Most of the articles on this website about term life insurance and disability insurance deal with the front end: how to buy it, what kind of policy to buy, how much to pay for it etc. There are very few posts (this one and this one) about the back end – when and how to get rid of it. This post is going to be a little bit more personal. We're going to talk about our family and our policies and what we've done with our policies throughout my career and what we're doing with them right now.
Insurance is Temporary
The whole point of term life insurance and disability insurance is to cancel it when it is no longer needed and save those premiums. Insure well against financial catastrophe while you have a need, then get rid of it once the need is gone since insurance by definition always costs more than it is worth on average. A typical physician is going to have a 5 figure monthly benefit from disability insurance and a 7 figure benefit from term life insurance. With the disability insurance, the goal is to have a benefit large enough that, after-tax, you can both maintain your standard of living AND still save for retirement (because disability insurance generally stops paying at age 65-67.) That usually means a benefit of $10-20,000 per month. With term life insurance, many high-income professionals want their family's financial life to be exactly the same with or without them. So they buy enough that when combined with their nest egg, their partner would have enough money to raise the kids, send them to college, and live the rest of their lives without ever having to go back to work. That usually means a benefit of $1-5 Million.
Some families do a little more or a little less, but the point is you probably need big, expensive insurance policies until you reach financial independence. At that point, when your nest egg would support you and your family the rest of your lives, you can cancel the policies and use the premiums for something else – spending more, building more wealth, or supporting charitable goals.
What We Have Done With Disability Insurance
I bought my first individual disability insurance policy from The Standard as an intern in October 2003, for a monthly benefit of $2,500. That policy cost $948.70 per year (3.2% of benefit). Almost half the cost was the riders, including a $5,000 Future Purchase Option Rider, an Indexed Cost of Living Rider, a Total Disability in your Occupation Rider (made it specialty-specific), and a Residual Disability Rider. As an active rock climber, there was an exclusion on the policy – it wouldn't pay if I was disabled rock climbing. It also excluded disability due to war, a concern of mine given my military commitment, and limited payments for disabilities due to mental disorders or substance abuse to 24 months.
As a senior resident with a slightly higher income, I was able to exercise $1,000 of that future purchase option, so I did. That additional $1,000 cost $363.05 per year (3.0% of benefit- cheaper because no FPO rider). I decided to keep paying the premiums on this policy while I was in the military. While the military provides a military disability benefit, it isn't anywhere near as robust as an individual disability insurance policy. But it is particularly hard to buy insurance while on active duty. However, The Standard assured me that it would pay me a benefit if I was disabled and it wasn't due to war, so I kept the policy. Shortly after leaving the military, I exercised the other $4,000 at a cost of $2,066.67 (4.3% of benefit.)
Although older and in a different state, I was still healthy and hadn't picked up any other “bad habits,” so I suppose I could have bought a completely new policy and saved that Future Purchase Option for later. But I didn't want to deal with the hassle and really didn't see a time when I would ever want a larger individual policy, especially one with a climbing exclusion. At that point, we were quite financially literate and our net worth was rising rapidly (this was only about 6 months before the birth of The White Coat Investor.)
My new employer offered a group disability policy. It was fairly inexpensive, but most importantly to me, didn't have a climbing exclusion. So I bought a benefit worth $10,000 a month. I don't recall the exact cost, but it was dramatically cheaper than my individual policy. It was specialty-specific but not as robust of a policy. That cost has gradually climbed over the years as I have gotten older and has changed from one company to another once or twice. It is currently also with The Standard and costs me $1,659.96 per year (1.38% of benefit). So my total coverage in the event of disability is $17,500 a month, or $210K per year. That's still more than we currently spend (you'd be surprised how hard it can be to spend money when you have no debt payments) and would certainly allow us to both maintain our lifestyle and still save for retirement.
Disability Insurance Changes
However, there's a problem. $210K is probably more than I'm going to be making from practicing medicine going forward. I'm down to 8 shifts per month, and they're all the lower paying day and evening shifts (in my group we heavily subsidize night shifts). In addition, I have a lot more income than that from my other work here at The White Coat Investor. Remember that the way disability policies are written, they pay you based on loss of income and/or the inability to perform the “substantial and material duties of Your Regular Occupation. If I cut off my right hand and could no longer intubate, I couldn't practice emergency medicine. But how much would my income drop immediately? Perhaps $200K. Most disabilities that would keep me from practicing medicine probably wouldn't have much of an effect on our overall income. By percentage of income, my regular occupation is no longer “physician.” It's “blogger.” If I can't practice but could blog, then we're looking at residual (partial) disability. My residual disability rider says that it isn't going to pay squat if my monthly earnings are reduced by less than 20%.
