[PIMD: I’ve always heard about the concept of being “self-insured” but I never really gave it much thought until recently. I’ve always preached that specialty-specific disability insurance is absolutely essential to protect the investment you’ve put in to become a physician. This includes plenty of money and time.
However, at what point do you not need that disability insurance anymore? Is it when you go part-time? Is it when you reach financial independence?
This is a guest post from Jamie Fleischner, president of Set For Life Insurance to try to help answer some of these questions. They are a sponsor of the site but we were not paid for this post.]
Disability insurance is designed to cover you if you can’t work due to sickness or injury. As a physician, your policy will most likely cover you if you can’t work in your specific medical specialty even if you can work in other specialties or another occupation altogether.
When you purchase your individual disability policy, the company will ask you about any passive income you might currently receive. If your passive income is substantial, approximately 30% or more of your total earned income, the amount of benefit they will allow you to purchase will be reduced. They set it up in this manner as they know that if you become disabled, chances are that you will still be receiving some passive income from your investments.
Most physicians purchase their individual disability policy early in their careers in medical school or residency. As such, most young physicians typically do not have a significant amount of passive income at the time of application so this point is relatively irrelevant.
However, if your passive income exceeds the 30% mark in the future already having a policy in place, the insurance company cannot force you to reduce or drop your individual disability policy if it has a non-cancelable, guaranteed renewable clause in the contract. However, they may reduce the amount of future benefit increases you are eligible to purchase on the policy.
With a substantial amount of passive income in place, when is it time to consider reducing or dropping your individual disability coverage?
Disability insurance is intended to cover earned income. If you are sick or injured and can’t actively earn your income, the policy will pay you a benefit. If your passive income grows to the point where it can pay all of your bills regardless if you are actively working, you may no longer need to carry an individual disability policy.
If you have had an adverse change in health since you purchased your policy, you may no longer be able to re-purchase the same policy if you drop it. Therefore, you may regret it later if you decide you do want the coverage. If your change in health may result in an inevitable claim, it would not make sense to drop your coverage either.
If your passive income is not stable, keep your individual coverage until you are sure you can rely on your passive income in the case of injury.
If you become sick or hurt, your bills may actually increase. Therefore, when calculating the amount of income you need in the event of a disability, you may need to take this increase into account and still keep some amount of disability insurance.
If you do decide to drop your individual disability policy, you may also consider replacing the disability policy with a long-term care policy. Long-term care policies cover catastrophic events and pay out benefits if you cannot perform activities of daily living (such as eating, dressing, etc…).
Without long-term care insurance to pay these costs, you may end up having to liquidate some assets, including those that produce passive income (such as real estate), to cover your costs. A long-term care policy will protect you and those assets so you can continue to receive your passive income.
If you are uncertain whether to keep your policy or make any changes, the best course of action is to contact a professional independent broker who specializes in working with physicians and disability insurance.