4 Critical Steps in Purchasing Resident Disability Insurance

MARCH 22, 2014
James M. Dahle, MD, FACEP, and Michael R. Relvas, CFP
A medical resident’s most valuable financial asset is his future earnings ability, which is at serious risk of loss due to a personal disability. In fact, the February 2013 Fact Sheet from the Social Security Administration suggests that more than a fourth of today’s 20-year-olds will become disabled before they retire.
We will outline 4 critical steps to purchasing disability insurance correctly as a resident.
Step 1: Buy the right type of insurance from the right person
Many residents are offered group disability insurance through their residency program or hospital. While this insurance is better than nothing and often relatively inexpensive, group disability insurance is generally inferior to a solid individual, specialty-specific disability insurance policy for several reasons.
Unlike life insurance, where the question of death is quite black and white, disability comes in many shades of gray. The stronger definition of disability in an individual policy is simply more likely to pay in a greater number of circumstances, thus the higher cost of premiums. An individual policy is also completely portable, meaning you can take it with you upon residency completion (and often add to it without additional medical screening.) The policy is also likely to be non-cancelable—the low premiums available to a young, healthy resident will remain level throughout your entire career.
Depending on your state of residence, specialty, discounts available, health, and hobbies, the pricing of a comprehensive policy may vary significantly from one insurance company to another. Independent agents earn their commission by comparing policies from all available companies with you so that you may decide on the best policy for your situation. As such, it may be beneficial to buy your policy through an agent who is completely independent, meaning he can sell you a policy from any of the half dozen companies out there offering high quality physician disability policies.
Step 2: Buy the right amount of disability insurance
The truth is that residents generally cannot purchase as much disability insurance as they need, nor can they really afford to do so. Disability insurance is expensive, usually costing 2% to 5% of the amount of income insured; a policy that pays $15,000 per month if you are disabled may cost approximately $3,600 to $9,000 per year—a sum that most residents simply cannot afford.
A resident, however, should generally purchase as much insurance as he can—a monthly benefit of $5,000. This might not seem like much, but it is a benefit that would normally be available only to someone making $100,000, not just the $45,000 a typical resident is making.
The benefit amount may be higher ($6,000 to $7,500 per month) during the last 6 months of residency, and can be markedly higher once a contract is secured for post-residency employment. You generally want to purchase your attending level disability insurance before starting your first attending job, since the amount of individual disability insurance you can purchase may be reduced by a group policy offered by your new employer.
There are a couple of options to help residents afford disability insurance. The first is to use a graded premium schedule instead of a level premium schedule. This means that premiums are lower during the early policy years (when you are living on a resident’s income) and then increase later. This works out especially well if you are able to cancel your disability insurance upon becoming financially independent in your 50s. You may also convert from graded to level as an attending, when your cash flow is less restrictive.
The second option is a Future Purchase Option rider. This allows you to buy more insurance at a later date without having to re-qualify medically (i.e. healthy with no dangerous hobbies). Using this strategy, a resident could buy a benefit of $3,000 to $5,000 a month (with a monthly premium as low as $90) now and then increase the coverage at the time of residency graduation when his or her higher income makes the higher premiums more affordable.

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