Buying Disability Insurance: The Biggest Mistake You Never Made

A full post devoted to the topic of disability insurance might sound a little extreme to some; you may be dismissive about the idea of buying disability insurance coverage. At one point in time, I would’ve thought the same thing.

I have to admit that I didn’t know much about disability insurance as a student, resident, or even for a long time as a practicing radiologist. Luckily, my naivety wasn’t tested. I never suffered a disability that prevented me from working. I’m now at a point in my career when I don’t rely on earned income to pay my bills so I don’t need disability insurance. But you may not be in my situation now and you may not be as lucky as I was.

Sure, disability insurance is costly. And the average radiologist will not benefit from paying for that insurance, except for the benefit of peace of mind. Some will benefit greatly when tragedy befalls them and their insurance kicks in. And some, unfortunately, will regret not having insurance when they become disabled and face financial catastrophe.

That is why I’m devoting a full post to the subject of disability insurance. I’ll help you become more informed by providing an overview, including why you should consider it a necessary investment to protect your future, different types of plans and coverage options, as well as other essential questions and practicalities.

Hopefully, such misfortune will never befall you, but if it does, investing in disability insurance may be the biggest mistake you never made

For most radiologists, their human capital (i.e., the economic value of their experience and skills) is their most valuable asset and greatest source of wealth.

Words on the “why”

A full-time radiologist earns, on average, just over $400,000. Multiply that figure, along with adjustments for salary increases (one can only hope) over a career of 30 years and you’re looking at a big pot of gold. For most radiologists, their human capital (i.e., the economic value of their experience and skills) is their most valuable asset and greatest source of wealth. It’s worth insuring.

Major takeaway: Don’t be penny wise and pound foolish

Radiologists often pay attention to life insurance needs but fail to consider the possibility of a debilitating incident. The chance of missing months or years of work because of an injury or illness may seem remote, especially to a young healthy radiologist who doesn’t see much risk from sitting in front of a monitor interpreting images. But the statistics tell a different story.

Fact: a professional has a greater statistical probability of suffering a severe disability that impedes their ability to work than of dying prematurely.

Fact: more than one in four 20-year-olds will experience a disability for 90 days or more before they reach age 67.

Fiction: you can rely on the government’s disability program to offer sufficient assistance to see you through a difficult time.

Don’t think Social Security’s disability program will protect you. Social Security requires you not only to have a disability that’s expected to last more than a year, but also the disability must prevent you from all work. If you’re able to work just a few hours a week or you’re expected to recover within 12 months, you won’t qualify. More than half of applicants get denied. And even if you do qualify, it could take a year or more to get approved. Furthermore, the estimated average Social Security disability benefit amount for a disabled worker receiving Social Security Disability Insurance (SSDI) as of Nov. 2019 was just $1,237 per month. Finally, SSDI pays benefits to you and certain members of your family only if you are “insured,” meaning that you worked long enough and paid Social Security taxes.

Think disability doesn’t happen to radiologists? Here is a sampling of conditions that I’m personally aware of as affecting a student, resident, fellow, or practicing radiologist’s ability to work:

Traumatic brain injury, ruptured brain aneurysm and stroke, near-drowning, autoimmune disorder with associated cognitive fatigue and “brain fog”, leukemia/other cancers, heart attack, depression, burn out, Parkinson disease, pregnancy-related complications, diabetes, drug addiction, debilitating back pain, and interstitial lung disease.

Note that several of those conditions are common in young individuals. And that’s just a list of what I’ve personally come across.

Major takeaway: yes, it really can happen to you; you just never know in life

When should you get disability insurance?

James Turner, MD, who blogs for The Physician Philosopher, tells his story of regret regarding the purchasing of disability insurance. When he was a third-year medical student and his first child was born, he met with an insurance agent (the brother of a friend) to ask about life insurance. The agent said that was a good idea and also recommended he get disability insurance. James trusted the agent and applied for a DI policy. His application was denied because he had an essential tremor. He didn’t think it was a big deal until he was a resident and found out about the great “guaranteed” policy offered by the hospital, with no medical exam and no medical history taking. But there was one stipulation: the insurance was not offered to anyone who had previously been denied DI. To this day, he does not have personal DI because “an insurance agent was trying to earn a commission off of him when that agent should have known that a guaranteed policy would be available to him just 14 months later that didn’t require an exam or medical history.”

If you have a pre-existing medical condition that would preclude you from getting DI, you might want to wait until you are a resident to apply for DI. Fortunately for James, who is now a practicing radiologist, his employer’s group disability insurance covers 60% of his base salary. After tax, that’s about $10,000 per month. But he has no individual DI policy on top of that. He describes his real disability insurance plan (If you’re curious, yes he applied for individual DI again with a different company, and was denied again) is to live within his means and to make sure his monthly expenses never go north of $10,000 per month. However,I’m assuming this means that if he leaves his current employer he would NOT take that group insurance policy with him (although in some cases you can take a group plan with you if you take on the full cost of the premium, including any portion that the group paid for you).

