With Disability Insurance, Your Savings, Spending Matter

I've discussed why it's important for physicians to know the definition of "disability" when it comes to choosing the right insurance policy. Too many have too little coverage. This week, I'll tackle two more factors crucial to buying the right disability policy: How much you spend, and how much you have saved.

In a previous article, I discussed the single most important factor in choosing disability insurance for physicians -- the definition of "disability" itself.

But there are multiple features of disability insurance you also need to consider before buying additional insurance -- or if you are buying a policy for the first time.

Before we get into it, let's cover why you need disability insurance to begin with. Here are some sobering statistics:

1. Almost 20% of working age people have a disability -- half are severe.

2. There is a one in eight chance of becoming disabled before age 65.

3. Only about 25% of working people with a severe disability are employed.

4. It is nearly 10 times more likely that you will become disabled than die during your working years.

With that in mind, let’s take a look at some of the key features of your disability insurance policy:

Benefit Amount. Next to the occupational definition of disability, this is the most important feature of your policy. Your benefit amount is related to your specific occupation. So higher-risk medical specialists, such as emergency medicine physicians, will qualify for a lower benefit amount than those in lower-risk jobs, such as internists.

The benefit amount also depends on the income you make, since the insurance company won’t pay out more in benefits than your current income. Typically, you won’t be able to buy insurance greater than about 60% to 70% of your annual gross income.

But one common mistake I see physicians make most often is that your benefit amount should be correlated as close as possible to your current monthly expenses. If you don’t know what you’re spending today, then how do you know what amount of disability insurance will cover those costs when you're no longer able to earn an income?

Before making any decisions on coverage, sit down and figure out what you’re spending. I know physicians who spend $20,000 per month or more, and have disability policies that provide benefits of less than $10,000 per month. Ask yourself: Will you be able to get by on disability benefits that are significantly lower than what you’re spending right now?

Elimination Period. This is similar to a deductible, in the sense that disability benefits typically don’t kick in until several months after you are totally disabled. In effect, during the elimination period you are paying for your disability out-of-pocket until benefits kick in. The most common elimination periods are 90 days and 180 days. So if you become disabled today and you have a 90-day elimination, you won’t receive your first check until the fourth month of being disabled (or the seventh month for a 180-day elimination period). Again, this gets back to the issue of what you’re spending. How long can you get by with your current savings before you need income? If you don't have a solid financial cushion of emergency savings, your disability policy should have a short elimination period; if you have adequate savings, choose a longer elimination period to save on the premium.

Next time, I’ll discuss other features that you need to consider in a disability insurance policy.

This week's financial prescription: Match your disability insurance benefit amount with your monthly expenses and your emergency savings.