By Dr. James M. Dahle, Emergency Physician, WCI Founder
Doctors all think their financial questions are unique, but the truth is they're the same 50-100 (mostly 30) questions that every other doctor has to learn the answer to. One frequent question I get that I have never done a blog post on is about dual doctor couples and disability insurance.
How Should Dual Physician Couples Buy Disability Insurance?
“My husband and I are both physicians with high-earning potential, though I'm still in fellowship and will pursue an academic research job. I'm reading your Financial Boot Camp book, and Chapter 1 is the kick in the rear that I needed. I'm curious what level of disability coverage you recommend for dual-physician households. We will always be able to live comfortably on just one of our incomes, and disability in both of us would be quite rare. Would we miss one person's income if it were gone? Sure, but we live below our means and we would adjust accordingly. Should we take our monthly coverage number and divide it in half? Or have my husband get more coverage since men are cheaper to insure?”
There Are Options for Disability Insurance Coverage, But No Right Answer
I've never been able to satisfactorily answer this question and the reason why is that there is no correct answer. Or rather, there is a RANGE of correct answers, and the range is incredibly broad. Let's talk about all of the options.
#1 Don't Buy Disability Insurance at All
Let's start on one end of the spectrum. This is the end where the two docs basically function as each other's disability insurance policy. If one of you becomes permanently disabled, well, you live on the other's income. No big deal, right? Clearly, disability insurance (at least prior to our becoming financially independent) was a much bigger deal in our household with one doctor and a teacher staying home to take care of our four kids than it is in the lives of this couple. It was a huge piece of the financial puzzle. Not so much for this couple.
Some people will be very comfortable with this option. Certainly, it has the advantage of thousands of dollars in saved premiums and avoids the hassle of applying for and qualifying for disability insurance. And a two-doc couple should theoretically be able to reach financial independence (where you can drop disability insurance anyway) much sooner than a single doc or a one-doc couple. Given typical doctor tax burdens, you don't even lose an entire second salary when one person quits working, you probably only lose 50-60% of it. However, before going down this road, there are a few things to think about.
Considerations Before You Cancel Your Disability Insurance
First, some dual-doc couples cannot live on just one salary without a significant change in their lifestyle. If you're a super saver living on half of one of your incomes, no big deal. But what if it takes both of your incomes just to cover your rent in downtown San Francisco? That disability insurance no longer looks so crazy, eh?
Second, there are financial consequences to losing that income. Sure, maybe you can still maintain your lifestyle and maybe even continue to save for retirement adequately, but that additional income was going SOMEWHERE. Maybe additional savings for earlier financial independence, maybe to charity, maybe to a family member in need, or maybe to some really fun vacations. It might still be worth it to you to buy that insurance just to cover that stuff.
Third, life happens and things change. Maybe you start spending more in a couple of years. Maybe your investment returns are not as good as you hoped. Maybe you become a one-doc couple when one of the partners decides to stay at home with the kids. Maybe you get divorced. Maybe one of you dies. Maybe there is a huge lawsuit above policy limits that wipes out a lot of wealth. Maybe doctor incomes go to pot. Who knows? But buying more disability insurance could provide some additional protection in those situations.
Fourth, perhaps the disabled partner can no longer do other household duties they were doing. There is a cost to hiring those out as well. And imagine the disabled partner also needs an in-home medical assistant of some kind. Wouldn't it be nice if there was a ready source of income for paying for those things?
Fifth, and perhaps most importantly, what happens if BOTH of you get disabled at once in some fiery car wreck. While the odds are obviously much lower than the chance of one of you becoming disabled, the odds are not zero. Choosing to go without could potentially leave you with no coverage in the event of dual disability.
#2 Buy Maximum Disability Insurance on Both Partners
Let's go to the other end of the spectrum now. That's to treat each doctor as though they are single and spend a large percentage of their income. The obvious advantage? Well, if one of you becomes disabled your income does not drop as much and you are as protected as you could be from life changes. The obvious disadvantage? Well, individual disability insurance isn't cheap. It would not be unusual to pay 5% of the amount of money protected. So if you were paying for a $15K monthly benefit on each of you, that could be something like $18,000 a year. That's basically a 401(k) contribution. $18,000 a year at 8% for 30 years adds up to over $2 Million.
=FV(8%,30,-18000,0) = $2,039,098
#3 Buy Maximum Disability Insurance on One Partner
Naturally, many couples look at that disability insurance bill and try to figure out a way to at least decrease it, even if they are not comfortable eliminating it completely. One solution might be to just insure one partner. Now if you are both disabled, at least there is still a single physician-like income to live on. Obviously, there is going to be some risk there that the “wrong” person gets disabled (or death or divorce, etc.), but it should at least cut the premiums in half.
So which person do you insure? Do you insure the one least likely to cut back on work or become a stay-at-home parent (usually the man in the US)? Do you insure the one most likely to get disabled (often the woman)? Do you insure the one who is cheapest to insure (usually the man)? Do you insure the one who earns the most? Do you insure the self-employed one or the employee? Some tough decisions that every couple is going to have to decide on their own. Just think through the consequences of each possibility and see what you're comfortable with.
#4 Buy Some Disability Insurance Coverage on Each Partner
Here's another frequently chosen option. Consider our situation. We NEVER bought “Maximum” disability insurance. We didn't think we needed that much coverage. I generally recommend you buy “enough” coverage. That is, enough to both cover your living expenses and save enough to meet your retirement/college goals since most policies stop paying out at age 65-67. You can usually buy enough disability insurance to cover 60-70% of your gross income. Given that disability benefits are typically tax-free, that is MORE than enough income for good savers.
Two-doc couples can do the same thing and probably need even less coverage. This eliminates the possibility of the “wrong” person getting disabled. Plus, in the event of divorce at least you each have some coverage going forward. And the cost of the coverage is much lower.
There are lots of places you can skimp here. Perhaps you just use the group policies provided by your employers. That could reduce the cost of your coverage by 80% or more. Perhaps you're more likely to buy a policy with graduated (instead of level) premiums (since you'll hit financial independence earlier). Perhaps you don't buy some of the riders such as the Cost of Living Rider, the Future Purchase Option Rider, the Catastrophic Disability Rider, or the Retirement Benefit rider. Perhaps you simply buy a smaller monthly benefit. Maybe you accept a 2-year limitation on mental/nervous conditions or you accept a policy that only has a 5-year payment in order to lower premiums.
Lots of ways to skin this cat, and you'll have to do what you feel comfortable with. I suspect that many couples could drop the cost of coverage by 50-75% from what “maximum coverage on both” would cost while still having coverage that would be acceptable to them.
#5 Buy Some Disability Insurance Coverage on One Partner
Here's another one that allows you to really cut back on the cost of coverage. Maybe you just get a group policy or a bare-bones policy on one of you. It includes some of the downsides of only buying coverage on one of you and some of the downsides of only buying limited coverage. But it does provide a little something in the event of dual disability.
Now you can see what I mean when I say there is no right answer. But there is a right answer for you, and I'm curious what it was. So if you're a dual high-income couple, please respond to the poll or leave a comment.
What do you think? Are you part of a dual high-income couple? What was your solution to the disability insurance dilemma? Comment below!