Let's say EM provides 20% of my income. If I lose the ability to do EM, but can still do The White Coat Investor, I'm only going to get 20% * $17,500 = $3,500. And I'm paying $5,038.38 for it (12% of benefit.) That's starting to feel a little steep, especially since we're now into the net worth range where we really don't have much of a need for additional income. Now, retirement and financial independence are a bit squishy, and we're probably in a bit of a gray area (at least without selling The White Coat Investor) where our nest egg could cover everything we need and most of what we want, but maybe not quite everything we want. But it seems dumb to overpay for disability insurance at this stage.
So we're dumping it. I've paid my last premiums for the individual policies. By the time you read this, those policies will have been surrendered. We won't be renewing the group policy at the end of the year either. That gives us another $5,038.38 after-tax to invest, spend, or give away.
What We Have Done With Life Insurance
Let's turn to life insurance. My first life insurance policy was sold to me during medical school by a “friend” (working as an intern at Northwestern Mutual for the summer.) It was a $280,000 term policy and a $20,000 whole life policy. I don't recall the premiums, but they weren't very high because there wasn't much insurance there and I was young and healthy. As an intern, I upgraded. However, I discovered that just like with disability insurance, the term life insurance companies didn't like the fact that I climbed. I ended up with a very overpriced policy through Minnesota Life. The base policy itself wasn't too bad, it was the extra $1,000 per year that I was paying simply for going climbing every now and then. However, it was basically a five-year policy that would go up in price every five years. (Remember, I wasn't particularly financially literate when this was sold to me.) The idea my “advisor” had was to upgrade it to a whole life policy when I became an attending.
Once I joined the military, I was able to buy a policy from the Serviceman's Group Life Insurance (SGLI) program. It wasn't level term, but it was very cheap AND it covered death from acts of war, which my other policy did not cover. It provided a $400,000 death benefit.
I was more financially literate at this point and I was also living in coastal Virginia, where the climbing is few and far between. Since I hadn't been climbing in a long time and didn't have any climbing planned in the next few months, I was able to secure policies without a climbing waiver. The first one I got was a $750,000, 20-year level term policy through USAA that I still have. I bought that in 2007 just before deploying. I really hadn't been climbing in a year at that point and was headed to the Middle East. Unlike the crummy, over-priced Minnesota Life policy, this one didn't exclude death from acts of war and included a couple of unique military features- an accidental dismemberment rider and a rider that guaranteed my ability to buy 2X my face value in term life upon separation from the military. All for $387.50 a year, about 1/4 of the price I was paying Minnesota Life for $500K in coverage. Total coverage at this point was $1,150,000.
A year later, I realized that I was probably still underinsured. I used the term4sale.com site (now a WCI partner) to find an agent and another policy. The agent tried to sell me a more expensive policy, and even VERY briefly mentioned whole life insurance (he regretted that), but it didn't take long for him to realize all I was going to do was buy a cheap $1 Million, 30-year level term policy as quickly as possible. I still wasn't really climbing, so that wasn't an issue. Within a few weeks, I had a $1 Million, 30-year level term policy from Metlife. I still have that policy. It costs $749 per year and I could keep it at that price until 2038 if I wanted to. Total insurance: $2,150,000.
Upon leaving the military in 2010, we decided we had enough of a nest egg that we could just let the $400K SGLI policy go without converting it to a VGLI (same thing, but for veterans) policy or buying more insurance. Ever since then, we've had $1,750,000 on me. We have never bought insurance on Katie. She wasn't working for pay from 2004 until the last couple of years as she's taken on WCI duties. And I always felt I had enough income that I could have paid for whatever household assistance I would have needed in the event of her untimely death. By the way, we also finally dumped the whole life policy about this time. Yup, seven years I held on to that stupid thing. My overall return? -33%. At least it was a tiny policy.
Why I'm Not Cancelling My Term Life Yet
So if I'm canceling my disability insurance, why am I not canceling my term life insurance? Well, three reasons really.
First, the disability insurance isn't really going to pay much of anything if I get disabled. If I die, the term life is still going to pay. That's the main reason.
Second, we're still in the financial independence gray area, at least without selling WCI, LLC which is highly illiquid and whose value is highly dependent on my ability to work in it, at least for a year or two after a sale. We'll be past that gray area in another year or two at our current savings rate. But I think if I died, Katie would appreciate an extra $1.75M in cash.annually renewable term since I obviously won't have a need for these policies that is anywhere near as long as they will last. But I'm only paying $387.50 + $749 = $1,136.50 per year for $1.75M in coverage. That's dramatically less than the disability coverage is costing. In addition, with a level term policy, you're actually overpaying for coverage in the first few years (since you're less likely to die) and underpaying in the last few years. I suspect that fact makes some people hold on to the last 5 or 10 years of their 30-year level term policies even if they're retired and no longer actually need the policy. It has just become a much better bet than it used to be. I don't think we're going to do that, but we're going to keep these two policies for another year or two anyway.
What do you think? Have you dumped your disability and term life policies? What issues did you take into consideration? If you haven't dumped yours, when do you plan to? Comment below!