Physicians face a dilemma. Their earning potential is high, but time is not on their side to fund a comfortable retirement due to the length of their education and training. Many of their peers in other professions have been paying down debts and accruing savings for several years before the physician even enters practice. For many doctors, their future income and the ability to earn it is their biggest asset. If you become too sick or too hurt to work early in your career, all the sweat equity you invested in becoming a specialist may go to waste. Disability insurance can be an effective means of protecting that earning capacity.
Before you can decide whether you have adequate disability coverage, you need to determine the net monthly income you need to support yourself and your dependents in the event of a disability. It’s preferable to consider the net income instead of gross income because some disability benefits can be taxable. Typically, this happens when the practice takes a tax deduction on the premiums paid. It might be tempting to take that small deduction every year, but it can cause a future tax liability if it is used. Ideally, you pay these premiums on an after-tax basis, and some employers will even allow you to impute the premium as income each year to help ensure your disability benefits remain tax free. It is highly recommended that you or your practice seek the advice of a tax professional familiar with your specific situation before taking action.
It’s also important to note that many mid-to-high earning physician specialists need more than one disability policy to cover 60% of their income. This is due to the coverage limits offered by disability insurance companies. Policy definition, structure and costs are all important items to consider when evaluating your protection needs.
Not All Disability Policies Are Created Equal
The nuances between disability insurance policies is beyond the scope of a single article, but there are some critical items to consider. First, many physicians combine employer and individual coverage. When combining disability policies, it’s essential to exhaust all possibilities for individual coverage before you take on any group coverage. That is because group coverage counts against you when determining the amount of coverage for which you are eligible on an individual policy.
Secondly, while obtaining the proper amount of coverage is a priority, the strength of that coverage is just as important. In many cases, hospitals and universities offer “any occupation” disability coverage to their employees. These policies state that as long as you are capable of performing even the most menial tasks of employment, you are no longer considered disabled. In order to fully protect your future income, you should seek a rider for “own-occupation, specialty-specific” coverage. By definition, your policy would pay out full disability benefits in the event you can no longer perform your specialty.
Another desirable rider for your policy is known as a “future increase pool” which could also save you a substantial amount of money. Policies with this rider have locked in a set amount of future income protection with no further medical requirements. It usually just requires a short application and proof of earning to execute. An additional important piece in these policies are non-revocable, and guaranteed renewals as long as you pay your premium on time. This means your policy is essentially locked-in so that your premiums remain flat.
Research indicates that nearly a quarter of physicians plan to change jobs in the near future. It’s imperative to make sure that your disability coverage will not be affected by any change of employment. It is a good idea to review your current employment contract to verify whether your disability policy is portable should you move to a new employer. It may help your decision making process.
Preparing for the Future
When using insurance to protect against potential catastrophe, it is best to map out a risk management strategy before any unfortunate circumstances come to light. A proactive approach will put yourself and your family in a better position to prosper financially by limiting your risk exposure.
Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax needs.