By Dr. James M. 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 cover five years of living expenses so the younger children are in school and his wife can go back to work, another might want to be able to provide for her husband to never have to work again and pay for expensive colleges for her two children. Obviously, the second 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.
How Much Disability Insurance Should You Buy?
As a general rule, insurance companies will allow you to buy enough insurance to replace 60% of your gross income, up to about $20,000 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.
How to Increase Your Disability Insurance Benefit
If you are a very high-earning doc and wish to buy more than $20,000 per month in benefit, 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 the retirement benefit rider discussed in the next section. Personally, I would just keep my spending below $20,000 a month, crush my student loan and mortgage debt, and save like a crazy fool 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 thus be assured that you could maintain your current lifestyle in the event of disability.
Pre-Tax vs. Post-Tax Disability Insurance Policy
Many attending physicians can make the decision between using a pre-tax vs. a post-tax disability policy. If you pay for the premium post-tax, your benefits are post-tax. If you deduct the premiums as a business expense (you must have a business to do this obviously), you'll have to pay tax on the benefit payments if you ever become disabled. This is an individual decision, but in the end I think it is usually pretty close to a wash. If you are underinsured (like most residents and fellows), you should probably go for the post-tax policy. You qualify for the same amount, and post-tax money is obviously worth more than pre-tax. If you are not underinsured, consider that if you're disabled, you'll have less income than you have now and 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 to many physicians when they consider the odds of acquiring a disability are in their favor. (Odds of a disability lasting longer than five years are around one in seven.) 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. 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 one in seven chance of having to pay taxes on the benefits.
Monthly vs. Annually 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 gives me a 5% discount to pay annually. One of my life insurance policies offers a similar discount. It's tough to get a guaranteed 5% return these days in the market. Good things happen to those who can budget. I just put 1/12 of the premiums aside each month and when the policy comes due each year I pay it in one lump sum.
If you're ready to talk to an independent agent about disability insurance head over the list we keep on the best disability insurance agents. Save yourself the work of finding a good one you can trust and use the same agents that have been used by thousands of WCI readers in the past. You do not need someone local that you can sit down across the table from. It is better to have someone who has sold policies to hundreds of docs this year working with you by phone, Skype, and email than someone you can sit down with who has only sold four policies. In addition, if there is some issue with one of these agents, I can usually help you resolve it quickly.
What other factors did you consider when determining how much disability insurance you need? Comment below!