By Dr. James M. Dahle, WCI Founder
Disability insurance is more complicated than life insurance. Buying life insurance isn't particularly complicated and won't require more than an hour or two of your time. Unfortunately, disability insurance is FAR more complicated, and while it may not require a ton of time to understand and purchase a policy, it will require more self-education and a lot more decisions to be made.
To get started, I have partnered with Pattern, one of our WCI Recommended Insurance providers, to create this crash course on disability insurance.
Similarities Between Disability Insurance and Life Insurance
Both life insurance and disability insurance are INSURANCE products. That means they must be bought from an agent. You are better off buying both types of policies from an independent agent who can sell you policies from multiple companies rather than a “captive” agent. The same policy will cost the same no matter which agent you buy it from. Agents, of course, may be compensated more for selling you one policy than another, but they are unlikely to disclose that to you and the differences aren't great for similarly priced policies. You hope that you'll never collect on either one of them.
Both life and disability insurance are also designed only to address the financial aspects of a tragedy. Just like life insurance doesn't bring a loved one back, disability insurance doesn't fix your disability. Both simply protect income.
If you die and cannot produce the income your family needs, life insurance will provide it. If you become disabled and cannot produce the income you and your family need, disability insurance will provide it. Both policies, of course, can be dropped as soon as the physician becomes financially independent from their investments. There shouldn't be an emotional factor to buying these policies—it's simply business.
Differences Between Life and Disability Insurance
There are seven significant differences between Life and Disability Insurance.
#1 Disability Is Subjective
As a doctor, you know very well that disability is subjective. With life insurance, someone is either dead or alive. Not infrequently, I find myself saying those simple words, “Time of death….9:21.” There really isn't a “time of disability.” Unfortunately, this aspect makes insuring against it far more complicated. You cannot buy disability insurance like a commodity. For the most part, all 30-year level-premium term life insurance policies are the same. You just buy the cheapest one. No two disability insurance policies are the same. The definition of disability becomes all-important.
#2 Disability Is Complicated
You must read the entire policy and discover when it will pay out and when it won't. For example, many policies don't pay out until you've been disabled for 60, 90, or even 180 days. Guess which one costs more? Some policies will only pay for two years if you are disabled with a psychiatric illness, while others will pay out until you're 65. Guess which one costs more? Some will increase the payout with inflation each year. Guess who pays for that? There are dozens of differences between policies and options within each policy.
#3 Disability Is Taxed Differently
Life insurance payouts are always tax-free to the beneficiary. Not true with disability insurance. It turns out the benefits are tax-free if you paid the premiums with post-tax dollars, but fully taxable if you paid with pre-tax dollars, such as through an employer's group plan.
#4 Disability Is More Expensive
Disability insurance is also more expensive than life insurance. This is mostly because it has a higher likelihood of being used. Consider a physician who makes $200,000 a year. A typical rule of thumb is to get 10 times your salary in term life insurance. A 30-year level-premium term life insurance policy might cost $1,600 a year—about 0.8% of your income. A disability insurance policy that will pay $10,000 a month (only 60% of salary) in the event of disability is likely to cost $3,000-$6,000/year, or about 2% of your income (but 3-5% of the income actually covered by the policy).
Disability and life insurance protects what is most important to you.
#5 Disability Insurance Is Sold in Proportion to Your Income
Disability insurance generally gets more expensive as you get older because the likelihood of using it gets higher. Residency can be a great time to buy it because you get lower rates (not only for age but also sometimes because a resident is put into a different classification of physician than an attending). But as a resident, you cannot buy enough of it (or afford enough of it) to cover the rest of your career. A brand new attending can buy more of it and isn't much older, so this isn't a bad time to buy either. A resident and new attending also have a great need for life insurance, since they have few assets and lots of liabilities.
Physician income levels can increase dramatically the first few years out of residency, due to making partner or building a successful practice. So, it isn't uncommon for a doctor to need to replace a policy or perhaps to purchase an additional one at that time. As the years go by, the disability insurance policies offered by the companies add new features, which may be particularly desirable to you. Although they'll cost you more due to the additional features and your increased age, it might be worth it to you to get those features, so updating policies even mid to late-career can make sense, too.
You can't just buy an unlimited amount of life insurance, but the amount you can get is much less strictly tied to your actual income. If you and your agent can convince the company that you'll soon have much more income, you shouldn't have much of a problem buying as much life insurance as you need.
