Video and Transcript 10: A Case Study: How To Protect Your Entire Career
We can now begin to discuss an income strategy we use to help residents and fellows protect their specialty for their entire career. The first strategic step is to consider the initial monthly benefit. For illustration purposes, we have displayed the current maximum allowed for residents and fellows with each company of $5,000 per month. This equates to an income of approximately $100,000 on a tax-free basis. Residents are allowed to purchase more than their actual salary because the insurance companies understand that once you graduate your income increases dramatically. This is one of the reasons why residents and fellows should considering purchase their policies before they graduate. It is when the insurance companies are most lenient with their application process and when they are most generous with the allowed benefit amounts. However, you are not required to purchase the $5,000. You can purchase a minimum of 500 up to $5,000 a monthly benefit. The method of calculating how much you may need to initially purchase determines how much coverage you lock in for the future. Again, this is important. The amount you purchase initially directly affects how much you can purchase in the future on a guaranteed issue basis.
This is where the strategy of protecting your future income and entire career is mapped out. We refer to it as disability insurance financial planning because protecting your income is the first step to financial planning. Protecting your income is protecting that foundation, your income which supports your financial portfolio. So the decision on what to purchase is a decision that asks several questions. Where do you expect your income potential to be once you are contracted as an attending? How do you combine the base benefit and the future increased benefit to reach the total monthly benefit that will adequately protect your future income? What are you comfortable with in terms of your budget? Is there a way you can pay a lower premium now while still in residency and then pay a higher premium once you are an attending and have more comfortability affording it. As we guide you through this analysis and revise it according to your needs and budget, we help you answer all those questions until you have reached your final decision on what and how you’re best able to affordably protect yourself.
Let’s begin with an example of a resident who expects their income to reach 220,000 over the course of their career. What would be the minimum base benefit they would need to purchase as a resident in order to protect that future income of 220,000? When we engage in disability, financial planning we refer to the income versus benefit chart that the insurance companies provide. The higher the anticipated income, the more future purchases needed. The amount of disability insurance will allow you to purchase is in your guaranteed future purchase rider is normally three times the base benefit. So if you are a resident and you expect to reach an earning potential of 220,000 in this example, purchasing a monthly benefit of $2,500 will allow you to lock in an additional 7,500 in your future purchase rider. Once you become contracted and your income is 220,000 or your practices now earning an adjusted gross income of 220,000, you can increase your policy with the additional 7,500 or a total benefit of $10,000 per month. According to the income chart, a tax-free benefit of 10,000 per month is considered adequate income protection for an annual salary of 220,000. Always remember that with a true own occupation policy, you are still able to earn and collect a full salary in another occupation while collecting your total disability benefits.
Ameritas will allow you to purchase a future increase option rider of three times the base benefit up to 20,000 per month. The same holds true for Guardian and Ohio National and Mass Mutual because Standard and Principal have a built in policy feature that allows the increase based upon their application guidelines there is no additional cost for purchase. As long as you submit and purchase the coverage according to their guidelines, when you apply you can purchase as much as your income warrants. Please bear in mind, the future purchase option guarantees you the right to purchase coverage without medical questions or blood tests. However, you will pay an additional premium for the additional coverage based upon your age at the time of increase, the amount selected and the corresponding rate, the insurance company charges. This is why physicians typically increase their policies sooner than later because the younger they are the cheaper it is to buy the guaranteed coverage. Now we must ask the question, when you are able and ready to increase your coverage, what will the rates of the additional coverage be based upon? Under all circumstances, it will be based upon the age you are when you were ready to increase. The question is what is that rate going to be in the future when you choose to increase. Will the cost be based upon the rates which were in place at time of initial purchase? Or will the cost be based upon the current rate, the company charges at the time the additional coverage is purchased. Why is this so important? Years could pass before you were ready to increase your coverage? And during that time, the insurance company may have increased their rate which could directly affect how much additional premium you would be charged. Unlike the scenario of an insurance company that is willing to guarantee the future rate allowing you to calculate and budget the future premium.
In other words, the insurance company is taking on more risk, which makes it a stronger contract which in turn gives you more peace of mind. Ameritas, Ohio National and Principal use the original rates when you purchase additional coverage. Guardian, Mass Mutual and Standard will charge a premium based upon whatever the rates are at the time of the future purchase. This has been a discerning factor for graduating residents especially those expecting several years of fellowship. They typically want to lock in the rate and the discount that they originally purchased. So to be certain, there are no surprises. Fortunately for the higher income specialties there is the ability to lock in as much as 15,000 a month of future coverage. Considering the amount of coverage that is being locked in on a guaranteed basis, it is advisable for residents and fellows to take full advantage of the special allowances the insurance companies are offering. Those being higher benefit amounts, higher future increase amounts coupled with a more lenient simplified application process. Once you’re an attending physician these guidelines do change.
We cannot stress enough how dynamic this industry is and how these products can effectively change in response to market conditions. For example claims experience. So please bear in mind that what is offered to you currently may change sometimes dramatically in the future. However, with a non-cancelable guaranteed renewable feature. Remember, once you purchase your policy, it is guaranteed not to change until you reach age 65 or 67. Please be mindful that a customized disability offer in residency with the four key components, discounts, special allowances may be the best opportunity you have or will ever have to secure your income and specialty for the length of your career. Perhaps the most important reason why residents and fellows should take advantage of these special allowances has to do with the difference between group and individual disability insurance as we previously discussed. Once you understand the difference and how limited group disability insurance can be in comparison, you truly will comprehend the disparity between the two levels of income protection. This completes our in-depth discussion of the four key components that you must have as part of a solid foundation to your income protection plan. In summary, these components are true in occupation definition of disability, non-cancelable guaranteed renewable provision, residual benefit and the guaranteed future purchase option rider.