[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 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 of your disability insurance as your needs change.
When To Drop Your 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 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.
When To Reduce or Modify 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!