Video and Transcript 3: Why Do I Need Disability Insurance?
All of us hope that a long-term disability will not happen to any of us. However, statistics are not so kind. Almost one-third entering the workforce today will become disabled before they retire. The burden of medical bills is the number one cause of bankruptcy. Nearly 50% of all mortgage foreclosures are caused by a disability. Statistics also shadow the illusion of what may cause a long-term disability. How many of us have thought, oh, if I have an accident I could suffer a long-term disability but otherwise I will be fine. In fact, at least 90% of longterm disabilities are due to illnesses. These statistics are for the general population. As resident physicians you are a unique population, uniquely exposed to risk factors. Sleep deprivation, chronic stress, exposure to blood pathogens and viruses are amongst them. And so for the medical occupation in general, there is a much higher incidence of long-term disability claims versus the non-medical occupations. For males at age 40 there is a 68% higher incident rate per thousand. For female physicians, it is an 85% higher incident rate. Now let us quantify what you actually have to lose should you choose not to purchase a long-term disability policy.
Your ability to earn an income is your most valuable asset. For physicians, it is the ability to practice in your chosen field. The more specialized you become typically the more income you earn, which increases the value of that asset. Your ability to be a physician places you in a higher income bracket, which as you can see from this chart becomes a multimillion dollar asset over the course of your career. Let’s take an example of a 35 year old graduating resident whose starting salary is $158,000. As this chart indicates, if that doctor were to earn that average income to age 67, that asset is worth in excess of $5 million. Obviously, the higher your average income and the younger you are, the greater your asset. This is the primary reason why residents, fellows and young attendings purchase more disability insurance than anyone. You have the most to lose. Your income track is certainly unique. In terms of payout, in the event of a long-term disability claim, the insurance companies pay out a monthly benefit of approximately 60% of your gross monthly income. And that is meant to represent your take-home pay. There is normally a waiting period you risk before you receive your benefits and that is 90 days. And then those payments continue for as long as you’re disabled, typically to age 67. In addition, the monthly benefits you receive are tax-free as long as you do not deduct a premium as an expense. This is an IRS issue not an insurance company issue. And basically the IRS states that if you do not deduct your premium, your benefits will be tax-free. If you do deduct your premium, the benefits will be taxable and you normally never want a disability payment to be taxable
By protecting your income, you are securing the foundation of your financial household with all of its wealth building blocks. Your savings for retirement, your children’s college education, paying off your student loan debt, your mortgage. The quality of your lifestyle all rest upon your income as the financial foundation. It only makes sense to secure that foundation because if you don’t then what you have worked so hard to build will crumble once your income suddenly stops. Fortunately, there are disability policies that are available for the purpose of securing that financial foundation. Like any structure, the key ingredients that make up the foundation determine its strength and longevity. Disability insurance works the same way. Without the knowledge of the four key components, the key ingredients, to a strong disability contract, your financial foundation may not be as secure as you had hoped, which brings us to step two. What is disability insurance?