by Bill Olmsted
If you’re a medical resident, chances are you’ve heard something about protecting your income using a true own-occupation disability insurance policy. You’ve heard that you need to buy something that protects your income in your chosen specialty; that it should have a cost of living adjustment rider; and that it should be able to grow with you over time, as your income increases. That all sounds great, but how do you do that at a time when you have student loans to pay back, and you’re trying to get your financial feet on the ground, AND graduate from residency?
First, know that you’re not alone in this concern. All the residents I’ve ever spoken to wonder whether they should buy a disability insurance policy now, or once they graduate and start making the “real” money. There are a couple of potential problems in waiting until after graduation to buy a policy.
Changes in Health
Even though you’ve made it 20-something years without any serious health concerns, that doesn’t mean you’ll live like this forever. It is much easier to buy a policy when you are healthy and don’t need one than it is when you’re sick, or have just had a major change in your health. Since individual disability insurance policies are medically underwritten, the company looks at your health history, and issues a policy contingent on you being in good health. They can also decline coverage for applicants with adverse medical histories, or even issue a policy with exclusions for pre-existing medical conditions.
Buying an individual disability insurance policy when you’re healthy, and in residency, can help ensure that you are getting the best offer possible. Almost all residents that I work with also purchase a future increase option rider to allow them the opportunity to increase their coverage as their income increases without having to answer more medical questions. Basically, you buy the policy once and you lock in your good health forever.
Some carriers have residency programs that provide for discounts off the regular cost of a policy. These are programs usually set up by local agents to provide the students discounts on coverage. While not all residency programs offer discounts on coverage, it’s important to look into this possibility before you graduate and the discount is no longer available.
Group Long Term Disability Coverage
Many insurance companies offer special programs for residents that ignore the existing group long term disability (LTD) policy that you may have in-force at the hospital. Because of this, most residents can buy $4,000-$5,000 per month of individual coverage, even though they might have a group disability policy that could pay them 60% of their resident salary in the event they were disabled. Once you have graduated from residency, however, this special offer is no longer available, and any group LTD that you may have at your practice counts against what you can buy as an individual.
While this article isn’t the place to discuss the differences between group and individual disability insurance, there are many, and I have found that most physicians prefer to have their own individual policy that protects them in their medical specialty. Take advantage of these special programs, and buy your policy while the group LTD isn’t a factor. If you wait until after graduation, you may find that you are stuck with a group LTD plan that you didn’t want, and you’d have preferred an individual policy.
So, if it’s easier to buy a policy when you’re still healthy; you may be able to take advantage of potential discounts that aren’t available after you leave residency; and, you won’t have to worry about not qualifying for coverage because of an employer provided group LTD plan, how do you structure the coverage so that it’s affordable?
Almost every resident that I’ve spoken with in the past decade is concerned about cash flow. They know that they are making about $50,000 per year now, but will make substantially more in the next few years. They want to protect this income over time, but don’t want to break the bank on premiums now that will hinder their ability to pay back school loans and get on the right foot financially. Because of this, I almost always recommend that a resident consider going with a graded premium option for their policy.
There are two ways you can buy most disability policies – level or graded premiums. Level premiums are fixed at the time you buy your policy, and never increase. If you buy a disability policy at age 30 with level premiums, and never increase your coverage, you’ll be paying the same rate when you’re age 65. Graded premiums, on the other hand, start off less expensive than level premiums, but increase over time according to a guaranteed pre-determined schedule as your income increases.
Eventually, these graded premiums overtake the level rate, so it’s important to understand that they come with a trade off. That trade off is worth it to most residents for the immediate benefit of cash flow.
The important thing to understand is that the graded premium can be converted to a level premium. Therefore, many residents look at the graded premium option as a way to lock in their insurability, take advantage of any applicable discounts, and not worry about being disqualified due to an employer LTD plan once they graduate. They intend to keep their lower graded premium for a couple of year until they are making more money and have some disposable income, at which time they will convert their graded premium to level and lock it in at their then-current age.
This structure provides the best of both worlds – low rates on a type of disability insurance that a resident must have, and the ability to maintain that coverage over time with fixed rates when they can afford it.