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Long-Term Disability Insurance: Do I Really Need It?

A damaged car after an accident

Abraham Maslow, a psychologist made famous by his study of the underlying causes of happiness, created a Hierarchy of Needs pyramid which is a framework that highlights the importance of certain needs as a means to happiness. For instance, the foundation or base is Physiological Needs (ie food, water, sleep, etc.). Once those requirements are met, one moves onto satisfying other subsequent needs such as (in order) Safety, Love/Belonging, Esteem, and finally Self-Actualization.

Abraham Maslow’s Hierarchy of Needs Pyramid

Safety is an interesting need, because among other aspects, it encompasses employment, resources, and property. Earning an attending salary will provide some initial satisfaction, but when you consider your family’s needs, protecting that income becomes important to maintaining financial safety, and therefore happiness.

Disability insurance pays you in the event you become disabled and are no longer able to work. As you might imagine there are a number of nuances to this type of insurance. I have tried to outline some of the important points in evaluating whether it is appropriate for you and your family, paying attention to unique details that apply more for those practicing medicine. Everyone will have to come to his or her own conclusions either alone or in consultation with their financial advisor, but for myself I have found disability insurance a worthwhile investment.

Timing

When should you consider getting long-term disability insurance? Personally I did not protect my income as a resident and fellow, but once my income increased as an attending I felt the time was right. One advantage to getting disability policies earlier on in your career is that your age and health status affects the premium and whether a policy will be underwritten for you at all. While young and healthy, the premiums can be substantially lower.

The second aspect of timing to consider is when the insurance policy will kick in. For most long-term disability policies this is after a 3-month or 90-day period. Coincidentally this is one reason financial professionals often suggest ensuring you keep a readily available balance of cash/liquid assets to cover expenses for 3 months.

Occupation Class

There are different classes of policies ranging from 1-6. An additional component of occupation class is “A” or “M”. “M” is a designation for medical professionals, while ”A” is for all others. So how does occupation class affect your coverage?

First, the numerical component can affect your premium amount as a higher occupation class typically has a lower premium (ie 3A premiums are higher than 4A). Second the letter designation “M” vs “A” has certain advantages for medical professionals. It often enables you to obtain (1) more coverage and (2) utilize the definition of “own-occupation” rather than “any occupation”. In some cases the disadvantage is that for some policies an “M” designation will limit disability from nervous/mental illness to 2 years.

There are some caveats to be aware of for occupation class. First, these classes vary by insurer; so shopping around to obtain a higher occupational class can be helpful. Second, sometimes earning a higher income in the same occupation can alter your class, though this generally applies more to non-medical professions.

Own Occupation vs Any Occupation

Your policy should have a clause related to “own occupation” or “regular occupation” which basically ensures that you will be considered disabled if you are unable to perform “material and substantial duties of a professionally recognized specialty” prior to the time of disability (i.e. you cannot perform the job for which you spent the last 10 years training). By this definition (“own occupation”) you would be considered disabled even if you are able to work in a different field (i.e. medical journalist), but not able to work as a physician. “Any occupation” as the name implies means you won’t be considered disabled unless you are unable to perform any occupation.

Especially for physicians in a surgical specialty or procedure based medical specialty, the “own occupation” clause is particularly valuable.

For example, if you are an urologist who loses the ability to operate due to traumatic nerve damage, but you can work as a medical consultant to the pharmaceutical industry, then you would still qualify for disability using the own occupation definition.

You may also want to consider a “residual disability” rider to your policy. Personally this is useful in the scenario described above where the urologist can no longer perform surgery, but is still able to see patients in clinic. If the urologist salary in that hypothetical example is reduced 30% because he/she can only perform medical but not surgical duties, the disability policy would help cover a proportionate portion of the loss of income from the partial disability.

Cost of Living Adjustment (COLA) Rider

Cost of Living Adjustment (COLA) Rider helps to cover the deterioration in payout that occurs as a consequence of inflation. For instance a $10,000 monthly payout policy may be sufficient for your family today, but in 20 years with an average inflation rate of 3%, this would be worth half, as the cost of living would have doubled. These riders tend to be expensive and the inflation adjustment only begins once the policy begins to pay out. So, if you’ve been paying your policy premium for 20 years and then become disabled, you still get $10,000 per month initially, which will adjust to inflation over the subsequent years.

An alternative and sometimes cheaper way to tackle the inflation issue is to have a guaranteed insurability benefit which allows you to pay a small added premium upfront but guarantees you the ability to buy additional coverage in the future without an additional medical exam.

For instance, in my policy I have the ability to buy up to an additional $7,000/month in benefit over time. In this way I can increase my disability coverage by $1,000/month every few years and effectively keep up with inflation. For my policy when I ran the numbers, this was a much cheaper approach to maintaining a certain inflation-adjusted income over time.

Association Discount

Finally before signing your policy look for discounts for membership in associations. The obvious association to include is the American Medical Association. For my policy that lead to a 10% discount and only requires me to be a member in the year I sign up for the plan, but not necessarily thereafter. This discount applies to all premiums for the duration of the policy so the savings can be substantial.

Summary Points

  1. Disability insurance can be valuable in protecting the income you have worked hard to earn.
  2. Understanding your policy and riders (i.e. Own-Occupation) is critical to getting the most out of your policy.
  3. Use your membership in common associations to look for potential discounts that are often substantial when you factor in the life of the policy.
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