After a long week of seeing patients and dealing with endless paperwork, Sarah, an Ob/Gyn physician, was looking forward to a long relaxing bike ride on Saturday morning in hopes of leaving all her workplace stress behind in exchange for warm sunshine on her back and a refreshing breeze in her face. The winter had been cold and dreary the past several months and she was excited that spring had finally arrived. Unfortunately, the tranquil begin of this day would not be how it would end.
Sarah planned to ride from her house to the local bike path where she’d head west away from the hustle and bustle of the city and into the scenic quiet countryside. One of the things Sarah hated was having to ride on busy roads to get to the bike path, but it seemed like a waste of time and energy to load her bike on her car to drive two short miles to the trailhead.
On what felt like a picture-perfect day with sunny skies, temps in the low 70s, and almost no wind, Sarah headed for the path keeping a cautious eye on the cars buzzing by her on the road to the trailhead. Her mind began to let go of the challenges and stress from work as she pedaled her way to the path. Soon she was thinking no longer of work, but of the beautiful day ahead of her.
As her mind drifted toward serenity her thoughts changed in an instant as she found herself flying through the air with her body going one way and her bike another. Before she could react, a car heading in the opposite direction turned left right into her, and by the time she could steer out of trouble she found herself lying on the ground in pain.
What happened? Why am I lying on the ground? Where am I? What’s going on? Questions flooded Sarah’s mind as she tried to understand the situation. Then everything went black.
Sarah awoke in the emergency room where doctors and nurses surrounded her. They described the seriousness of her injuries and told her surgery would be needed immediately to save her life.
John, Sarah’s husband, was at the emergency room in minutes after receiving the call from the hospital. He arrived just in time to kiss her as she was wheeled by him on the way to surgery. Hours later the life-saving operation had succeeded in stabilizing Sarah, but she faced a long road ahead to recovery.
Due to the extensive injuries, the doctor told Sarah she could expect recovery to take up to a year. Almost immediately Sarah’s physical pain transformed into financial pain. She and her husband had been struggling to keep up with all their bills each month. John was an engineer making six-figures and Sarah also earned a high salary, but despite making hundreds of thousands of dollars each year they were living paycheck-to-paycheck like nearly 80% of Americans.
With more than half their household income disappearing while Sarah recovered how would they make it? They both had six-figure student loans, over $20K in credit card debt, two leased vehicles costing over $1K every month, not to mention personal loans they had both taken out to pay for living expenses during medical school and residency. They were dead broke and now were about to face the biggest financial challenge of their lives, not to mention Sarah facing the biggest physical challenge of her life.
Sarah’s story is not an uncommon one. No one ever plans to become disabled, but the statistics show that 30% of people from 35 to 65 will suffer a disability that lasts at least 90 days. In fact, you are on average two to three times more likely to be disabled than die before age 65. Would you be able to financially survive if you were not able to work 3, 6, 12 months or longer?
What Sarah was lacking is insurance to cover lost income from a long-term injury. In this blog we’ll share some insight into disability insurance and what you need to know if you don’t already have insurance, and what you should check for in your existing insurance if you are already covered.
Short vs. Long Term Disability Insurance
There are two types of disability insurance – short and long term. Short term insurance generally covers a period of 3-6 months after an injury. In other words, it pays out for a short timeframe while you recover before going back to work. Long term insurance usually starts around 90 days after an injury and can payout for decades depending on your ability to go back to work.
So, do you need both? We would argue that short term insurance is not worth the premium cost and should instead be covered by your emergency fund (typically a savings fund of 3-6 months of expenses). In many cases short term insurance is just as expensive as long term. The only way we would suggest getting short term insurance is if your employer provides it for free.
Long term insurance is what Sarah should have had. This type of insurance usually starts a few months after an injury takes place and you are not able to return to work. The annual cost of this insurance is usually around 1-3% of your annual income. For example, a $200K annual salary would equate to a monthly premium of $166 up to $500. What riders (options) you add to your policy, how much you want it to pay each month, and how long before it starts to kick in are all factors that can cause a premium to go up or down.
