By Dr. James M. Dahle, WCI Founder
The vast majority of physicians and other high-income professionals should and do buy a disability insurance policy at some point during their careers. Despite the presence of plenty of information about doctor disability insurance on the internet, too many of them are still doing it wrong. In this post, I'm going to address 17 common errors that doctors continue to make regarding disability insurance.
Top 17 Ways Doctors Screw Up Their Disability Insurance
#1 Didn't Buy Disability Insurance
Far and away the biggest mistake that is made out there is that doctors don't buy disability insurance at all. You want to see a financial catastrophe? Take a look at a doctor who became disabled early in their career after spending 10-15 years of their life and hundreds of thousands of dollars investing in their future ability to earn money. This is your most valuable asset. Insure it.
More common than becoming disabled is becoming uninsurable or less insurable. People develop medical problems all the time in their 20s, 30s, and 40s. These folks often discover that they cannot buy insurance at all, or if they can, they end up paying through the nose for a policy riddled with exclusions for the medical conditions most likely to disable them or perhaps even their favorite hobbies. If you're making this mistake right now, please, please, please…go get yourself a disability insurance policy.
Interestingly, I saw an article written by an emergency physician published in Emergency Medicine News arguing against buying disability insurance at all. I'll be addressing/debunking that in a follow-up post. For now, just realize that if you still need your income, then you need disability insurance.
#2 Didn't Buy Enough Disability Insurance
Only slightly better than not buying it at all, is not buying enough. I once met a doctor who bought a policy with a $2,500 per month long-term disability benefit in residency. No future purchase option. No cost of living rider. He didn't bother increasing his benefit after residency. Then he became disabled. He and his family then lived off of $2,500 per month. $30,000 per year.
Now, there are lots of people in this country who live off of $30,000 per year. It isn't impossible by any means. You won't starve. But it will be a dramatically different lifestyle than you and your family expected, especially as those kids get bigger and inflation gradually erodes the value of $2,500.
Do yourself a favor and make sure you buy a large enough policy to both pay all of your living expenses AND save for retirement (remember these policies generally stop paying at age 65-67). Then buy a little more, just in case.
#3 Missed Out on Medical Residency Discount
I frequently see doctors ask whether it is better to buy a policy at the end of residency or the beginning of attendinghood. I want to smack them upside the head, because they're already several years too late and ran a risk they should not have run. Buy a policy as an intern, even if you cannot afford a policy as large as you need, want, and eventually will be able to afford. Get something in place. (Even $2,500 is better than nothing.) There is a discount available to residents compared to attendings. It is often extended for 3-6 months after residency. But if you're asking yourself this question, you've already screwed this up. You've gotten lucky so far. Stop rolling the dice and get that policy in place.
#4 Didn't Buy Before Changing States
A lot of people don't realize that the price of insurance varies significantly by state. For example, disability insurance is 30% more expensive in California than it is in New York. So if you expect to move soon from one state to another, check with an independent disability insurance agent to find out which state is cheaper. Buy it there, or at least swap policies once you get to the new, cheaper state.
#5 Didn't Get the Partial/Residual Disability Rider
The most important rider on a disability insurance policy is the partial/residual disability rider. Many reputable agents won't sell a policy without it because they know how important it is. This rider provides a benefit if you are partially disabled and as you return from disability. Make sure your policy has this benefit.
#6 Didn't Buy the Future Purchase Option Rider in Residency
Another rider that is important for a resident, a military doctor, or anyone who expects to soon have a larger income and increased lifestyle spending is a Future Purchase Option rider. This rider locks in your ability to purchase more disability insurance no matter what medical condition you may develop or what dangerous hobbies you may take up. You probably don't need it if you are buying a policy at age 45, but a resident almost surely does.
#7 Didn't Buy a COLA Rider as a Young Doc
Inflation has been around for a long time. I don't expect it to go away, especially since the Fed actually targets a 2% inflation rate. A Cost of Living Allowance (COLA) rider allows your disability insurance benefit, once it starts being paid, to increase each year with inflation, usually up to a maximum of 3-6% per year. This preserves your spending power. Again, you may do fine without buying this rider if you're buying a policy at 50 or 55, but if you're buying one at age 28? I'd get the rider.
#8 Spent Money on Unnecessary Riders Instead of a Larger Base Benefit
There are tons of other riders out there. These bells and whistles can be expensive and unnecessary. I include riders like student loan riders, retirement riders, lump sum riders, and catastrophic disability riders in this category. I get lots of questions from doctors about these riders, but they're usually thinking about this the wrong way. They're wondering “Should I spend money on this rider or not?” Instead, I ask them to ask “Is it a better use of your disability insurance money to buy this rider or to simply buy a larger base benefit?” Most of the time, getting a larger base benefit is a smarter move. Unless you're already buying the maximum benefit the company will give you, I'd usually spend my money there instead of these riders. In fact, I'd look into adding on a second policy from another company before buying gimmicky riders that only pay out in certain circumstances or force you to use less than ideal savings vehicles.
In most ways, in a two-doctor couple, each member of the couple effectively functions as each other's disability insurance policy. Many of these couples still opt to buy some type of disability policy for each of them. I think that's reasonable. But the fact remains that their need for disability insurance is dramatically lower than that of a doctor married to a stay-at-home husband. Yet the price is exactly the same. This is not quite the no-brainer it is for a single doctor or a doctor married to a non-earner. Thus, if you are going to buy policies anyway, don't buy the maxed-out policy with all the bells and whistles. That's a mistake. I'd aim to spend about the same amount of money a single-doc couple would spend on disability insurance, or less.