#6 Disability Insurance Is More Likely to Be Used Than Life Insurance
Studies have shown that 10-20% of people will have a period of disability of some kind between the ages of 25-65. Those odds are simply too high not to insure against that type of financial catastrophe. If you do not currently have disability insurance, it is time to get serious about it and cover that risk.
#7 There Is No “Whole Life” Equivalent in Disability Insurance
When you go seeking life insurance, many agents will try to inappropriately sell you whole life insurance instead of the term insurance you really need. There is no equivalent cash value disability insurance, so you don't have to worry too much about that.
The Bottom Line
If you do not already have disability or term life insurance, make an appointment to meet with a good independent insurance agent today. Educating yourself about disability insurance will take more time to figure out compared to life insurance, and, yes, it will be more expensive and come with additional hassles. But both are essential tasks to complete as part of a sound financial plan.
What do you think? Have you avoided buying disability insurance? Why? Comment below!
[This updated post was originally published in 2018.]
I’ve heard that statistic about disability being more common than death but it sure runs counter to my experience. I’ve never known anyone to become disabled at work, not in nearly four decades of work at a company employing nearly a thousand people, but I’ve known many to die before the age of 60. I wonder if disability strikes a different demographic than the engineers and technicians I worked with or if people left work due to being disabled but I never knew that was the reason? Puzzling.
That is interesting. I’ve certainly met lots of people who have become disabled both short and long term.
Well, I would say consider yourself lucky that in nearly 40 years in your company that you never knew anyone that was hurt or sick. I would certainly say you are a lucky charm and folks should want to work near you!
I see the claims come in to be processed on both the individual and group side all the time. Most claims are fairly minor when you think about disability claims but auto accidents, falls, health scares that are not terminal and the such can still take months to years for one to fully rehab back from. When the insured go back to work part time or ‘light duty’ while rehabbing often they are experiencing a loss of income due to loss of productivity, a properly structured disability policy is there to continue providing a supplemental pay check. As we know most physicians are working 60+ hours per week, if put on light duty, which is typically 20-30 hours a week, that represents a loss of 50-66% of their productivity and for many that equates to 50-66% loss of income.
Nobody loves buying disability insurance, I get it, but truthfully it is easier to come up $20-$30 per month per $1,000 of benefit while you are healthy and working than to come up with the thousands of dollars of cash flow the policy would have provided at claim time while not working.
No, I was only referring to permanent total disability. We had the normal amount of short term occurrences from the causes you mentioned. Most of the time our sick leave benefits were generous enough to cover those but there were some long term incidents. One guy was out for a year when he hit a deer while he was on his motorcycle. I wasn’t very clear in my comment.
Physical disabilities are extremely common. I see a lot of disability/workers comp since I do musculoskeletal care. Obviously there is a spectrum of disabilities and a spectrum of work requirements. It’s no big deal for desk worker to get thumb arthritis but this is a huge problem for a surgeon.
Agreed, as I often tell my clients “when you lose your thumb you might lose your career, when most others lose their thumb they just hit the space bar with their other thumb”.
Does it make sense to drop disability insurance and whole life insurance once you hit FIRE levels of wealth?
Yes.
I really enjoyed your article. I’ve been considering a disability insurance for a while and I found it really helpful to read about the differences between these types of insurance. I’m glad that you mentioned the Pattern Insurance company because I’ve been looking into them specifically for disability insurance lately. It’s really great that you included a list of similar things between disability insurance and life insurance to make the decision process easier.
Great summary.
A few points.
Taxation. As you indicate, taxability of benefits depends on who pays for the insurance. Although I have group coverage through my employer, they report the disability premiums as taxable income. Thus, I pay the tax and benefits, if I ever receive any, would not be taxed. Employer based disability does not necessarily imply taxable DI benefits.
Shopping. When you shop for insurance, or any other product, you should look at the full range of providers. By all means, work with independent agents. But do not ignore companies that sell through captive agents. These sell only policies from the companies they represent. They may or may not offer the best option for your case. If you never get quotes from them, you will never know. Some of the largest life insurance companies in the country sell this way. No reason to rule them out without looking. It does require reaching out individually to each company, but it is not that difficult or time consuming
Also, see what your professional societies are offering. In my insurance buying days, I never found a good deal for life insurance through any of my societies. However, one of them made an arrangement for members to buy individual DI policies at a group rate. It was a great deal.
