By Dr. Jim Dahle, WCI Founder
Determining how much disability insurance coverage to purchase is a very individual decision, much like buying life insurance. While one doctor might want enough life insurance to pay off the mortgage and to cover five years of living expenses so their spouse doesn't have to go back to work until the younger children are in school, another might want to make sure their spouse never has to work again and still pay for expensive colleges for their two children. Obviously, the second doc will want to purchase much more coverage than the first. It is the same with disability insurance.
The question isn't how much of your salary you want to replace. It's how much you'll need to live on if you get disabled.
How Much Disability Insurance Do You Need?
As a general rule, insurance companies will allow you to buy enough insurance to replace 60% of your gross income; companies will give you up to about $30,000 a month. Since most high-income professionals are paying 15%-35% of their income toward taxes, that is usually MORE than enough income on which to live.
Remember that disability insurance benefits, unless the premiums were paid for by your employer, are completely tax-free to you. If you already have a nest egg that by age 65 will be sufficient to provide your desired retirement, then you may need even less. As a general rule, decide how much to buy based on your actual expenses, not some percentage of your income. If you are spending $8,000 per month and need to put $3,000 per month toward retirement and $1,000 per month toward college, then you need a disability benefit of $12,000 per month—whether you are earning $20,000 per month or $40,000 per month.
More information here:
The Physician’s Guide to the Best Disability Insurance Companies
How to Increase Your Disability Insurance Benefit
If you are a very high-earning doc and wish to buy more than $30,000 per month in benefits, there are some options. These include combining policies from two companies, buying an “excess disability” policy from a company like Chubb or Lloyd’s of London, or getting a retirement benefit rider. Personally, I would just keep my spending below $30,000 a month, crush my student loan and mortgage debt, and save like mad for a few years to rapidly reach financial independence.
At that point, you would not need disability insurance at all. You could then increase your spending in proportion to the growth of your nest egg, and you could be assured that you could maintain your current lifestyle in the event of disability.
Pre-Tax vs. Post-Tax Disability Insurance Policy
Few attending physicians can make the decision between using a pre-tax vs. a post-tax disability policy. Unless your policy is provided by your employer or you are formed as a C Corp (rare for docs), you will be paying your premiums with after-tax dollars. If you pay for the premium post-tax, your benefits are post-tax. If you deduct the premiums as a C Corp business expense (you obviously must have a C Corp to do this), you'll have to pay tax on the benefit payments if you ever become disabled.
This is an individual decision, but it's not one you are very likely to get to make. If you are one of those rare people who has to make this decision, consider the following two points:
#1 If you are not underinsured, consider this: if you're disabled, you'll have less income than you have now, and you may be in a lower tax bracket. So, you can take the deductions in a high tax bracket, and if disabled, you can then pay taxes on the benefits in a lower bracket. This is particularly attractive when you consider that the odds of acquiring a disability are in your favor. (Odds of a disability lasting longer than five years are around 1 in 7.) If you are in a high tax bracket, a maximum size POST-TAX policy (2/3 of income) may mean that you have no drop (or even an increase) in your standard of living with a disability.
#2 For those who are not looking for a maximum size policy, I recommend you get a bigger policy than you otherwise would. But pay for it pre-tax to take advantage of the sure tax deduction, while only taking a 1 in 7 chance of having to pay taxes on the benefits.
More information here:
Why You Need Disability Insurance (and I Need Shoulder Pads)
Why Do Some Doctors Get Declined for Disability Insurance?
Monthly vs. Annual Premiums
Many physicians will find it most convenient to pay their disability and life insurance premiums on a monthly basis. Always ask if there is a discount for those who pay on an annual basis; there almost always is. My policy gave me a 5% discount to pay annually. One of my life insurance policies offered a similar discount. It's never a bad thing to get a guaranteed 5% return. Good things happen to those who can budget. I would put 1/12 of the premiums aside each month, and when the policy came due each year, I paid it in one lump sum.
If you're ready to talk to an independent agent about disability insurance, head over to the list we keep of the best disability insurance agents. Save yourself the work of finding a good one you can trust and use one from a list of agents that have been utilized by thousands of WCI readers. You do not need someone local whom you can meet in person. It is better to have someone who has sold policies to hundreds of docs this year working with you by phone, Zoom, and email than someone you can sit down with who has only sold four policies. In addition, if there is an issue with one of these agents, we can usually help you resolve it quickly.
