have a healthy emergency fund set aside, your debt is paid off, and you have investments you can draw from, then perhaps you no longer need as much coverage as you’ve purchased.
It’s not ideal to dip into your savings to cover a time period where you may be out of work. Especially given the fact you never know how long of a disability claim could have to last. However, if you are still comfortable with the amount of savings you have to bridge the gap until retirement, then you could consider a modification.
When your Riders and Features Need to be Updated
When you review your current policy, you’ll notice you most likely have certain conditions written into your policy. These conditions are referred to as riders. There are a multitude of riders for your consideration. While there are a couple of different riders which a physician should confirm is included, there are some riders which may no longer be necessary.
One example of this is the Cost-of-Living-Adjustment Rider, also referred to as COLA. This is a rider which is especially beneficial for physicians early in their career but might become less beneficial the older you are. It’s tied to inflation or the Consumer Price Index and can be a fixed percentage or flat rate. But the older you are and closer to retirement, you may not be as concerned about your coverage amount increasing to keep up with inflation.
Other examples are if you’re in your late 40s or 50s then you could probably go without the Catastrophic Disability Rider or maybe the Future Increase Option. Again, these are all points to review with your insurance agent on how you could modify your policy to fit your needs at this point in your career.
When a Physician can Drop a Disability Insurance Policy
There are only a couple of circumstances which might justify dropping a policy but let’s take a look at why you could consider this action.
You Are Financially Independent
If you’re financially independent and could draw from your savings to cover a loss in income, then you could definitely consider dropping your policy. At this point, it’s a simple math equation for you. Assuming you’re still practicing medicine, then you need to evaluate how much you spend each year in premiums and determine which accounts you would pull your savings from.
You are Close to Retirement
There will come a point where you will be so close to your retirement age, you could conceivably bridge a gap with your income until you retire. For instance, if you are in your early 60s and your goal is to retire at age 65, then it’s entirely possible you have enough savings to cover a loss in income until you can draw from a retirement account in a few years.
Either scenario means you have worked quite hard to meet your goal. You should be proud of these accomplishments which have brought you to this point you can consider dropping a policy!
Why You Need Disability Insurance in the First Place
While we are on the subject of reviewing all facets of your policy, this is a good time to remind you why you need your own policy in the first place. There are several compelling reasons you need this additional coverage throughout your career in medicine.
When it comes to the numbers of how many people will need to file disability insurance, you might be surprised to learn one in four individuals will need disability coverage before age 65. Would you be even more surprised to learn physicians are twice as likely to file a claim versus other professions?
There are several scenarios which could require you to stop working. Whether it’s an injury, an accident, an extended illness, or complications from a pregnancy. There could also be impacts on your mental health which include physician burnout. You truly can’t predict what might cause you to have to take time out of work.
A Policy Through Your Workplace Is Not Enough
While a group policy through your hospital or employer is a great benefit to have, it’s never going to be the full solution for you if you need disability coverage. Almost all workplace policies only pay out for two years. These group policies are almost always written with an Any Occupation definition of disability.
In addition to the lousy definition of disability provided by the group policy, your workplace policy won’t allow you to have any input into the type of coverage you need for your specialty. And of course, if you leave your place of employment, unfortunately, the group policy can’t travel with you. Your own disability policy is portable however, so no matter where you go, your policy will follow.
A Long-Term Disability Insurance Policy Can Adjust With Your Career
As you can see, there are multiple options when it comes to a disability policy. It’s definitely not a one-size-fits-all approach. While it may seem a little overwhelming to go through all the details of your policies, the important point to remember is to focus on your goal of making smart financial decisions.
Having a comprehensive disability is one of several steps you can take towards overall financial health. If you are interested in learning more about this subject, check out our additional disability topics on our blog and our podcast!