By Travis Christy, White Coat Insurance
As a physician or dentist, you understand the importance of being prepared for unexpected health challenges. Disability insurance serves as a safeguard, protecting your income and investments in your education and career. However, as your professional journey evolves, so do your financial needs and circumstances. Knowing when to adjust your disability insurance policy (or drop it and cancel it completely) is crucial for maintaining the right balance of coverage and cost.
When to Consider Dropping Your Disability Insurance
A few years back, I collaborated with an agent whose client, a medical professional, was diagnosed with ALS. This diagnosis had the potential to cause significant financial strain, a burden that was substantially alleviated by having disability income protection in place. It's vital to consider, if faced with a similar situation, whether your finances could withstand such an impact. If there's any uncertainty in your ability to cope financially, it's wise to maintain your disability insurance policy. 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.
Keep in mind that once you drop your policy, you may not have the option to purchase that policy again at the original price since 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.
However, there are certain circumstances where it might be prudent to reevaluate the necessity of this coverage. Let's explore a few scenarios where letting go of disability income protection could be a viable option.
#1 Achieving Financial Independence
The prime factor in deciding to drop your disability insurance is reaching financial independence. If your assets and passive income streams sufficiently cover your living expenses and you're no longer reliant on your active income, maintaining disability insurance may become redundant. Keep in mind that this is something to consider if the risk of suffering an extended sickness or injury would not cause a strain and would still allow for a comfortable lifestyle.
#2 Approaching Retirement
If you're nearing retirement age and your policy benefits will soon expire (typically around age 65), it might be time to reassess the necessity of your policy. Consider whether your retirement savings can adequately support your lifestyle if you had a significant health event and you had to retire tomorrow.
#3 Substantial Financial Windfall
Receiving a large inheritance or other significant financial gains could alter your need for income protection. However, ensure that this windfall is secure and substantial enough to cover potential long-term needs—including those mentioned above—before dropping your coverage. If you were to become sick or hurt and you needed additional medical care, would your finances cover the additional costs you could possibly incur—even a catastrophic event like the ALS example from above?
More information here:
Why I Dumped My Disability Insurance Policy at 43 Years Old
When to Modify or Reduce Your Disability Insurance Coverage
Throughout my career in the insurance industry, I've frequently encountered situations where clients or agents have sought advice on cost-reduction strategies for their disability plans. These inquiries often arise due to decreased cash flow or because certain features of their policy are no longer necessary. For instance, it's not uncommon for individuals, such as physicians, to pay off student loans or mortgages ahead of schedule. In such cases, it might be sensible to reevaluate the necessity of certain policy riders, like a student loan rider or a cost of living protection rider. The key takeaway is that there are circumstances where it's more practical to adjust or scale back an existing policy rather than completely discontinuing the coverage.
#1 Changes in Financial Responsibilities
Life events, like paying off major debts (student loans, mortgage) or changes in family dependency (children becoming independent), might reduce your need for extensive coverage. It could be a reason to consider evaluating your disability policy and seeing if it makes sense to reduce the benefits. Maybe that $10,000 a month benefit can be reduced to $8,000 a month, potentially reducing the cost of the policy by 20%.
#2 Adjusting Benefit Periods or Riders
You can potentially decrease your disability insurance premiums through a couple of methods. First, consider adjusting the benefit period or removing certain riders, like the Cost of Living Adjustment (COLA), if they seem unnecessary. The COLA rider is particularly vital early in your career, as it helps your benefits keep pace with inflation. However, as you age into your mid- to late-50s, you might want to reassess its necessity.
Another approach is to shorten the benefit period. If your policy initially covered you until age 65, 67, or 70, you might switch to a five- or 10-year benefit period. It's important to understand that with a five-year benefit period, for example, your policy doesn't become a five-year term contract. You remain covered, usually up to age 65, but the policy will only pay out for five years for each disability claim. This change can significantly reduce your premiums, especially for older policies.
For those over the age of 55 or 60, reducing the benefit period could be a wise decision, allowing you to allocate the saved premiums elsewhere. However, if you're younger, it's crucial to carefully weigh the risks associated with a reduced benefit period before making any changes.
#3 Salary Adjustments
If your income changes significantly, either increase or decrease your coverage accordingly to match your current financial scenario. If income goes up, it may warrant looking into increasing your current disability income protection by either exercising a future purchase option or going through full medical underwriting. However, if your income has decreased, you could decrease your benefits to match.
Replacing Your Disability Insurance Policy
In another instance, I collaborated with a physician who had purchased a disability policy years earlier and who was now in his 50s. The policy's premium had significantly increased over time due to its initially lower-graded premium structure, and the anticipated dividends, which were supposed to offset this increase, did not materialize. Fortunately, we identified a more cost-effective alternative with superior disability definitions. Additionally, since the doctor was still in good health, transitioning to this new policy was a sensible move. It's important to note that if his health had been compromised, switching policies might not have been a viable or advisable option.