Obtaining quality disability insurance is a must for any physician, so you can be sure to protect your hard-earned income. Get a quote from one of our recommended insurance agents and cross this task off your to-do list today!
What do you think? What other factors did you consider when determining how much disability insurance you need?
[This updated post was originally published in 2022.]
The White Coat Investor may receive compensation from White Coat Insurance Services, LLC; licensed in all states including MA and DC; CA license #6009217; NY license #1758759 (exp. 6/2025); Registered address: 10610 S. Jordan Gateway, #200 South Jordan, UT 84095. This does not affect the cost or coverage of insurance.
Great post. A couple things to note
1) The 60% guideline listed in the post doesn’t necessarily hold true for independent contractor physicians. They looked at my 1099 income differently than W2 income when calculating how much they were willing to insure.
2) If you think you may be one of the high earning docs who could want more than 20k in monthly coverage at some point, then a suggestion would be to get two separate policies in residency. That way you never need to get another physical exam later in life. I purchased a 4k/mo policy and a separate 1k/mo policy in residency rather than one 5k/month. Several years later as income has grown, I just maxed out the one policy but still kept the smaller 1k/mo policy and now want a little extra from the other policy and don’t need to take another physical again allowing me to maintain the good rates I locked in as a resident.
1. And….
What did they let you do? Less? More?
2. Didn’t the size of the policies limit the future purchase option size? i.e. with a $4,000 policy and a $1,000 policy you could get a $4,000 FPO and a $1,000 FPO but if you’d just bought a $5,000 policy you could get a $5,000 FPO? Or how did it work out?
1) Definitely less. I don’t recall the exact numbers as I think it depended upon the company, but I’d venture to say 30-40% of my 1099 income could be replaced with a DI policy. I think that is a combination of both 1099 income (rather than W2) and also as Scott mentioned, at higher incomes, the less % of the income will be covered.
2) Agree what Scott said below as that was my exact scenario. Bought MetLife policy for 4k and separate 1k policy with Principal during training with future purchase options on both. I eventually maxed out MeLife at ~17k/month and only recently increased my Principal policy above the overall 20k limit up to a total of ~24k/month between the two policies. But because I had kept the Principal policy at only 1k/month since it was purchased in residency, I did not need to get a new physical, labwork, etc… But as Scott mentioned, I needed to be in a specialty and subsequent income that allowed >20k/mo to even be possible.
So buying $1K a month allowed you to lock in the ability to get $20K+? That’s awesome. Even the $4K/$17K ratio is awesome. No additional requirements for either? Really?
For some carriers who use the Benefit Update process that is correct, max increases with minimum initial purchase. The other end of that is if you use a carrier with FIO then as you use that feature up the cost for that rider goes away because you pay for that. The BU process is a free rider so as you use it there is not cost reduction on the policy because you were never charged for it. When you really look at it sometimes where an FIO based contract costs more to begin with they can end up less than the BU based contract once the increase is used as an attending. Every situation is different so one really needs to study it.
Remind us which carriers use the benefit update process and which use the future insurance option.
Jeff,
You are correct that when you are buying individual disability insurance the more you make the less % of the income will be covered. There are many reasons for that:
The more you make the larger a % of your income goes to taxes, so that portion is not really your income.
The more you make the more discretionary your income becomes (at least to the insurance company vantage point).
On individual contracts they can’t typically compress your benefit further for ‘other income offsets’.
A number of other issues are present as well but group plans which typically offer 60% – 66% of your income are then taxed and compressed with offsets so it becomes an even lower percentage covered.
In regards to the over $20k issue, you can go buy a $1k benefit with a few carriers using their BU process and then have increase capacity to as much as $35,000 per month. The real question I always have for folks is around what their income capacity will be and any group benefits they have as that will then allow us to have a design that will really work for them. I often hear about folks being told to split coverage to get over $20k but then they are in a specialty that will only allow them to have capacity of $10-$12k due to the income anticipated.
A lot of moving parts, just make sure you are working with someone who knows how to navigate all of this for you.
I have inquired through my HR dept but have never gotten a satisfactory answer. In addition to my outside disability policy (I have had it for 20+ years and it’s solid), I get a no-cost, no-frills long-term policy through my employer.
Would holding a parallel policy, albeit inferior and one I could not opt-out of, preclude payout or reduce the value of my primary policy (or worse, negate it)? I have read the policy over and there is no qualifying language that speaks to this.
I suspect there are many readers who are in the same position given the large number of employed docs within large health systems.
