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Written by: Corey Janoff

Listen Here!

One of the most overlooked components of financial planning for doctors is income protection, i.e., disability insurance. As a physician, income is the linchpin that holds your entire financial world together.  Unless you are already financially independent and do not need to work anymore, you probably rely heavily on your earnings.  If this is the case, you should probably do everything in your power to make sure that you protect your income.  

Not protecting your income is the equivalent of having 2-Time Super Bowl Champion Patrick Mahomes as your quarterback and not putting an offensive line out on the field to protect him.  His coach, Andy Reid, would not run plays with Patrick Mahomes at quarterback and ten wide receivers.  He’s one hit away from being out for the season, so the coaching staff makes sure to put a line of protection in front of their most important asset. 

For the same reasons football teams put a protective line in front of their quarterbacks, you should put a protective shield around your income.  If you lose your income, you will have a lot of trouble winning in this game called life. 

Like Mahomes, physicians are specialized and have put a lot of time, money, and effort into the ability to earn a nice income to set yourself and family up for long-term success. If that income is derailed due to injury or illness, your financial plan will also be derailed if you are not properly protected with disability insurance for physicians.  

How Much Income Protection Do I Need?

Glad you asked.  It is quite simple to calculate.  To figure it out, we need to know several things: 

  1. Your current monthly expenses. 
  2. The amount you need to invest each month to be able to retire by a reasonable age (I would say your mid 60’s at the latest). 
  3. Additional anticipated expenses if you lose your job due to health reasons, such as increase medical costs and out-of-pocket health insurance premiums.   

1: Monthly Expenses

This includes your rent/mortgage, utilities, car payments, food/groceries, home/auto insurance/umbrella/life insurance, student loan payments, child related expenses, and miscellaneous expenses (including some fun money). 

2: Retirement Savings

Calculating this is an inexact science, because we don’t know how long we will live, we don’t know what expenses might look like in retirement, and we don’t know what our future investment returns will be.  However, most financial advisors recommend investing at least 20% of gross income for retirement purposes. Read more in our recent post, How Much Money Does a Doctor Need to Retire 

3: Anticipated Expenses Due to Job Loss

This one is also tough to predict, but if you lose your job, you probably lose your health insurance at work.  If you need to purchase health insurance on your own outside of work and have health issues, it can be quite expensive.  Also, you will probably have an increase in monthly costs to cover health related expenses (prescriptions, treatment, therapy, insurance deductible, etc.). 

Show Me Some Examples

Assume you currently have $4,000 of monthly living expenses. You and your financial planner have determined you need to be investing $1,500/month in order to retire sometime in your mid-60’s.  If you have to purchase health insurance on your own and have an increase in out-of-pocket medical expenses, let’s assume that will add an additional $1,000/month to your budget.   

By adding those three figures up, we get a monthly income protection need of $6,500.  So, if you are looking to protect your income, be sure to get a policy with at least a $6,500/month benefit (tax-free) and ideally tack on an inflation rider to the policy so if you are permanently disabled, benefits will increase to account for inflation. 

Let’s look at another scenario.  Let’s assume you currently have $7,000/month of expenses.  You need to save $2,500/month to hit your retirement goals.  And we anticipate $1,000/month of additional healthcare expenses if you become disabled.  You should probably get a policy that pays $10,500 of monthly benefit. 

Ideally these policies adjust for inflation, as cost of living will increase over time.  

What if My Spouse Also Earns Income?

That is excellent!  If you are a dual income earning couple, you may not need as much income protection coverage.  However, it is still prudent to estimate each spouse’s share of the total household expenses.  You can run through the above exercise and multiply your percentage of the household income by the total expenses/retirement savings need.   

If you and your spouse earn $400,000/year combined for a round number, you earn $280,000 (70%) and your spouse earns $120,000 (30%).  If your total combined household expenses + retirement savings + medical expenses are $16,000, you should get 70% of $16,000 in disability income benefit and your spouse should get 30% of $16,000 in disability income benefit.  Therefore, you would get a policy with a $11,200/month benefit and your spouse would get a policy with a $4,800/month benefit. 

Based on incomes, the above individuals would each likely qualify for a larger monthly benefit, but because they live below their means, they don’t need to protect 100% of their incomes. 

How Do I Get a Disability Insurance Policy?

First, you may have access to an employer sponsored group disability insurance policy through your employer. Employer provided coverage is not guaranteed, but most larger institutions offer some sort of free or inexpensive disability insurance benefit that you can enroll in. Typically, group plans only cover a portion of your gross income up to a capped benefit amount. For example, 50% of your gross income, up to $10,000 / month. Group disability insurance benefit is almost always taxable when paid as well. 

If you are earning $300,000, your monthly gross income is $25,000 and approximate take home after taxes is $16,667. If you were disabled and only had the group benefit listed above, you would take home about $6,667 of monthly benefit. Here is the math. Since your gross is above the $10,000 cap, you would receive the $10,000 benefit and after approximate taxes, receive about 2/3 of that, equaling around $6,667.  

If you go from taking home $16,667/month to now only $6,667/month, most likely you will not be able to cover your monthly fixed expenses, save for retirement, and cover additional medical expenses. So, what are your options? You need an individual own-occupation disability insurance policy to cover the gaps in group coverage. 

With an individual disability insurance policy, it is your own policy that you can take with you at any employer, and it is designed to cover your full take-home income. If you were fully protected in this scenario above with an individual policy, you would expect to have a $10,000 policy in order to ensure that you are taking home the same amount that you were pre-disability. These policies are typically designed to pay a benefit into normal retirement (Age 65) and allow you to increase your policy as you change employers or increase your income. 

Individual disability insurance requires that you go through medical screening and cost increases with age. Typically, we don’t get any older and healthier, so look into coverage as soon as possible.  

If you would like help seeing which disability insurance company may be the best fit for you, contact us to speak with one of our independent financial advisors who can assist you in this process. 

The Future is Difficult to Predict

Because we do not know what the future holds for us, if you are early on in your career, it is probably smart to protect as much income as possible, even if you don’t rely on 100% of your income.  Nobody likes paying for unnecessary insurance, however if you become sick or injured and unable to work, you will be thankful you have that additional cash flow.  I’ve never heard anyone say, “I wish I had less money.” 

If you don’t already have a solid disability insurance policy that protects your income if you can’t do your job, go get one.  Now.  Please.  You’ll thank me if you ever need to use it. 


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