How to Buy Disability Insurance While in Residency

As a resident you face a dilemma. You are probably aware you need disability insurance but the cost can be prohibitive.

A “good” resident policy with a $5,000 a month benefit can cost between $1,500 and $3,000. With an average PGY1 salary in 2016 of $52,200, that cost represents 3% to 6% of your salary. Compared to repaying your student loans and the value of the car you are driving, it’s pretty hard to pull the trigger on a private disability policy.

Why you should buy it now

If you buy a policy now, the rates are based on your current age and health. The longer you wait, the higher the cost of the disability insurance will rise. Whatever you buy today will likely be at the lowest rates you will pay for the rest of your life.

Why you need disability insurance

You have spent the last eight or nine years in college and medical school training to become a doctor. You followed that up with three to five years of residency and maybe a few years of fellowship for good measure. You have invested 11 to 16 years into your business. Your most valuable asset? Your ability to earn money over your working life. This is by far more valuable than any tangible asset you may own. Your earning ability is worth anywhere from $6,000,000 to $25,000,000 depending on your specialty and the amount of time you choose to work. You have car insurance for your car, homeowners insurance for your house and health insurance for your medical bills. You need to insure the most valuable asset you have, YOU!

So how do you buy a “good” disability policy now at a price you can afford?

One option that may seem reasonable is to buy a policy sponsored by the AMA or your specialty association. Yes you can get in for $25 – $35 a month but the policies are not what they appear to be. Even if they say things like own occupation in their brochures, they are not. There are many, many problems with these policies. If you want to learn more about these policies check out this article by Larry Keller on association disability plans. From the research I have done, you want to stay as far away from these policies as possible.

What are the best policies?

There are five companies that offer true own occupation definitions. Berkshire (Guardian), Principal, Mass Mutual (some people don’t like their own occupation definition), Standard and Ameritas. All of these companies offer a $5,000 monthly benefit plan for residents even though your income does not warrant that amount of insurance. These are the “good” policies that I referred to above that cost in the $1,500 to $3,000 range. The price depends on your specialty, age, gender and your agent’s ability to offer a discount in your hospital.

Benefit	Based On	Premium	Based On	Future Benefit	Based On
$5,000 per month	Potential earnings	$1,500 to $3,000	100% of Premium	$17,000 per month	Future earnings

How do you get into one of these policies without breaking the bank?

These companies want to sell you as much insurance as they can today while you are young and healthy but… they also want to limit the amount you can come back for later when you are older and possibly have a health issue brewing. To facilitate this, the companies have rules that force you to buy a certain percentage of the amount of insurance you are currently eligible for. If you buy this specified amount, you can increase your benefits in the future to cover your increased income. For Principal, that percentage is 75% of your eligible coverage.

So how can we use this to your advantage?

First of all, you don’t need to buy the $5,000 benefit that you are being offered as a resident. If you buy 75% of that benefit you are still eligible to purchase future increases in insurance coverage. At Principal, that future benefit is currently up to $17,000 a month.

If you reduce your benefit by 25%, your premium will go down by 25%. This would take a $1,500 annual premium to $1,125.

Benefit	Based On	Premium	Based On	Future Benefit	Based On
$3,750 per month	Potential earnings	$1,125 to $2,250	75% of Premium	$17,000 per month	Future earnings

Still too expensive?

Tell your agent you don’t want the special resident offer. You want your policy to be quoted based on your current income.

Assume you are making $5,000 a month as a resident. Your employer has a 60% policy which will pay you $3,000 a month if you become disabled. If you buy a policy that brings you up to 75% or your current income or $4,500 a month you are within the guidelines. At this point you would buy a policy with a $1,500 monthly benefit. That is only 30% of the $5,000 benefit initially offered. The premium on this policy would be 30% of $1500 or $450. This is only $37.5 a month. Make sure you have the agent run the numbers and determine the eligibility. These numbers change all the time.

Benefit	Based On	Premium	Based On	Future Benefit	Based On
$1,500 per month	Current earnings	$450 to $900	75% of coverage gap	$17,000 per month	Future earnings

What? You still can’t afford it?

If you are really strapped, you can even go one step further. You only need to buy 75% of the $1,500 benefit or $1,125 per month. This would cost only $28.13 per month and still make you eligible for future benefit increases up to $17,000 per month.

Benefit	Based On	Premium	Based On	Future Benefit	Based On
$1,125 per month	Current earnings	$337.50 to $675	75% of 75% of coverage gap	$17,000 per month	Future earnings

You can purchase a top notch disability policy at a ridiculously low entry fee. You have the option of increasing your future benefit to as high as $17,000 a month when your income increases. The price of those additions will be based on your current age and health. This is a much better solution than buying an inferior policy or counting on your employer coverage.

Remember, whatever price you lock in today will likely be at the lowest rates you will get in your lifetime.