I received the following question by email from a resident physician:
I'm a 29 year old resident. I've heard conflicting opinions regarding disability insurance. The mantra in most places seems to be buy buy buy, but most of the people selling this gospel also sell the product.
My question to you is, what are the situations in which it doesn't make sense to buy disability insurance?
I was recently approved for a Berkshire policy for $160ish/month (that rate is locked in for the life of the policy) for about 48k annual coverage. That seems like a pretty steep price to pay – the Net present value of the payments to the age of 65 works out to about 30-35k depending on the discount rate – 30k if you assume a 5% discount rate.
There has to be some point at which disability insurance is too “expensive” i.e. its cost is greater than the value that one accrues. A physician's cumulative earnings over a life time can be $8 Million or more , but a policy similar to the above covers $1.6 Million to age 65 for a cost equivalent to 35k in real dollars today. I understand that maybe the lens to look at these policies isn't a investment strategy but rather a risk mitigation strategy – at what point does the cost of risk mitigation become too much? Part of the answer is probably personal, but what guidelines should one use when thinking about this?
Perhaps there are specific situations where the cost benefit analysis significantly shifts to the point where it's not worthwhile. An extreme example is if one has a large trust fund (wish I had one), or one has another qualification that they think they could perform if they were disabled and unable to continue doctor-ing, or other situations.
A very perceptive question. Indeed, there are situations where it does not make sense. However, it is pretty unlikely that a resident or young attending is in one of those situations. I'll review the situations where it doesn't make sense in a moment, but first a few comments your question brought to mind.
Disability Insurance IS Expensive
First, you are absolutely right. Disability insurance is expensive. The typical rate for a resident or young attending buying a solid, portable, individual disability insurance policy is 2-5% i.e. if your benefit is $10K a month expect to pay $200-500 per month for it. ($120K per year for $2400-6000 per year.) Your policy ($1920 per year for a $48K benefit per year) is 4%, certainly within the expected range. You might be able to 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 reason it is expensive is that it is highly likely to pay if you actually become disabled, and because those who purchase this 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 will likely be significantly weaker, and may not have level premiums, but it will probably be a lot cheaper. I own a group policy and an individual policy for various reasons, including price.
It's 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 cost 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 or 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. Not to mention the fact that most doctors unfortunately aren't qualified to do anything that pays anywhere near the same salary. I think relying on anything but a passive or mostly passive income to replace disability insurance is probably a mistake.
Seven Times When Disability Insurance Doesn't Make Sense
There are some occasions, however, where it truly doesn't make sense to buy disability insurance.
# 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 so 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 the income of just one of you, then I think it is okay 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 ~ $3200 per month for a 100% disability if you're married with children.) Unfortunately, it is also particularly difficulty 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 Okay 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 are okay with the fact 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 $2K a month. That's not going to cut it for most attendings, including me.
# 5 Family Assistance
You mentioned a “trust fund” as an exception and obviously since that would make you financially independent 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 then 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 his income on a “luxury” like disability insurance. Most residents can too. But sometimes, when you're choosing between rent, food, and medicine, perhaps it isn't too unreasonable to delay the purchase of disability insurance until completion of training. It's a big risk, but I can understand somebody running 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, pre-existing 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, 5 years, or even 1 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. I anticipate dropping mine by age 50.Those were all the exceptions I could think of. Can you think of any more? Do you agree with these exceptions? Why or why not? Comment below!