No. It can affect how large of a policy you can buy, but your good policy will pay its full amount even if you have a group policy. You’ll have to read the group policy to make sure it will still pay its full amount even with your individual policy paying.
I had two policies back in the day, and they would have both paid the full amount if I had been disabled.
Typically will not affect your individual policy as long as it is real individual policy. The reason I state that is some folks buy a medical association policy thinking since they are buying it is a real policy but the reality it is a Certificate of Coverage and those can be problematic with your group policy. You should get your group policy, read the section called Income benefit offset and look for “other group or franchise plans” if you see that then you have a problem if you then also have a group or association plan.
It’s good to think about several changes in disability:
1) your income is lost
2) your medical expenses can increase (even if you have sterling insurance)
3) your miscellaneous expenses can increase (e.g. hiring help when you used to do your own housework)
4) loss of medical benefits due to loss of job (leading to #2)
These things are difficult to calculate, but think about how much more you would hypothetically spend on the above ON TOP of meeting your financial goals. Then get coverage that matches your need.
As always, if your are already financially independent…this coverage may not be necessary.
Regards,
Psy-FI MD
Excellent points.
I agree with the comments above and have been wanting to ask this question for awhile now. I’m a 47 year old physician with a sizeable nest egg near financial independence, but my brother suffered a C6 spinal cord injury while skiing in 2015. Fortunately, with grit, stubbornness, the help of an amazing wife and The High Fives Foundation he has been able to continue to work part time, but if this injury were a bit higher or if he didn’t have such amazing family and community support his finances could have been a lot worse off. I’m skeptical that the only thing you need to take into account is your current expenses and need for retirement savings because something that truly causes long term disability for 10+ years could require medical expenses and help that require a dramatic increase in expenses especially if one wishes to remain at home rather than in an institution. I’ve been reluctant for this reason to consider reducing or eliminating disability insurance as I near FI. Would welcome thoughts from the group.
So perhaps wait another year or two and let your portfolio grow a bit more to cover that additional expense.
At what wealth threshold does it make sense to self insure? Thanks
My opinion is when you have enough assets to create the cash flow you need to pay all of your bills, taxes, insurance, and moderate % of growth still happening on your portfolio so that you are not draining the portfolio. At that point it is optional. However, you can always push out waiting periods, drop riders, reduce benefits as your assets increase thus you are kind of reducing the value of the contract as your needs/dependency on that policy reduces. In other words you don’t have to keep it at max benefit until the last day that you then don’t need any of it.
When you no longer need your income from your job in order to live the life you want to live for the rest of your life. i.e. financial independence.
1. If in early 40s should you have amassed 25-30x not including IRA’s to safely drop disability/life insurance(s) since it can be quite some time before you access them without penalty or is that too extreme unless one was to retire around that time ?
If you can live just fine if you get disabled and your heirs can live just fine if you die (i.e. you’re financially independent) then you can drop disability and life insurance no matter what age you are.
Some people give it a year or two after they hit their number, just in case. But at a certain point, it becomes kind of dumb. We’re at that point and dropped my disability insurance a while back.
Thank you for all the helpful info Dr. Dahle!
My wife (new attending last fall) + I are new to WCI as of last winter and just finalized our disability policy paperwork a few weeks ago. On a different post you mentioned a good policy should run about 4% of the annual benefit… we had no idea if we were getting a fair deal until I found that post and calculated her premium to be 3.9%. A good rule of thumb for new readers to create a budget.
Thank you for also pointing out the annual premium option here. This option didn’t save much for term insurance but as we were about to submit the disability paperwork I realized we could save over $100 by paying annually for a policy that frankly we should be able to cashflow each anniversary without setting money aside each month. $100 is a $100, even as my wife moves from residency to attending!
2-6% is the range I usually quote. So 3.9% is just fine.
Glad you have this important insurance in place.
I cancelled my individual policies a while ago. My employer pays for the group policy at work. I do not have the option of telling them to drop the coverage and pay me the cash. They report the premiums as compensation on our W2’s, so benefits would not be taxable.
Thus the cost to me is the income tax on the premiums. Essentially, I am forced to buy coverage at a discount to the group rate. The net cost to me is such that a back of the envelope calculation suggested that it has a positive expected value. Particularly so since I anticipate working until infirmity forces me out of the labor force.
Depending on the hazy future, I might be old enough that the coverage at that point would only pay for a year. That still would be a year before I would be required to start RMDs or draw from savings. One year of disability coverage for a fraction of the group rate looks good to me.
Who is your group policy through?