In countless blog posts here we have stressed the importance of understanding the definition of “disability” in choosing a physician’s disability insurance plan. More than any other type of professional, physicians must be able to protect their specific occupation and specialty from the prospect of losing their ability to perform them. And, with a one in eight chance of becoming disabled before age 65, physicians should base their disability insurance on reality and not simple rules of thumb.
But, the definition of disability, while key, is only one of several important considerations when buying disability insurance. A disability income insurance plan has to fit a physician like a glove, and there two components of a plan that should be coordinated with the physician’s specific financial situation.
Both the policy’s monthly benefit and elimination period should take into consideration aphysician’s actual spending habits and savings in order to determine the appropriate amount for each. To simply apply a default number, i.e. 60 to 70 percent for the benefit amount; or 90 days for the elimination period, ignores the realities of a physician’s actual financial need, and could result in a drastic overestimation or underestimation.
Monthly Benefit Amount
The benefit amount is a critical component of the disability policy and should not simply be left to standard rules-of-thumb. First of all, the maximum benefit amount is related to a physician’s specific occupation. High-risk occupations or specialties, such as ER physician, typically qualify for a lower benefit amount than a low-risk occupation such as a family practitioner.
It also depends on the amount of income a physician earns. Insurance carriers usually limit to benefit amount to 60 to 70 percent of earned income. But to simply determine the monthly benefit based on a percentage of income could be a big mistake.
Instead, physicians should determine their actual expenses with consideration for adjusting their spending habits during a period of disability. Without a clear picture of what is actually spent each month, a physician can’t really know if the monthly benefit amount would suffice, or might be more than is needed. If a physician spends $20,000 a month and has a monthly benefit amount of only $15,000, he or she will need to make a substantial change in lifestyle. Conversely, if monthly his actual monthly expenses are only $15,000 a month there is no reason to pay the extra premium for a $20,000 monthly benefit.
As with other forms of insurance, disability policies come with a deductible in the form of an elimination period. The length of the elimination period determines the physician’s out-of-pocket responsibility before monthly benefit is paid. Most physicians choose the 90-day period, in part because it is what is most often recommended, and, in part, because it tends to be the most efficiently priced period. A 30 or 60-day period can boost the premium amount significantly, and a 180-day period doesn’t save much on the premium.
But, premium amount should be a secondary factor in determining the right elimination period. A physician’s current financial situation should be the primary determining factor. For instance, if a new physician with little in savings became disabled and was covered with a 90-day elimination period, it could be an extremely difficult three month before benefits kick in.
Conversely, if a physician had done well to establish a short-term emergency fund of six to twelve months of living expenses, he could benefit from a lower premium amount by choosing a longer elimination period. Again, it comes down individual spending and savings habits.
An optimal disability income insurance plan should be tailored to meet the specific needs of a physician based on the realities on the ground not general rules-of-thumb. Whether your reviewing your disability plan or buying new or additional coverage, it would be important to review your actual spending and savings to determine the optimum benefit amount and elimination period.