Your greatest asset is you and your ability to do your job. As a medical professional, you have devoted a decade or more to education and training and countless dollars with the likelihood of student loans. So the logical first step of your financial plan should be to protect yourself.
It’s common for a young medical professional to think of financial planning as investment-focused. The financial media certainly doesn’t help with constant headlines about the best stocks and mutual funds to pick. And while investments play an important role, it is one element out of many moving pieces. A common mistake I see with medical professionals is focusing too heavily on their investment plan before assessing the other areas in their plan. In this article, we’ll focus on protecting your earned income now and in the future.
Protecting Your Income
For new medical professionals, your starting net worth is probably negative. The elephant in the room is the large amount of student loans. For most, this may be well over $200,000. Without income replacement and a sizable debt load from student loans, any serious illness or accident could cripple your ability to achieve your long-term financial goals. Depending on the types of student loans and the severity of a disability, not all debts are automatically forgiven. Not to sound morbid, but the risk is real. One in four millennials can expect a long-term disability before they retire.
How Can We Plan For This Risk?
The answer is disability insurance. The goal of disability insurance is to protect your income during your wealth accumulation years. Disability insurance will not make you more money, it will simply act as wage replacement. There are two types of disability insurance, short-term and long-term policies. Short-term policies typically cover up to a few months while long-term policies can cover up to age 65. For the purposes of this article, we’ll discuss the greater risk, the long-term.
What Kind of Policy Should I Look For?
For high-income earners like physicians and dentists, an own-occupation policy with a future increase option is necessary. Disability insurance policies come in a variety of options. Some have weaker definitions of disability like “any occupation” and others have the necessary “own occupation” definition. Any occupation means that if you are disabled and can’t perform practically any job, the policy will not pay. For example, if you were diagnosed with cancer and could not return to your practice for a few years, you would experience a loss of earnings. With an “any occupation” policy, if you were deemed capable of working at a fast-food restaurant or greeting people at a large grocery store, the policy would not pay. This type of policy definition is not appropriate for medical professionals who have spent years of training and invested hundreds of thousands of dollars into their skillset. Using the above scenario, an “own occupation” policy would replace a percentage of your pre-disability earnings while you recover.
An important add-on called the future increase option (FIO) allows you to increase the limits on your policy as you earn more. This allows your income to be protected in peak accumulation years. The nice part of this feature is that it allows you to increase the coverage on your policy without having to repeat medical underwriting. Disability insurance premiums are determined by your age and health. The ability to lock in your best health rating when you are young and healthy can significantly decrease the long-term cost of insurance.
More importantly, it protects your future insurability if you develop any sort of illness that would hinder your ability to get coverage. For example, let’s say you bought a disability insurance policy during residency and structured it appropriately with a future increase option. If you wanted to increase the policy limits once in a higher paying position to protect your higher earnings, your health, in the eyes of the insurance company, would not matter. Conversely, if you did not have a future increase option, the insurance company could deny you from increasing your policy limits for a variety of health issues. Oftentimes, it is minor health issues that trigger fear for insurance carriers.
Where Can I Find an Own-Occupation Policy?
There are over a hundred disability insurance carriers, but only a handful provide true own-occupation coverage. Some companies offer more favorable ratings based on factors such as state of residence, gender, lifestyle, previous medical history, and type of work. Your employer may also provide disability insurance or you may see policies through a medical association. However, with these types of policies be mindful to read the policy details and check the definitions. Often these group policies lack key riders, are not portable if you leave, or the definition may shift to any occupation after a few years.
A prudent option is to work with a fee-only financial planner who helps you evaluate the various carriers and prospective offers. Because a fee-only financial planner receives no commissions, they can provide unbiased advice that is in your best interest.
How Much Will It Cost?
Like most financial planning items, it depends. The premiums are based on your age and health. If you're young and healthy, the cost will be substantially lower. For a comprehensive policy, expect to pay somewhere in the range of 1-3% of your income. And paying 1-3% of your income to protect the other 97%+ is actually fairly reasonable. Over time, as you accumulate more assets and get closer to reaching financial independence, your financial planner can help you evaluate if it makes sense to modify the policy. Regardless, you should review all of your insurance needs at least once per year.
The Bottom Line
In financial planning, it is imperative to plan for the worst-case scenarios. We have no crystal ball and no one plans to get disabled. We must acknowledge these possibilities. However, like most things in life, financial planning is about focusing on the items within our control. We have immense control over our financial lives e.g. how we save, how we tackle student loans, and how we protect our most valuable assets.
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