I have certainly known people to become long term disabled. One very prominent doc at my place suffered a severe health event. With fantastic care (not bragging, I was not involved. But I saw what they did) and dedicated rehab, they regained walking, talking, ADLs. Could be involved with their kids. No way they could resume practicing medicine. Held out the hope for over a year while trying, but eventually became clear that return of function had plateaued at too low a level to ever make it back to even part time work.
You cannot just buy the cheapest policy, not even for term life insurance. You need to care about financial stability. Although states have guaranty associations, made up of insurance companies that sell in the state, they hardly provide complete protection from failure of a company. Most have caps on how much they will pay if your company goes under. Those caps are far below what most docs would carry in life insurance if they have young families. Same for disability.
Sure there’s a reason. You can go to one person and shop dozens of companies. Or you can go to dozens of people to shop dozens of companies. Your time has value.
We’ve looked at hundreds of claims and policies. Not just for physicians, but for CEO , entrepreneurs and hourly workers, too. Most of the group policies sold to affinity national groups/associations are poor products. They may be less expensive, but the true test is when it comes time to make a claim. Some require you to file a lawsuit only in the state where the association is headquartered, for example. When choosing a group or individual policy, a relevant but hard-to-find piece of information is how well the policies have paid (or not) after court battles. Your best resource for purchasing is going to be an experienced agent who knows what questions to ask you (and your group if you are in charge of purchasing for your practice).. When it comes time to make a claim, speak to an attorney experienced not only long-term disability policies, but also in physicians in particular.
Or go to two people, each of whom shops dozens of companies for you AND go yourself to another 5-15 (probably fewer) companies on your own. Remember, we are talking about a company to which one expects to pay many thousands of dollars over decades, in the expectation that it will pay off for your family if you die while they rely on your earned income.
Given its importance, make a few phone calls and see what you get. Spend an hour to find a company for a 30 year relationship? Does not sound unreasonable to me.
It may take some of your time but it is certainly worth it.
It’s going to take a whole lot longer than an hour my friend. And no, I don’t think it’s worth it. I stand by my original recommendation to buy from an independent agent.
Maybe I am missing something, but I just got quotes from zander.com, term4sale.com and USAA, $1M policy,30 year term, 40 year old male nonsmoker in excellent health. It took under one minute for each quote. At that pace, I could shop 60 sites in an hour.
Note that included one direct writer company. Less than a minute.
But I don’t need 60 direct writer sites. More like 10, tops. I am not going to waste the time of 10 salespeople to find out how quickly I could get prices for the same policy from New York Life and its competitors. I seriously doubt it would take an hour each. But even if it did, 10 hours shopping for a policy to protect my family for 30 years is well within what I would be willing to do.
Again, more like 1 hour total, since I already have USAA. I value my time but just as I shop for providers of other things I need- index funds, food, etc, I did the same for insurance. Sometimes bought through an independent agent. Sometimes bought through a direct writer. Whichever had the right policy at the right price at the time.
I can see major downsides to skipping a huge share of the industry: overpaying for the policy or buying from a weaker company than I should have because I ignored too many choices.
You’re making my point for me with term4sale. That’s a list of independent agents you get from them and companies that use independent agents.
Three data points.
JD Power ranking of life insurance companies. Agree or disagree, but these are the results of their survey
Maximum is 1,000, industry average is 763.
Top company is State Farm, which sells only through its agents, with 838.
Fourth is Northwestern Mutual, 790, only through its agents.
Sixth is NY life, 784, only through its own agents.
Largest life insurance companies by direct premiums written for individual policies, according to
COMPANY DIRECT WRITTEN PREMIUM PERCENT OF MARKET SHARE J.D. POWER SCORE BBB RATING A.M. BEST RATING
Northwestern Mutual $11,278,801,822 6.48 790 A+ A++
New York Life $11,053,776,227 6.35 784 A+ A++
MetLife (Metropolitan group) $10,767,180,668 6.19 773 A- A+
Again, free country and everyone is entitled to their own opinion about what are good companies from which to buy insurance. But everyone is not entitled to their own facts.
Another fact.
https://www.naic.org/cis_refined_results.htm?TABLEAU=CIS_COMPLAINTS&COCODE=67091&REALM=PROD
The NAIC maintains records of complaints about insurance companies. The link is to the report for NWML.
