I've been remiss in doing some basic housekeeping - I compiled a comprehensive financial checklist plucked a variety of sources, and ran through the checklist mentally, but it's high time I take a deep dive and examine each of the items on that checklist.
First item on my list: my disability insurance policy. I pay my premium annually, and I just received the notice in the mail that the automatic deduction from my bank account will occur in June. This is where the housekeeping analogy (strained though it may be) kicks in.
Marie Kondo asks, "Does this item bring you joy?" If not, you discard it.
For disability, the question is reversed: Would giving up the policy bring you tsuris (aggravation)? If yes, you hang onto it.
I've written previously about what every newbie should look for in obtaining a disability policy, and it's time to see if younger, financially illiterate me chose wisely.
I have to admit I'm more than a little anxious: what if younger me hopped into bed with a policy that older me would never have dated? Time to peek under the covers and see who is sharing my mattress.
This Trinity Ain't No Study
Turns out I own not one, but three separate disability policies!
Even more embarrassing than not knowing my policy inside and out is the way in which I acquired it: I asked a trusted mentor who referred me to "a very nice young woman" who obtained his policy. I couldn't tell you if she was an independent agent. It's frightening how much might have gone terribly awry.
Let's dissect each one.
Policy #1
- Acquired at age 33 (my first post-fellowship year as an attending)
- Noncancelable
- Guaranteed renewable
- 90 day elimination
- Annual premium: $2766 (=$1613 base policy + $1153 riders)
- $5000 benefit to age 65
- Riders:
- Future Purchase Option: Hence the 3 policies - I paid for the privilege of buying up to $5000 more in disability insurance at a later date.
- Indexed Cost of Living Rider: After 365 days on disability, I get an increase (max 6%) based on any increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers published by the US Dept. of Labor. Notably, if the CPI-W drops, my benefit is not reduced.
- Own Occupation Benefit Rider: As stated in the policy: If you have limited your practice to a professionally recognized specialty in medicine or law, the specialty will be deemed to be your regular occupation. Looks good.
- Residual Disability Rider: Let's say I'm partially disabled and my earnings are reduced by 20% or more of what I made the prior year. I can still do my job but I see fewer patients and have less endurance. This rider pays me the difference in earnings so my income remains near pre-disability levels.
- Knight Rider: Before there was Tesla, David Hasselhoff fought crime in a souped-up self-driving black Pontiac Trans Am. 12-year-old me loved this TV show.
Policy #2
- Acquired at age 34
- Noncancelable
- Guaranteed renewable
- 90 day elimination
- Annual premium: $818.85 (=$519.45 base policy + $299.40 riders)
- $1500 benefit to age 65
- Same riders as policy #1
Policy #3
- Acquired at age 35
- Noncancelable
- Guaranteed renewable
- 90 day elimination
- Annual premium: $1600.54 (=$848.88 base policy + $751.66 riders)
- $2500 benefit to age 67
- Same riders as policy #1
Impression
Total Annual Premium: $5185.39
Total Benefits: $9k / month or $108k / year
It's interesting to note that the riders cumulatively constitute 42.5% of the cost of these 3 policies.
Since I pay with post-tax dollars, any disability benefit I obtain will be completely tax-free.
It's also interesting that $108k/yr, while a lot of money, doesn't nearly replace a physician income.
A final observation is that these benefits only last until age 65-67 depending on the policy, meaning you need retirement savings in addition if you plan to live off of more than Social Security and Medicare.
Thanks to dumb luck, a good recommendation from my mentor, and an ethical insurance agent (she did not try to sell me whole life insurance) I bought the right coverage at the right time for what seems like a fair price in an expensive state (California).
Better lucky than smart any day, right?
Plan
The wife and I talked it over, and for now, despite the expense, we've decided to keep the policies and re-evaluate on an annual basis. We are at 24X annual expenses, but we'd like to get that multiple closer to 30X to feel we have a buffer of comfort without needing to modify our lifestyle.
While we could probably self-insure, we are both risk-averse, and would like to see how the next five years shake out. Our fear is the FI bogey man, Sequence Of Returns Risk.
If the markets continue to be generous, we'd cancel them in 5 years.
If there is a major correction, I'd keep working to allow time for our aggressive asset allocation (currently 80% stocks/20% bonds) to recover.
What would it take to get you to ditch your disability insurance policy?
Comments 12
You can live a retired life well on 9K/mo if you have no untoward expenses in the mean time. If you have children and an active family life it’s a long row to hoe. The problem is one of leverage, your life is levered to your ability to perform and bring in income at some level we’ll call 30K/mo. It’s that extra 21K/mo that allows you to design your life and your kids lives 60 years into the future. It’s from that 21K/mo, you will fund your retirement, fund school for your children, fund some happiness for your wife. It’s a long uncomfortable way to fall to a subsistence existence.
When I retired I had 2 kids in college. One in her last year and one in her first year. All of that expense needs to be explicitly planned for year by year IMHO. A 529 is not good enough. I also dropped us to a subsistence budget for a while with my wife’s permission because I wanted to experience what living like that felt like and to see how she felt about living like that. Initially I wasn’t sure how to budget and the subsistence experiment gave me the data to fine tune my/our appetite. The range for my retired life is 6500-10k/mo with an average of 8500/mo On months I spend less the delta between what I spend and 10K which I use as my upper budget limit goes positive. On months when insurance comes due for example I use some of that + delta to ballast the overcharge, so far that has worked for me. Each month of good markets works to my advantage insulating me from SOR . Knowledge is power so I quantified granularized my knowledge and I track it in Excel. I can tell you what month will be expensive and what month cheap I can plan extraordinary expenditure to months that are cheap. After 2 years experience expense has normalized and understanding normal expenses allows accurate projection of need and growth and risk on the rest of the portfolio, not just bogglehead numbers plucked from thin air.
