[Editor's Note: This is a guest post from insurance agent Jamie Fleischner, CLU, ChFC, LUTCF, the president of Set For Life Insurance. She is a long-time advertiser on the site but neither she nor I was paid for this post.]
Many articles are written about what to look for when purchasing a disability insurance policy. These articles focus on what potentially lies ahead and what risks you need to cover. The majority of physicians and dentists purchase their individual disability insurance policies when they are young and right out of residency or training. Typically, they are in their early 30s with an approximately 30 year time frame. As such, it is critical to insure this risk as best as possible. This means loading the policy with most available riders and the longest benefit period available to insure the worst case scenario.
Reevaluating Your Disability Insurance Needs
Most people purchase their policies, add to them when their income rises and don’t re-evaluate them until they are ready to retire. However, it is prudent to reevaluate your disability insurance coverage as you reevaluate other areas of your financial life. How has your life changed? Have you paid off your student loans? Your mortgage? Are you now married with two working spouses? Are the kids grown and no longer dependent? As these life changes take place, you may need to change your disability insurance coverage to follow suit. Just as it is prudent to increase your deductibles on your insurance to reduce fixed monthly costs as you are able to absorb more out of pocket expenses, you may be able to reduce the fixed cost
Jamie Fleischner, CLU, ChFC, LUTCF
of your disability insurance as your needs change.
When To Drop Your Disability Insurance Policy
Your disability policy is critical to keep as long as you are dependent on your income. The policy was purchased to protect your income. As long as you are working and relying on this working income to pay your bills, you need to make sure that important working income is protected. Once you reach a state where you are financially independent and are no longer dependent on your income, you can consider dropping your coverage. If you are retired and no longer working and can live off of your assets, you can safely drop your coverage as you can rely on your own resources to live.
Some policies automatically expire at age 65. Before you drop your coverage, you ought to evaluate your situation. If you are very unhealthy and are likely to have a claim, you ought to keep your policy. In this situation, you may not be able to go out and purchase your policy again, especially at the same rate. Therefore, it is important to consider multiple factors before dropping your policy completely. Keep in mind that once you drop your policy, you may not be able to purchase that policy again at that price as you will now be older and most likely less healthy. Therefore, you MUST be confident that you are financially independent and are no longer reliant on any income.
When to Replace Your Disability Insurance Policy
Often it does not make sense to replace coverage, especially if you have had a policy in force for a long period of time. Replacing coverage requires a new application and medical underwriting. If you have had an adverse change in health, your new policy may come back with exclusions or ratings, costing you more premium dollars. If it has been a few years since you initially purchased your policy, your new policy may be more expensive since you are now older.
However, there are a few instances where it makes sense to replace your current policy. If you are able to save at least 20% on your premiums on the new policy and the new policy provisions are comparable or better, it may make sense to replace the policy. [I don't know about you, but if the policy is better, I'd swap even without a premium savings-ed.] This is especially true if you are a woman and are paying full female rates. If you are able to obtain a discounted, unisex policy, you may be able to save more than 60% off of your current rate.
If you have coverage through an association where the rates increase each year or have a policy with a company, it may make sense to replace that policy with a fixed premium policy. As a result, you may end up paying significantly less in the long run. If you have disability insurance with a company that does not specialize in disability insurance for physicians, you may consider replacing coverage to ensure you have the best provisions covering you for your needs. Sometimes people purchase their disability insurance with the same company that they purchased their automobile insurance. Oftentimes these policies do not properly cover you in your medical specialty and are worth replacing to provide you with more comprehensive coverage.
When To Reduce or Modify Disability Insurance Coverage
Once you are in a position where your fixed monthly expenses are less such as paying off a mortgage or student loans or your kids are out of the house, it may be time to reevaluate how much monthly benefit you need. Reducing your monthly benefit is the most significant way to reduce the fixed monthly costs on the policy. Most policies have linear rates. As such, if you cut your monthly benefit in half, this would cut your premium expense in half. Other ways to reduce the premium include decreasing the benefit period. For example, if you have a policy that is a lifetime policy, you may be able to reduce it to an age 65 benefit period. This can result in a 20% or more premium savings. Reducing the policy from age 65 to a 5 year benefit can also significantly reduce the premium. Before reducing the benefit period, evaluate your financial situation to ensure you can absorb the risk on your own if your benefit period is reduced. Removing riders, such as the cost of living rider, can also result in a reduction of 10-20% in premium. Cost of Living riders increase your policy benefits after you are on claim for at least a year. This rider is important in your early years as you have the longest potential benefit period. Once you are in your 50s, you have a lower potential benefit period. You may also have other assets to tap in the event of a claim. Removing this rider can result in reducing your fixed out of pocket costs in premium payments.
The most important thing to keep in mind is once you reduce your benefits or benefit period, increasing or reversing this change would require medical underwriting. As such, if you have had a change in health, you may not want to make this change as it may be irreversible. Be absolutely sure that the changes you make do not create a potential liability that you cannot absorb with your own assets. On the other hand, by re-evaluating your coverage or making modifications, you may be freeing up fixed monthly expenses that may be better spent or saved elsewhere.
[Editor's Note: One consideration for late career physicians not mentioned above is that most policies only pay to age 65/67 or for two years, whichever is longer. So the same premium that would give you 30 years of benefits if you were disabled in your 30s may only give you 2 years of benefits if you are disabled in your 60s. While some may view this as “fair” since you are more likely to be disabled in your 60s, I see it as overpriced. Even if you are not financially independent at 60 or 63, this may not be worth paying for to you. Hopefully, if you get a hold of information like that on this site early in your career, you won't need to deal with this dilemma as you will be financially independent well before 60.]