The disparity between your residency paychecks and your post-residency ones puts your long-term financial health at a unique risk. If you become too ill or injured to work before you reach peak earning potential, you’ll still have to pay back the lender that bankrolled your medical school education. The lender will not care that you are disabled.

Most residents are offered disability insurance through their employer. A 2016 survey showed that residents were offered long-term disability insurance that was fully paid (70.9%), cost shared (17.6%), available but not paid by the institutions (9.3%), or not offered (2.2%).

Group vs. individual plans

Disability insurance can be purchased on an individual or group basis. Individual insurance plans are typically purchased through a local insurance agent and, in some cases, can now be purchased over the phone or through a company’s website. Most insurance companies will issue disability insurance coverage equal to approximately 60% of earned income.

Group insurance is usually provided by an employer or purchased individually through a sponsoring professional association. The two main benefits of a group policy is that they cost less than individual policies (perhaps ¼ the cost) and they are easier to qualify for. Most radiologists will qualify for a group policy because it usually doesn’t require underwriting (i.e., no medical exam). Getting cheap group insurance through an employer is a no-brainer. But relying on this alone can be risky. Group insurance doesn’t automatically go with you when you change employers.

When I worked in the Department of Radiology at the University of Wisconsin I had good group coverage (although I admit I didn’t know much about it until I looked into it several years after leaving). At UW, radiologists get paid from two sources: the University and the UW Medical Foundation. For most, the largest portion comes from the UWMF. The DI through the university (to cover university income) is called Income Continuation. The UWMF portion of salary is covered through a group disability program, which is “own occupation” covering 66 ⅔ of salary. I was lucky to have good coverage, but I don’t advocate luck as a strategy for financial and professional success. I suggest you do what I should have done, and that is to learn about the DI offered through your employer before you accept the job and sign the contract.

There are several advantages to having an individual plan. They’re portable, meaning you get to keep the coverage if you change employers. Conversely, employer-paid coverage ends when you leave the company (although you might be able to take the coverage with you if you pay the full premium, including the portion paid by the employer). And with individual plans you get to choose among the available plan options you want to pay for. Group policies, on the other hand, are “one-size fits all.”

Buying your own policy also lets you:

Control the disability insurance. The coverage stays intact as long as you pay for it. But employer-sponsored coverage will end if the employer decides to stop providing disability benefits.
Collect benefits tax-free if you become disabled. If the employer pays for the coverage, you must pay taxes on the benefits.

The annual price for a long-term disability insurance policy generally ranges from 1% to 3% of your annual income. A variety of factors affect the cost:

Your age and health. You’ll pay more the older you are and the more health problems you have.
Your gender. Disability insurance generally costs more for women than men because women tend to file more claims. Therefore, men should generally buy a “gender-specific” policy and women should generally buy a “unisex” policy whenever possible.
Whether you smoke. You pay less if you don’t smoke.
Your occupation. You’ll pay more if you work in a job with a high risk of injuries (e.g., rock climbing).
The definition of disability. This is probably the most important part of any DI policy. The strongest definition is one that states if you cannot work in your chosen occupation (i.e., as a radiologist, or an interventional radiologist) that the policy will pay out its full amount. Specialty-specific, own occupation – that’s what you want. The broader the definition of disability, the higher the premium. A policy that covers you if you can’t work in your own occupation but could earn income in a lower-paying job will cost more than a policy that covers you only if you can’t work at all.
Length of waiting period. This is known as the elimination period. You can reduce the premium by increasing the waiting period before benefits kick in.
Your income. The more income you have to protect, the more you’ll pay for coverage.
Length of benefits. The longer the period that the policy promises to pay out if you become disabled, the more you’ll pay in premiums.
Extra features. Additional features, such as cost-of-living adjustments to protect against inflation, will increase the premium.

There are various “riders” that can be tacked on to an individual DI policy, each usually accompanied by an increase in the premium. Therefore, you should choose only those riders that are important to you and relevant to your personal circumstances. For example, many riders will not be relevant to radiologists who are close to retirement.

Here are various riders that companies offer:

Guaranteed renewable

Guarantees that the insurance company can never cancel your policy as long as you continue to pay the premiums. This is a good one!

Automatic increase benefit

Increases your monthly benefit for the first four to five years you own the policy, with no additional underwriting, to cover normal pay increases without any underwriting needed to justify the increase.

Presumptive total disability

Pays out the full benefit immediately if you lose sight in both eyes, hearing, speech, or the use of at least two limbs, regardless of the elimination period (how long you must be disabled before you receive the benefit) or whether or not you’re working.

Family care benefit

Pays out the full benefit of your policy if you take time off of work to care for a loved one.

Survivor benefit or death benefit

Pays compensation to your beneficiary if you die while on a disability claim. An alternative to this is to make sure you have enough life insurance.

Good health benefit

Reduces the elimination period by two days each consecutive year you go without a claim.

Occupational rehabilitation

Helps pay for vocational training after a disability to help you return to work. This can be especially valuable if you have an own-occupation policy, since you can collect the benefit while still working another job.