Though it’s not typically the most common or prudent option, sometimes replacement makes sense.
#1 Better Market Options
If new policies offer better terms or lower premiums, consider replacing your existing policy. If your policy is several years old, replacement may not make sense at all because the current premiums being paid may be much lower than the current age-based rates. In addition, as mentioned above, medical underwriting and potential exclusions on new policies also are a risk when buying disability insurance. If your health has changed and your current rates are quite a bit lower, it might be in your best interest to stay put.
#2 Evolving Professional Risks
Changes in your medical specialty or job role might necessitate a policy with different coverage specifics or occupation classes. If a medical occupation class becomes more risky, carriers will typically lower the occupation classification and raise the cost for those doctors when buying new policies. It’s important to ensure your new policy matches or improves on your current professional risks. Sometimes existing policies can be improved depending on carrier rules and guidelines when a physician has a few years of experience or if there’s a switch in medical specialties.
More information here:
People Aren’t Buying Disability Insurance, But They Should
How to Cancel Your Disability Insurance Policy
There will be instances where it may make sense to cancel a disability policy or contract altogether. Here is how it can be done:
#1 Contact Your Insurance Provider
Obtain the necessary cancelation forms, either online or through direct contact with the insurer or a trusted advisor.
#2 Complete and Submit the Forms
Fill in the details accurately, including the policy number and desired cancelation date, and submit the forms as instructed.
#3 Cease Premium Payments
If you have automatic payments set up, remember to cancel these with your bank.
Before changing your disability insurance, it's crucial to seek advice from an advisor. We recommend choosing from our network of trusted advisors, who are well-equipped to evaluate your existing policy. It's important to understand that once changes are made or a policy is dropped, reinstating it or adding back certain features can be challenging, if not impossible. This is because you may need to undergo medical underwriting again, and some features might no longer be available from the insurer.
Our advisors can conduct an in-depth review of your financial circumstances, ensuring that any modifications to your insurance work with your overall financial plan. This is particularly important for physicians, for whom disability insurance is a vital component of financial security. Expert guidance is indispensable when navigating these significant decisions.
Obtaining quality disability insurance is a must for any physician, so you can be sure to protect your hard-earned income. Get a quote from one of our recommended insurance agents and cross this task off your to-do list today!
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?
[This updated post was originally published in 2016.]
The White Coat Investor may receive compensation from White Coat Insurance Services, LLC; licensed in all states including MA and DC; CA license #6009217; NY license #1758759 (exp. 6/2025); Registered address: 10610 S. Jordan Gateway, #200 South Jordan, UT 84095. This does not affect the cost or coverage of insurance.
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.
I found this decision emotionally difficult. When I was post-FI and in my mid-fifties I asked several disability experts about my policies. They all recommended dropping them. I didn’t.
I subsequently became disabled. Although the loss of job income wouldn’t have been catastrophic, I came out tens of thousands of dollars ahead by continuing my policies.
I’m not saying the advice was wrong, just that I came out way ahead financially by not following it.
Seems moot to me.
By the time a physician is in their mid 50s, they ought to have a NW of at least $5M (and likely much more), if they’ve played their cards mostly right over a 25 year career. The monthly DI benefit would be small potatoes even if one kept it.
I have an interesting situation. My agent who issued me my disability insurance sadly passed away several years ago. My DI is with Standard. Has anybody else been in that situation here? I’d like to modify (increase my coverage) but don’t need all the other financial advice, products etc his old company will try to sell me. I seem to remember trying to call Standard years ago and they said I’d have to call my agent. At the time I thought ‘Well thanks but he’s dead’ but just kinda forgot about trying to change it. This article has reminded me that I need I address my insurance. Thanks in advance.
Jenny at the Standard Insurance Company can assist you. Here is her email – jennifer.truman(at)standard.com
I have had a Met Life own occupation disability policy for about 20 years that also has rider to be able to convert it to long term care insurance. I’m currently 49. Is this usually a good option or better to just shop for a different long term care policy at the appropriate time ?? Thanks
Do you need a LTC policy? Most WCIers become rich enough by 50 or 60 to self-insure that risk.
Very interesting article and good to see that you’re responding after all these years. Got contacted by my life insurance company about switching policy. $1 annual increase for extra death benefit coverage and a portfolio at similar rates to the old policy which I’ve had since I was 22. The only concern is that with the switch, that the disability coverage will be removed as their policy states that it can only be added on for people who are 59 and younger. The current disability coverage is through age 65. I’m plenty healthy but you never know. Was not sure where to ask for advice about it, understandable if you cannot give any but any referrals would also be appreciated.
https://wwww.whitecoatinvestor.com/insurance
Those are the folks we’d send you to. It would be pretty weird to switch life insurance policies at your age as the one bought at a younger age is almost always cheaper than one bought later. Are you SURE you’re comparing apples to apples? How much longer do you need life insurance anyway?