Your plan to gain financial independence can be taken off the rails when you can’t work due to injury or disability. Fortunately, this is a risk that can be insured away.
Insuring your income is an important step toward a secure financial future, and I know a number of physicians whose careers were cut way short in unexpected ways. Most were insured, but sadly, not all.
If you happen to be wrapping up residency or fellowship and don’t have your own plan in place, you’ve still got a couple of months to do so — there can be real advantages and cost savings to be had by obtaining a policy now rather than waiting until you’ve graduated.
This guest post was submitted by Mark Seltzer from Seltzer & Associates, PC. We have no financial relationship. Take it away, Mark!
Planning for Plan B: What Happens When You Can’t Work Anymore
Many physicians see themselves as invincible. As healthcare providers, they are used to projecting an image of strength and competence. It is therefore not surprising that doctors who suffer from a disabling injury or illness are often unprepared, both emotionally and financially, for the possibility that they may suddenly find themselves unable to work.
Before you find yourself in such a predicament, you should assess the scope and extent of your long-term disability insurance while also being sure that your financial house is in order.
Long-term disability insurance coverage, whether provided through group policy or individual coverage, or both, combined with disciplined savings and a comprehensive investment plan that addresses long- and short-term financial goals, will go a long way to preparing physicians and their families should they suffer a sudden disabling injury or illness.
Sound Investment Strategies for Physicians and Other High-Income Professionals
Generally speaking, a typical doctor can ensure a comfortable retirement following a 25-30 year career by saving 20% of his or her gross income. While 15% is a common benchmark, because medical professionals typically start earning later and will receive a smaller relative benefit from Social Security tax payments, more savings is necessary.
Importantly, if you have been sidelined by an injury or illness and have been consistent in putting aside a percentage of your earnings, your savings should help to fill any gap in what your long-term disability coverage provides. That said, the 20% you are putting aside should be dedicated toward saving for retirement
Investing a portion of your earned income is also a good strategy to build wealth, as long as you implement a reasonable investment strategy. While what is “reasonable” will differ from investor to investor, depending on how much risk you are comfortable with, as well as your age and where you are in your career, there are some basic strategies that apply to all professionals.
Any discussion of investment strategies should always start with your financial goals, including how much you would like to have saved by the time of your retirement, how much you will need to save by the time your first child goes to college, and when you might want to purchase a larger home or a second home.
With these goals in mind, you should formulate a plan for each goal. Depending on your specific goals and targets, your investing strategy will likely include some or all of these tax-protected accounts: retirement plan; education plan (such as a 529 account); a healthcare savings account; and perhaps a general investing account.
When considering investment accounts, it is important to look for accounts with the lowest fees and taxes. You should also keep in mind that the earlier in your career you start to save and invest the better situated you will be.
Whether you hire a financial planner to make investment recommendations, or invest on your own, it is helpful to start the process by doing some research to educate yourself about your various options.
There are many online investment forums that provide practical tips and advice. Once your financial plan is in place, it is up to you how involved you want to be in managing your investments.
Long-Term Disability Insurance is Also a Wise Investment
Disability insurance provides financial protection if you become unable to work due to an injury or illness. Since one in four Americans is living with a disability, according to the CDC, it is clear that no one is immune to the possibility of becoming disabled.
Noting that professionals have a greater statistical probability of suffering a severe disability that impedes their ability to work, rather than dying prematurely, the American Medical Association advises that most physicians need disability insurance to cover the risk.
Your employer will likely provide group long-term disability insurance coverage. Most group policies will provide coverage of approximately 60-65% of earned income. Premium rates will depend on facts such as age gender, monthly benefit, and occupational classification.
In general, the younger the policyholder is, the lower the premium. Your long-term disability benefits may be taxable or tax-free, depending on who paid the premiums (if paid by the employer, benefits are taxable).
One of the most important aspects of your long-term disability policy will be whether it provides “own occupation” coverage or “any occupation” coverage. With “own occupation” coverage, you are entitled to benefits if you are unable, due to your injury or illness, to perform the material and substantial duties of the occupation you were performing when you became disabled. “Any occupation” coverage provides benefits if you are unable to perform the duties of any gainful occupation for which you are qualified by training, education, or experience.
You May Want to Supplement Disability Coverage Provided by Your Employer with Private Disability Insurance
Many professionals opt to carry individual disability insurance either to supplement a group plan or as their primary disability insurance. Employer-provided policies are tied to a specific employer, so if the employee changes jobs or goes out on their own — something many medical professionals and executives end up doing — they cannot take their coverage with them.
Group insurance coverage can also change year to year, as can the premiums. The employer chooses which policy to offer its employees, as well as the terms and conditions for receiving disability insurance benefits. Having private disability insurance gives high-earning professionals more control over their benefits.
As you research possible options for private disability coverage, keep in mind that most insurance companies also offer riders to add to your policy. While each rider added will increase your premium, they also provide valuable extra measures of security, above and beyond your standard disability insurance policies.
Examples of common riders include:
- Residual disability: if you have this rider you can earn benefits even if you are not fully disabled. If you suffer a partial disability and are able to work in a limited capacity, the residual disability rider helps to close the gap between how much you earned before your disability and how much you earn after your disability. This rider is a great way to protect yourself if you suffer a reduction or loss of earnings.
- Catastrophic disability: This rider will protect you in a worst-case scenario such as loss of speech, hearing or sight to loss of the use of your hands and feet. It also protects you if you are unable to do day-to-day activities, such as bathing, eating, dressing, and using the restroom. With this rider, you will receive an additional benefit on top of your regular monthly benefit.
- Retirement benefit: With this rider, your insurance company will put a percentage of your premium into a monthly retirement account. It will go into a trust that will pay out once you are in retirement. It is a great way to continue to contribute to a retirement savings account, even when your income is reduced and you are only collecting disability benefits.
- Cost of living adjustment: The COLA rider ensures that your benefit amount will increase in accordance with the rate of inflation. This rider is particularly important if you take out a policy when you are young. As the Consumer Price Index increases with years, so will your monthly disability insurance benefit. This rider is a way to ensure that your benefit will grow as your earnings grow over the years.
- Future increase option: sometimes referred to as the future purchase option, this rider affords you the option to increase benefits without having to undergo any health evaluations. Thus, you are guaranteed to be insurable at the time of increase. You will only have to show that your income has grown and is eligible for the increase. Although there is usually a cap, this rider allows you to increase benefits to keep pace with your income and for life events such as when you get married or have children. Without this rider, you will need to undergo a new medical evaluation and have a new policy underwritten based on your current health should you wish to increase your coverage.
Your Emotional Well-being is Also Important
Making sure that you have money saved, as well as adequate disability coverage, in the event you suffer an injury or illness that prevents you from doing your job, will go a long way to reducing stress. That said, it is also important to be emotionally prepared should you suffer a sudden disability or illness.
Fortunately, as physician well-being has gained more attention and recognition — particularly in the wake of the global pandemic — more and more resources are available on line, including coping strategies, as well as information about whether mental health issues will be covered by your disability insurance.
In general, although it will depend on the terms of your policy, if you suffer from a legitimate mental health condition that is interfering with your ability to practice medicine safely, you should be able to collect disability benefits.
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