Own occupation

Changes the qualification of a claim so it’s specific to your occupation (if you can do another job, you would still get the benefit). There are several different definitions of “disabled” when it comes to own-occupation policies but it’s one of the most important aspects to a policy. Specialty-specific, own occupation is what you want!

Non-cancelable

Guarantees the premium and prevents the insurance company from changing the price you pay. This is a good one!

Partial or residual disability benefit

Pays a benefit if you are still working in your own occupation, but experience a loss of income due to a decrease in hours or productivity. Radiologists whose earnings are predominantly based on productivity (e.g., work RVUs) might want to consider this benefit.

Most residents and fellows are limited (by insurance company policy and what they’re able to afford) to buying less benefit than they want to live on for the rest of their lives. For them it makes sense to buy a future option rider.

Future purchase option

Lets you increase your coverage in the future with no evidence of medical insurability (i.e., you won’t have to go through the underwriting process again). Anyone who expects their income to increase should consider this rider, which essentially “locks in” your insurability. This means no matter what happens to you medically, you can buy more coverage if your income goes up. This is particularly relevant to residents. Most residents and fellows are limited (by insurance company policy and what they’re able to afford) to buying less benefit than they want to live on for the rest of their lives. For them it makes sense to buy a future option rider. For radiologists later in their career, this is probably an unnecessary rider.

Allows you to purchase additional coverage to pay student loan balances while on claim. Most residents with student loans will be enrolled in an income-driven repayment program and be paying a minimal amount on their loans. Practicing radiologists, who have large monthly payments, might consider this rider. The cost of the benefit should be weighed against the alternative of just renegotiating the terms of the loan.

Retirement protection

Group and individually owned disability insurance plans traditionally are designed only to replace a portion of the insured’s current income, not to replace monthly contributions into company or individual defined contribution retirement plans. This rider covers payments you would have made to a retirement account, like a 401(k). Before considering this benefit you need to know what kind of restrictions there are on the investment options. If the options are poor, you may want to skip this, particularly if the rider is expensive.

Social Security offset

If you sign up for this rider, you agree to apply for Social Security disability insurance (SSDI) in the event of a disability and, if you qualify, your insurer will subtract your SSDI benefit from the amount they pay you.

Cost-of-living adjustment (COLA)

Increases the monthly benefit paid to you while you’re claiming disability insurance benefits, pegged to the Consumer Price Index or other cost measurement. This can be an expensive rider, and the benefit only begins to increase while you’re on a claim. Most people will be better off keeping pace with their earnings with future purchase and automatic increase of benefit riders.

Catastrophic disability benefit

Pays an additional benefit amount if you are so disabled that you cannot perform at least two activities of daily living (eating, bathing, getting dressed, toileting, transferring, and maintaining continence) without assistance.

Unemployment premium suspension

Suspends premiums while you’re unemployed, allowing you to stop paying premiums but continue owning the policy. However, coverage is also suspended while you’re unemployed, so if you become disabled during that time, you won’t receive a benefit. This makes it risky, so it’s recommended that policyholders continue to pay premiums while going through temporary unemployment, so they have protection if they have an injury or illness during that time.

Return of premium

Returns a certain percentage of your paid premiums when you cancel a policy. That means you’ll receive something back if you never use the policy benefit, but a return of premium rider is usually pretty expensive. You’re generally better off saving or investing the additional rider cost.

How much coverage do you need?

Most experts suggest that a physician’s disability policies should cover approximately 60-65% of their after-tax income. Since most radiologists are paying 15 to 40% of their income toward taxes (which you presumably wouldn’t be paying if you were disabled), that is usually more than enough income on which to live. But keep in mind that the benefits are only tax-free to you if you, and not your employer, paid the premiums. For example, a radiologist earning $300,000 per year generates $25,000 of monthly income, and would need disability benefits totaling $16,250 per month (65% of gross income). If she has an employer-group plan with a $10,000 monthly benefit, she could purchase an individual plan with a $6,250 monthly benefit, and the total benefit of $16,250 should be sufficient—right? Not necessarily. Since the employer paid the premium for the physician’s group coverage, the $10,000 benefit is taxable and would only create a net benefit of $6,000 (assuming a 40% tax rate). Therefore, the physician’s disability plans only replace $12,250 of income – and is short $4,000. The 40% tax rate used in this example may be high, but the point is that some of the benefit from employer coverage will be eaten up by taxes.

Should two high-income earners in a marriage each get full disability insurance?

I’ve heard this question quite a lot and there’s no one-size-fits-all answer. I tend to say “yes” for two reasons: 1) you may wind up divorced, and 2) the older you are, the harder DI is to get and the more it costs.

Hopefully by now, you have a better, big-picture understanding of disability insurance! I wish I could make it easy for you and tell you exactly what kind of DI policy to get. Alas, everyone has different needs, depending on their personal financial situation and career stage. You will have to choose the amount of coverage you need (and can reasonably afford) and the riders that are worth the added expense.

The most important decision you can make regarding DI, unless you are already financially independent or can live off your spouse’s or someone else’s income if you become disabled, is to buy disability insurance.