The last thing is tax management. It’s taken a couple years to develop my tax strategy. in the end it’s not what you have but what the government will let you keep. If you are wealthy through the “maxing out pretax” you are F*** *D when it comes to post RMD retirement. My tax plan will take every bit of 5 -7 years to implement 100% I’ve extensively blogged on that
Author
Gasem, I realize you have your own blog and I’d by no means hold it against you if you opt to post on this there, but you’ve pioneered a novel concept that intersects with an already hot meme: financial intermittent fasting!
The idea of taking spending to subsistence levels periodically as a stress test for what your core level of spending could be without overly harming your family is akin to spending a little time each day feeling hungry an short of breath – you push so you know you can handle it, and also in order to maintain the type of conditioning that will enable you to handle it.
Your Roth conversion /tax-planning strategy is something most docs ought to consider a final stage of financial planning after achieving their tax-deferred objectives, and I often refer back to your posts on the topic when considering.
Should you have interest in guest posting on financial intermittent fasting, please consider this a standing offer to do so here! And if not, I look forward to reading about it on your own blog.
With appreciation,
CD
How bout you reprint an article from my blog killing 2 stomes with one bird?
Author
Done!
I am guilty of not knowing what younger me has gotten myself into and honestly don’t know much about my disability insurance policy except that I have got one.
I am not sure why mine is so much different than yours but I smn getting away relatively cheap. It was through the AMA and started at around $80/mo and now is up to $120/mo. I have a group policy through my work so don’t know much about what it truly is costing me etc.
You have to be wary if you have many policies because they can cancel each other out (even if you have max policy for each one they will only combined be paying you a max amount a month allowable so anything over that is wasted.
I am to the point that I probably could get away from having one because if something happens I will be able to live off my passive income streams but I figure hold it till I retire at least because it’s just an added margin of safety
Author
Given your most recent birthday, Xrayvsn, I’ll assume your years of financial savvy have led you to a place where you could cancel your individual policy and slide by on your investments and good looks alone.
Your point about multiple policies limiting their collective maximum payout is well-taken.
We ought to by all rights cancel our policy now. Yet, being risk-averse like you, we do not. As the poet Johnny Cochrane might phrase it, “It’s that small spark of doubt that keeps me paying out.”
I have group disability insurance that will provide me half of my base income. So this would be about $16,000 a month. But this would be taxed.
I also have a private disability insurance with a benefit of $5,000 a month. And this would not be taxed.
With our current lifestyle, all we would need is $10,000 a month. And there is a lot of fluff in our lifestyle, so we could totally get by with $5,000 a month if we had to (especially assuming my wife is still able to work).
With this in mind, I was considering dropping my private disability insurance because it’s addition is somewhat excessive and my group disability is so good. But then I decided to keep it because it is relatively cheap at $174 a month (and with own occ and all appropriate riders too). I had bought this policy when I was 26 years old when I first started residency so I was locked in at a pretty good rate. I guess it doesn’t hurt to have an extra $5,000 a month tax free if I was disabled.
Author
DMF,
Sounds like you are in a terrific position, and I’m happy to hear it. Sounds like you’d cover your base expenses easily in a crisis.
Regarding the private disability, I’d do the same in your position. First, I tend to be skeptical that group policies will be as strong as an individual policy. Second, you’ve locked in a bargain rate, so this may not be the place you decide to pinch pennies, at least not for another decade or so.
May neither of us ever need it!
Fondly,
CD
I totally get the “risk averse” part of keeping these policies. DH and I discuss them every.single.year for like the past ?3 years. This will continue to be an ongoing discussion for probably another year, maybe two, in our household.
Author
It’s Bernstein’s maxim: the goal is not to get rich, it’s to not die poor.
Risk mitigation can make you flick pennies at disability for years on end, because hey, who wants to risk dying poor?
I am still paying for disability insurance at work. I also have two of my own personal after-tax policies.
Running the numbers would probably show I should drop them. But they seem like old friends now. I have had one policy for 21 years.
I just know I will become disabled the week after I cancel them. I will kick myself for cancelling (if I’m still able to lift my leg to do that).
So, for now, I will continue them. It is emotional, not rational.
But heck I should run my numbers as you did. That 21-year-old policy may not fit my current needs.
Author
WD,
I peed myself at the leg lift comment! You are truly the Larry David of the physician finance community.
From what circumspect details you’ve let slip about your financial health, I’ve no doubt you’d be able to self-insure.
You remind me of my wife in some ways – she has grown more superstitious over the years, to the point where I like to joke that I originally married this vital modern woman and now I have a partner to spits over her shoulder and fears the evil eye as my old world grandmother (who swore she lived around the corner from a witch as a child) did.
Perhaps it’s just that greater experience has taught her the evil eye will strike when she is less vigilant – in which case, keep your policy, my friend, and ptooeh!