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).
#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.]