By Dr. James M. Dahle, WCI Founder
There are situations where it does not make sense to purchase disability insurance. However, it is pretty unlikely that a resident or young attending is in one of those situations. Today, we’ll walk through what you need to consider about this type of insurance policy and define the situations where buying disability insurance doesn't make sense.
Disability Insurance IS Expensive, But It IS Worth It
Disability insurance is expensive. The typical rate for a resident or young attending buying a solid, portable, individual disability insurance policy is 2%-6% of your benefit. In other words, if your benefit is $10,000 a month expect to pay $200-$600 per month for it ($120,0000 per year for $2,400-$7,200 per year). If your policy is 4% ($1,920 per year for a $48,000 benefit per year), that's certainly within the expected range. You could save a little bit by dropping a rider or two or going with a different company, but don't expect to get it for a dramatically lower price. The reasons they are expensive is that they are highly likely to pay if you actually become disabled and because those who purchase these policies become disabled relatively frequently.
(Plus you have to pay the agents a commission to sell these things and the insurance company has expenses, and unless it is mutually owned, its shareholders expect a profit each year, etc, etc. But mostly, the policies actually get used.)
If you want a dramatically lower price, you need to look into a group policy. It will not be portable, and it will likely be significantly weaker. It may not have level premiums, but it will probably be a lot cheaper. I owned both an individual and a group disability policy for many years, but I canceled both when I became financially independent.
Insurance Is About Risk, Not Return
Like with term life insurance, disability insurance is all about mitigating risks that you cannot afford to self-insure against. It doesn't make sense to calculate your return because you really do have a need for this insurance. If you become disabled as a resident or young attending (or even an older attending who is not yet financially independent), it is a financial catastrophe. Even if the insurance costs twice as much, that doesn't change your need for it.
Don't Count on Another Way to Earn
While we're all worried about losing our left thumb and thus our ability to intubate, operate, or suture, the truth is that most disabilities that keep you from practicing medicine are also going to keep you from doing anything that is going to earn you anywhere near the same amount of money. Most doctors, unfortunately, aren't qualified to do anything that pays anywhere near the same salary, so I think relying on anything but a passive or mostly passive income to replace disability insurance is probably a mistake.
Is Disability Insurance Worth It? Seven Times When It Doesn't Make Sense
Disability insurance is worth it for the vast majority of doctors, but there are some occasions where it truly doesn't make sense to buy.
#1 Financially Independent
If you can afford to self-insure a risk, it is always cheaper, on average, to do so. There are costs of insurance, including commissions and profit, and so an insurance company (at least one that wants to stay in business) always takes in more in premiums than it pays out in benefits. If you are financially independent, you are no longer depending on your income as a physician, and thus, you no longer have an insurance need. It's very reasonable to drop a policy at that point.
#2 High-Earning Spouses
If your spouse is also a high earner and you are both comfortable living on just one income, it's OK to forego disability insurance. There is a risk that both of you become disabled simultaneously, but that seems far too low to justify the price of two full-rate policies. I do not know of a company that offers a “second to become disabled” (similar to second to die life insurance) policy for a much cheaper rate. That product would make sense for a two-doc household. Keep in mind that if one of you is a pediatrician working part-time and the other is the owner of a very successful plastics practice, it may still make sense to buy some disability insurance on the surgeon.
#3 Military Docs
The military does provide a disability benefit, including VA benefits. It is not nearly as good as the individual disability policies that most civilian docs buy, but it is better than a kick in the teeth. (It pays ~$3,200 per month for a 100% disability if you're married with children.) Unfortunately, it is also particularly difficult for active-duty military folks to purchase individual disability policies. Combine these two issues and it may make sense for an active-duty military doc to not own disability insurance.
#4 OK with Social Security Disability
Most disability insurance agents like to gloss over the fact that we all have a disability policy. It isn't a particularly great one and the benefit isn't very high, but there is a policy included in your Social Security benefits. If you are particularly frugal or have a significant nest egg already AND you're OK that this policy is much less likely to pay than a typical individual disability policy, then it may make sense to skip a disability policy. But when I say “frugal,” I really mean it. I recently saw my Social Security disability benefit and it's less than $3,000 a month. That's not going to cut it for most attendings, including me.
#5 Family Assistance
A “trust fund” is an exception since that would make you financially independent, and you would not need disability insurance. However, there are other types of family assistance that may fill your need for disability insurance. If your parents would support you and leave you most of their assets or if you have a rich uncle or sister who would provide for you if you were disabled, then you can probably get away without insurance. I wouldn't do that to my family members, but in the right family . . . it would be far cheaper to rely on each other than to each individually insure against risks like disability.
#6 You're Broke
While the need for a medical student or resident to have disability insurance is probably never higher, the fact is that income is limited. An attending can afford to spend 2%-3% of her income on a “luxury” like disability insurance. Most residents can, too. But sometimes, when you're choosing between rent, food, and medicine, it isn't unreasonable to delay the purchase of disability insurance until the completion of training. It's a big risk, but I can understand somebody running with it. I suppose if you were really ill and the price at which disability insurance was offered to you was ridiculous, that might also not be worth purchasing. But in general with disability insurance, preexisting conditions are simply excluded rather than used to increase your price.
#7 Late 50s and 60s
Most disability insurance policies only pay to age 65 or 67, or for a year or two—whichever is greater. However, as you get into your late 50s and early 60s, those premiums aren't getting any cheaper. In essence, you're paying the same amount of money for 10 years, five years, or even one year of benefits as you were paying in your 30s for 30 years of benefits. At a certain point, that just doesn't make any sense, even if you're still not quite financially independent. You would really have to be in pretty bad shape (physically or financially) to continue a policy very far into your 60s.
As for me, I originally anticipated letting go of my disability insurance policies by age 50, but after I felt comfortable that I had enough money that I didn't need it anymore, I dropped it even earlier than that.
Have more questions about disability insurance and if you actually need it? Hire a WCI-vetted professional to help you sort it out.
Those were all the exceptions I could think of. Can you think of any more reasons not to buy DI? Do you agree with these exceptions? Why or why not? Comment below!
[This updated post was originally published in 2015.]