#10 Mistook the Agent for a Financial Advisor
I like independent insurance agents. I have partnered with many of them for years here at The White Coat Investor and consider them friends. Selling necessary insurance is a noble profession that protects families from financial catastrophes. But insurance agents are not financial advisors. Like any commissioned salespeople, they are experts at the products they sell and can help you decide between them and make an informed decision about your insurance options. But don't mistake them for a financial planner or an investment manager. That's a good way to end up with a potpourri of commissioned products in your portfolio, including whole life insurance and loaded mutual funds.
#11 Didn't Buy Specialty-Specific Coverage
Own-occupation, specialty-specific coverage. That's what you want. The definition of disability is all-important. The most important aspect of a policy is that it actually pays you when you become disabled. This is particularly important for surgeons, dentists, and other procedural specialties, but most specialties do at least some procedures. You don't want a policy that incentivizes you to not do any work at all after a disability or, worse, won't pay you because you can still do some sort of work you don't actually want to do. There's a reason people have to hire an attorney to get their Social Security disability benefits. With a strong definition of disability, you won't have to do that. Yes, it costs more to get a top-notch policy from one of the Big 5-6 companies. But you get what you pay for.
#12 Bought a Group Disability Policy Because It Was Cheaper
Many employers and professional organizations offer disability insurance as a benefit. It is sometimes even specialty-specific. However, it is generally not portable and often contains other weaknesses. If a policy costs 1/10th as much, don't expect it to perform in exactly the same way. Now, there are reasons to have a group policy. The best one is if someone else is paying for it, like your employer. But it often also comes without a medical exam or asking any pesky questions about dangerous hobbies. That might be a good reason to have a group policy in addition to your individual policy or because you can't get an individual policy. But just because it is cheaper? That's a mistake. There is a disabled doctor out there selling disability insurance mostly because he is so mad that he had to fight the insurance company so hard to get his group disability insurance benefits and doesn't want that to happen to anyone else.
#13 Bought Short-Term Disability Insurance
Long-term disability insurance policies generally don't start paying out until you've been disabled for 3-6 months. But you can buy a short-term disability policy to cover that period. However, a 3-month disability isn't really a financial catastrophe. You should be able to cover that period with an emergency fund of 3+ months of living expenses. Sure, you might not yet have one of those if you're a new intern, but hopefully, within a year or two you will have that saved up and no longer need to ever pay for short-term disability insurance. As a general rule, insurance is a losing proposition. Since some portion of your premium dollar must go to pay for the expenses (including agent commissions) and profits (if for-profit) of the company, the company cannot possibly pay it all back out in benefits and stay in business. It's a losing bet on average. It must be, or insurance companies would not exist. So you should only buy insurance that you need.
#14 Didn't Buy Disability Insurance Before Getting Pregnant
Pregnancy is not a disability, but a complication of pregnancy is. You are far more likely to become disabled while pregnant than you were a month before you got pregnant. Unfortunately, if you go to buy a policy during the 1st or 2nd trimester, you will discover that pregnancy will be an excluded condition until 30 days after you deliver. If you go to buy a policy during the 3rd trimester, you will find that the policy won't be issued at all until 30 days after you deliver. There is a proper order to this process. Buy insurance. Then get pregnant. Don't screw it up.
#15 Didn't Pause It During Deployments or Active Duty
Mass Mutual is the only company that sells disability insurance policies to active duty military doctors. If you own a policy before going on active duty, be sure to discuss it with your agent or the company itself when you go active duty and especially when deployed. If it will still cover non-act of war disabilities, you may wish to keep it in force while serving. If it will not cover it, you may wish to put the policy on hold. That allows you to keep the policy in place for when you leave active duty, but not pay any premiums during that time period. You may even be able to get your premium money back afterward if you were deployed recently and did not pause the policy, but it would be best to arrange this in advance. Bottom line: There is no point in paying for insurance if it isn't providing any protection.
#16 Didn't Cancel It Upon Reaching Financial Independence
The idea behind disability insurance and term life insurance is to use it to protect against financial catastrophe—i.e. your disability or death during your working career up until the time your portfolio can sustain you and your family for the rest of your life. If you are financially independent, you no longer have a need for disability or term life insurance. Perhaps if you are a particularly risky person (i.e. just got diagnosed with cancer) it is still a “good bet” at that point, and you may choose to keep it. But most of the time, paying the premiums on a disability insurance policy after you reach financial independence is an expensive mistake.
#17 Didn't Buy It from an Independent Agent
I often have doctors ask me if the disability insurance policy they just bought was a good deal or not. If they had purchased it in the proper way, they would already know that they had the best deal available to them. The proper way is to go to an independent insurance agent (i.e. not a captive agent—an agent who only sells policies or primarily sells policies from one company) and evaluate all of your options together. For a doctor, this usually means looking at your current policies, policies from each of the Big 5-6 companies, and any policies available from your employer or professional organization. The agent will help you to compare pricing and features, allowing you to make an informed decision. Then you will know that you own the best policy for you.
These disability insurance mistakes are unfortunately much too common. If you have found that you have made one of them, get it fixed ASAP.
What do you think? What mistakes did you make with your disability insurance? Have you had to make a claim with it? Comment below!