Disability Insurance and You

Written by Tareq Azad, MD
Editors: Smruti Desai, DO and Noah Berland, MD
Faculty Reviewer: Eden Kim, DO

As emergency physicians, we not only consider likely diagnoses, but also create contingency plans for catastrophic “cannot miss” pathologies. In a similar vein, one would be remiss to not get disability insurance, which protects against what would otherwise cause catastrophic financial ruin for a newly disabled physician. In this post, I will explain what disability insurance is, why you should get it, some details to look for in policies, and some pointers on how to pick the right policy. The goal of this post is to provide you with a basic understanding of disability insurance and to provide you with enough knowledge to have an informed discussion with an agent.

At a basic level, disability insurance is a type of insurance where you, the policyholder, are provided a portion of your income in the event that you are no longer able to work due to a disability. Ideally, the best time to buy disability insurance would be immediately prior to becoming disabled. However, for all of us without a crystal ball, that answer is as soon as you begin to earn an income in your profession. This means that even the first-year resident, who has just begun the path in their field, should insure themselves against the unpredictable possibility of disability. Although paying for insurance, on average, is a losing proposition for policyholders (insurance companies would not be in business if they did not make money in the long run), most individuals are unable to withstand a significant portion of time without an income, and are better off insuring against this. A 2017 study conducted by the Social Security Administration showed that one in four people in their twenties can expect to be disabled (defined by being eligible to receive a disabled-worker benefit at any point) before the normal age of retirement.[1] The closer you are to achieving financial independence or retirement, the less of a monthly benefit you will typically need.

Disability insurance is crucial for a physician for many reasons. Unlike many other professions, a significant portion of a physician’s financial independence is directly tied to their ability to work for pay. We are not paid in forms of passive income (for example, stock options) that can reduce our need for work. Physicians spend an enormous amount of time training – 11-12 years including college, medical school, and residency – until we begin receiving an attending level income. That puts physicians behind financially, when compared to other professions that are able to invest and capitalize on compounding interest over this decade. Additionally, the average medical student graduates with approximately $200,000 in student loan debt.[2] Many physicians are therefore extremely reliant on this income early in their career, because residents and new attendings may not have assets to buffer against any significant lapses in income.

Disability insurance may be short-term, providing a worker with a portion of their income for typically three to six months, or long-term, which does so over six months. In this post, I will discuss long-term disability coverage. A standard disability insurance policy will have an elimination period, which is the period of time (typically 90 days[3]) before which a disabled policyholder is eligible to receive payment. It is important to have an emergency fund to cover your necessary costs (bills, mortgage, loans, food, etc) in a liquid form (easily cashable) during this elimination period. A policy will define a benefit period, which is the age, typically 65 years, after which a policyholder is no longer able to collect income from insurance. Of note, the income received from disability insurance is usually tax-free assuming that the premiums are paid with post-tax dollars. This means that if you receive your disability insurance through your employer and they utilize pre-tax money for the premiums, you may be responsible for paying taxes on the benefits from the insurance.

One of the most important characteristics of a policy is its definition of disability. Consider this scenario to see how it becomes more complicated for disability insurance: Jill is an emergency physician with fellowship training in ED administration, and takes on both clinical and administrative responsibilities at her job. Her income primarily comes from her shifts in the ED, but she still enjoys the administrative aspects of her position. Due to a tragic event, Jill becomes disabled and is unable to work in the main ED/critical care areas due to procedural aspects of the job. However, she can still work telemedicine shifts and consult on administrative issues. This scenario severely reduces the income Jill has been accustomed to. Depending on the specifics of her policy, she may or may not be considered disabled and be eligible for her premiums, because she technically is still able to work as an administrator. The take-home point from this example is this: When choosing a policy, review the insurance company’s definition of disability and how it can best protect you financially in any employment scenario.

In summary, disability insurance provides a way to protect your income in the event that you are no longer able to provide for yourself. Hopefully, this introductory post has given you an idea of what disability insurance is about and why it is vitally important. In the next of this two post series, we’ll go over important details when choosing disability insurance such as amount of coverage, exclusions, add-on riders, and more. Stay tuned!

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