By construction, the mean complaint index for insurance companies is 1.00.
The complaint index for NWML is 0.05.
There are anecdotes and there are facts.
I don’t work for any insurance company and I don’t care who buys what from which company. But I suggest people base their decisions on facts.
If the ranking isn’t based 100% on price and likelihood of payout then it’s worthless. If NML is on that list, then I can assure you it isn’t based on those two things. Their term life prices that I’ve seen have been universally terrible. NY Life is another one I’d put on the “avoid” list for the most part given how often they sell whole life to docs.
Just because a company is big doesn’t you should buy insurance from them. Take a look at these stories about NML:
https://forum.whitecoatinvestor.com/insurance/1728-inappropriate-whole-life-policy-of-the-week
“If the ranking isn’t based 100% on price and likelihood of payout then it’s worthless. ”
The ranking is based on “overall customer satisfaction” in a survey of insurance customers. So it reflects what those customers thought was important.
“The study is based on responses from 5,469 individual life insurance customers and 3,674 annuity customers. It was fielded from June through August 2020.”
Similarly, the NAIC rating is based on complaints made about companies.
As for stories vs data, I find that anecdote loses to data. Every time.
If you never contact NWML to get their prices, how could you know what they are?
I can see someone saying “I routinely check these companies that sell only through their own agents and therefore I know their prices.”
I could understand someone saying “I never check these companies, so I don’t know their prices.”
I do not see how someone could be taken seriously when saying “I never check these prices. Based on never having looked, I know their prices are high”
Complaining that someone looking for term should avoid a company that sells WL does not make sense.
” Never buy a Toyota. They are terrible cars. I heard of someone who wanted to buy a used Prius. They went to a Toyota dealership and the salesperson told them the customer should buy a new Lexus LC Inspiration (which my quick lookup says is the most expensive item in their fleet. I am not a car person, so maybe that is not true and there is some other Lexus that is much more expensive. If so, substitute if for the LC Inspiration). That is an inappropriate car for someone who wants a used Prius. My conclusion is not that the salesperson convinced the buyer to make a bad decision. Instead, my conclusion is that Toyota makes terrible cars and no one should buy one.”
Does that make sense? Do some insurance companies sell WL to people who do not need them?
Sure.
Does this have anything at all with where to buy term?
No.
If you need term, buy the best term policy you can find. It might come from a company that sells WL, it might not. The only way to know is to shop WL peddling companies and those that do not sell such policies.
If one is shopping for term, relevant considerations are the price, the term, and the financial strength of the insurance company.
Considerations that are not relevant are the design of the logo, the celebrities used in advertising, the color of their brochures or what other products the company may sell.
If I were looking to buy term life insurance, I would shop for term life insurance. I would not care about the terms or sales the WL or super high priced variable non-guaranteed high commission whatever policy the company might sell. I am not buying it, so what difference does it make.
According to the NAIC, USAA’s complaint ratio was 0.12. Higher than NWML but far below the industry average of 1.00.
https://www.naic.org/cis_refined_results.htm?TABLEAU=CIS_COMPLAINTS&COCODE=69663&REALM=PROD
DATA
The satisfaction rate with NML among financially literate doctors is incredibly low in my experience. But it’s a free country. If you want to spend days shopping for term life and check with every company in the country to do so, knock yourself out. I’m not going to recommend everyone do that though.
More data.
NAIC complaint index for New York Life.
0.16. Higher than NWML or USAA, but still well below the industry average of 1.00.
https://www.naic.org/cis_refined_results.htm?TABLEAU=CIS_COMPLAINTS&COCODE=66915&REALM=PROD
Thanks for posting this. We are surprised at how many physicians who come to us do have long-term disability insurance but don’t have a clue what those policies say. The issues get really thorny when, for example, an interventional radiologist or cardiologist starts showing blood markers for cancer, is told by his/her doctors to stop doing those procedures and yet, from a physical standpoint they can actually still “do” the procedure right now. It’s just risky to keep going. Another thing that physicians find challenging is when they are the practice owner and, for example, can’t operate but can still manage. Some want to sell their practices and get the maximum benefit out of their policies. Doing things in the wrong order can be costly. Finally, please tell your readers to stop getting “disability insurance claim advice” from their fellow physicians. Most get it wrong and that can be very costly. Keep up the good work.