What do you think? Have you cut back on, dropped, or changed your disability coverage? Why or why not? How much more did you pay or save? Comment below!
I completely dropped my coverage when I realized I was financially independent in my mid 40s. I know several docs in their early 60s who still have it. I think people do not reassess this expense. You obviously need to be sure that you are financially independent before you drop it. I thought about it for about 6 months before I did it. I worried that I had made the wrong decision in 2008 but even that worked out. I thought I would use the savings to buy LTC insurance but now I think self insurance works well for me.
Thank you Jamie, for a very refreshing look at not just how much insurance we need, but also how little we might need.
I started my true own occ policy in residency, increased coverage when I finished, and dropped it within ten years. I was glad to have it while I was accumulating, but more than happy to start putting that $3600 a year towards the kids’ 529 accounts in my late thirties.
After reading your post, I realize I probably could have considered cutting back on it a couple years earlier. Paying half for half the coverage never occured to me.
Tried to modify my policy to decrease expenses and the agent never responded. Guess I was just a number to him….see ya.
Dropped my private DI policy at age 55. Figured I had enough in retirement accounts to cover Disability. Money for premiums might be better used to pay off or decrease fixed expenses such as your mortgage. Remember you can always tap your 401k/IRA without penalty if disabled. Paying a overpriced premium to an insurance company to prop up a lavish lifestyle seems foolish. Next step is dropping (not renewing) my Life insurance.
Ahhh, yes. I dropped the life insurance, too. I had a 10-year term policy, but stopped paying at some point in the 9th year. It’s great to be self-insured!
I have said it before. I think many physicians who buy insurance over-insure. This holds very true if you live below your means, building wealth and paying off debt.
Although there are at least as many who are underinsured, and they’re often the same ones who are not living below their means.
Ditto above. Had an additional disability policy along with the military disability option but dropped private policy once I hit FI. We also considered maintaining my wife’s teaching credentials (while she was a full time stay-at-home mom as a form of life insurance/disability insurance policy.
Good article but I don’t see why you’d change to a policy with similar coverage only if you can save 20%. Since the policies run for a number of years even a small savings would add up and there shouldn’t be any up front costs.
Another reason to possibly cut it back: joining a practice group that includes a disability policy for all members of the group.
Also, don’t forget social security disability in your calculations.
A rule of thumb: don’t drop disability coverage until you have dropped the comprehensive coverage on your car.
Uhhh…Those seem awfully unrelated to me. Replacing a car is chump change compared to replacing a physician’s income.
Well, you maybe able to replace $50K car, but how about medical bills, legal bills, and what if you or another party gets paralyzed or dies. Lets say its not you but your spouse or kids are involved in the accident? “chump change”, I think not.
No, umbrella insurance is not going to help.
If you need to work to maintain your life style or to meet current or future financial obligation then you need disability insurance.
What? Yes, if need to work you need disability insurance. That doesn’t mean you should tie it in to when you drop comprehensive coverage on the car. That doesn’t pay when you paralyze or kill someone, the liability (including umbrella) does. No one is suggesting dropping liability insurance. Nor the health insurance that pays for care of your spouse and kids.
I was just saying that if you’re still paying for insurance on comprehensive coverage to your own car ($10k, $50k, whatever), that’s a smarter place to start self-insuring than trying to self-insure a $1M to $5M in future income. If you’re still paying for comprehensive car insurance (I’m not talking about collision, liability, or umbrella), that’s probably a better starting point to think about as far as what sort of losses you are equipped to pay out of pocket vs. pay an insurance company to cover those risks for you. The same goes for cell phone insurance, extended warranties on laptops, etc. The folks who sell those products (like all insurance products) tend to make money in the long run and in the aggregate and generally the only reason to carry insurance like that is because your financial situation is so precarious that you can’t self-insure.
I have a METLIFE DI. Should I change it now that they are getting out of the DI business. I know they are not canceling existing policies but if there is no money coming in to support their product, this could create issues with claims
The recent MetLife announcement is only regarding the issuing of new policies. That has nothing to do with the premiums they collect on existing policies though. So long as all the existing policy holders continue to renew their coverage and pay their premiums, there will be money to support claims. Obviously everyone handles these matters differently, but I don’t personally believe this is reason to switch your coverage. MetLife’s Income Guard is a great contract.
What about part-time physicians working 3 or 4 days a week by their 60’s? What disability insurance is there?
You can get it from anyone, but I don’t think I’d carry any after 60 unless I was really in a terrible financial position.
Actually, many companies require you to work at least 30 hours a week. There is at least one carrier who will insure part time workers. Most applications also ask if the proposed insured has $5 million in net worth and or X amount of unearned income.
Jamie,
Regarding reducing monthly benefit to cut costs, since the base premium for the benefit is the most significant cost on a policy, can a person reduce that in half while still exercising the FIO to its fullest?
For instance, I intend on purchasing a $4K + $7500 FIO (resident) to insure a total future monthly income of $11,500. In order to maximize my savings, could I purchase the $10,000 FIO right off the bat on top of the $4K base and then decrease my monthly base to $1500 in the future. That would put me at the same total monthly benefit of $11,500 but according to my calculations would save me significantly more money. Is my understanding of this appropriate?
I think there are limits on this. Basically you have to buy a minimum size policy to maximize the FIO. But Jamie would have to give you the details on what the minimum/maximum would be with any given company.