Policy Types – Individual vs. Group
There are also a few types of policies to consider. An individual policy is likely to be the most expensive because you are buying it on your own. A group policy is usually the least expensive and can be purchased through your employer or through an association like the American Medical Association. Purchasing through a group is less expensive because of the volume of those insured. One word of caution is when purchasing through your employer you may lose your policy if you quit, get fired, or retire. This may not seem like a big deal, but when you are young and healthy it’s easy to get covered, but as you age and perhaps get an illness (i.e. diabetes, heart issues, hypertension) you may struggle to find coverage. We suggest buying through an association to make the policy portable as you move from job-to-job.
Defining a Disability
Perhaps the most important thing to review when shopping policies is the insurer’s definition of a disability. The best definition would be one that defines a disability as one in which you cannot work in your occupation / specialty. In this case the policy would pay out the full amount each month while you cannot work in your specialty. Usually the words you are looking for are “specialty-specific” and / or “own occupation”. Without this definition in the policy you could lose coverage if you are able to work, but just not in your chosen profession or field of expertise.
A rider is an “add-on” to the policy and you will find there are many options when it comes to riders. And, as you would expect with any insurance, each rider adds cost to your policy. Some common options are a future purchase option rider where your income may go up over time and you want more coverage. This rider usually doesn’t require going through all the physical exams or questions to add the coverage, which makes it easier to up your coverage.
Another common option is a cost of living rider where after you make a claim and start receiving benefits as inflation kicks in the benefit will also increase with inflation. However, keep in mind that the inflation adjustment to your monthly benefit won’t start until you make a claim.
One other common rider is a partial disability option. This can be helpful if you are able to go back to work part-time. It generally can cover the gap between your part-time income and full-time income. This can be helpful if you return to work and slowly work back up to full-time status. There are many other types of riders and you need to decide which are the best value for your situation.
How much coverage do you need?
Most insurance companies won’t allow you to get coverage for 100% of your income, and in general this not a big deal since because if you are purchasing the coverage yourself the benefits are tax free. Keep in mind that if your employer purchases the insurance the benefit will be taxed. Usually the maximum benefit is 60% of your gross income or a maximum of $20K per month. A good starting point for how much coverage you need is to look at your monthly expenses. These expenses should not only include the usual things like food, utilities, transportation, debt payments, and housing, but also retirement savings, and if you have children, college savings. If you really want a lot more coverage another option is to buy a second policy to bump up the payout amount.
Another thing to consider is how long you can wait to start receiving benefits. The longer you can wait the less your monthly premium will be. In general, most insurers will offer 30, 90, and 180 day waiting periods. We would suggest your emergency fund is there to self-insure through the 90 day period and the added expense of a 30 waiting period is not worth the extra premium amount. The premium for 180 days is also not usually much cheaper than 90 days, so the 90 day is the best option in most cases.
When You No Longer Need Insurance
There may, we hope, come a day when you no longer need long term disability insurance. We can think of two common scenarios when you no longer need insurance. The best one is when you are completely debt-free and have enough assets that generate income to cover your expenses. You may still want to pay your premiums in this case so you don’t have to dig into your nest egg, but insurance becomes optional when you can afford to cover expenses without working.
Another time when insurance becomes questionable as to its value is as you get older. Most policies will cover you up to the age of 65. There comes a point when you get to a certain age and the payout if you get injured isn’t worth the premiums. For example, if you become disabled at age 60 and you would only receive five years of benefits it may be better to just invest your premiums for those five years. Hopefully all of you will be financially independent by the time you are 60 and insurance will be no longer needed!
We’ll leave you with one final statistic. Many home foreclosures, about 48% according to Principal Life Disability, are a result of a disability, but only 3% are because of death. No one likes to think about getting injured and not being able to work and support yourself, so we do like Sarah did and just ignore it, especially when we’re young and feel invincible. We pray the day will never come that you become disabled and won’t be able to serve your patients, however, the statistics show it could happen so get insured ASAP!
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