Financial Checklist: Reviewing My Disability Policy

crispydocUncategorized

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?