Coverage for future revenue stream does not have to be as big a financial burden as initially feared. Here’s how to make the option more affordable.
While you may think that your investment portfolio or your home is your biggest asset, for most emergency medicine physicians, the ability to produce income (future income stream) usually dwarfs the current assets you own — especially in the first half of your career. Protecting your future income stream by purchasing disability income (DI) insurance is a must, but I’ve encountered many physicians who are reluctant to buy DI insurance because of the relatively high premiums. There are several strategies to make disability coverage more affordable. Full disclosure: I do not sell insurance.
1. LENGTHEN THE ELIMINATION PERIOD
The elimination period is the period of time after which the insurance company will start paying you benefits so the longer the elimination period, the lower your premium. This means that you’ve got to have enough reserves to support you and your family for a period of time when you have no income. The most common elimination periods are 90 days and 180 days, but can be longer if you choose.
If you have an adequate emergency fund, other sources of income like a working spouse or your expenses are modest, consider a longer elimination period. You may also want to skip buying short term disability insurance, which are usually offered through group coverage, altogether.
2. SHORTEN THE BENEFIT PERIOD
If you’re just starting out in your EM career, you’re better off choosing a policy that pays you benefits until your retirement age — usually age 65. If you’ve done a good job of saving, building wealth and reducing debt over your career, you can lower your premium by shortening the benefit period which is the number of months or years that the DI policy pays you. In that case a benefit period of say five years might make sense. Premiums could be 20-30 percent lower.
3. LOWER YOUR COVERAGE
When you go through the underwriting process to buy DI insurance, usually the insurance company will quote you your maximum eligible DI insurance. They won’t replace all of your pre-disability income. Instead it’s usually capped at 60%-70% of your pre-disability income. But what if your monthly expenses are much lower than the amount of DI insurance benefit quoted to you? In this case you can opt to lower the DI insurance benefits instead of accepting the maximum amount offered to you. This is risky because it’s possible that your expenses could go up when you are disabled. Again, you’ll need a large investment portfolio or other source to cover the gap in this situation.
4. ELIMINATE RIDERS
There are a number of riders you can add to the base DI insurance policy such as catastrophic disability coverage, cost of living adjustments, own occupation coverage, residual disability coverage and others. In my opinion, several of these riders are quite valuable — such as own occupation coverage that pays you disability benefits even if you work in another occupation. But if your goal is to reduce your premium so that you’re more likely to get at least some DI insurance coverage rather than having none, then skipping the riders could save you a good chunk of money.
5. BUY GROUP DISABILITY INSURANCE
Individual DI insurance is usually more expensive than group insurance. If you’re an employee of a hospital system or other EM group, take a look at the benefits guide from your employer and see if they offer group disability insurance. Sometimes the employer pays the premiums for you for a basic long-term DI insurance policy. However, you may have the option to purchase more for a modest deduction from your paycheck.
Realize that group DI insurance policies have limitations such as a less favorable definition of disability and the inability to take the policy with you if you leave the group. Also realize that the premiums tend to go up as you age. If this is the only type of disability coverage you can afford, or if you already have health problems or can’t otherwise get coverage, having group disability insurance is a lot better than having none.
Realize that with insurance — like anything you buy — you can’t just look at the cost. You’ve got to consider the potential benefit if the policy pays out and the consequences of not having adequate coverage. You’ll have to decide whether it’s worth risking the quality of coverage to save some money, but if the pain of the premium is too high for you, then the strategies outlined might soothe some of your concerns.