We often get questions in our physician communities about how much base monthly benefit a doctor should get as part of their disability insurance benefit. While the answer is pretty straightforward as a resident or fellow in training, it becomes more complicated as you progress throughout your career. When you’re an attending physician or when you’re exercising your future benefit increase rider, you’ll have to think more carefully about how much monthly disability insurance benefit you need to avoid over-insuring and wasting money. This is also true when thinking about dropping or decreasing your disability insurance benefit as you progress through your career and become financially independent or approach retirement. Below, we will cover how to calculate an appropriate amount of disability insurance benefit for your personal financial situation.
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Why is having disability insurance important for doctors in the first place?
If you’re reading this article, you likely already know the importance of disability insurance in protecting the financial security that you’ve worked so hard to build. If you are not familiar with this, please review our guide to disability insurance for physicians.
How much disability insurance do I need?
This is a complex discussion, and if you put 10 physicians in the same room, the answer is likely going to be different. Here are some factors that go into determining your ideal benefit amount.
Should I just take as much disability insurance coverage as I qualify for?
As a general rule of thumb, insurance companies let you insure 60% of your income, noting that they don’t want to incentivize you not to work. While this may seem like it leaves you vulnerable to not insuring your full income, remember that the benefit you get from your personal disability insurance policy isn’t taxed as long as you paid your premiums in post tax dollars. Thus, 60% of your income is pretty much replacing your income for most doctors (read our primer on taxes for physicians if you’re not clear on this). You may be able to get a little more coverage by combining policies or supplementing with disability insurance through your employer.
If you purchase disability insurance as a resident or fellow, the answer is likely yes, as you wouldn’t qualify for nearly enough to insure what your future income will likely be, so you may as well just get as much as you qualify for. That benefit won’t be as much (around $5000/month typically) because your income as a trainee will preclude you from purchasing significantly more.
As an attending physician, this decision is more complicated. While many in our physician communities still respond to this question with “as much as you qualify for,” the fact is that not everyone needs the max benefit that they qualify for, particularly the higher earning physician specialties. For example, if you qualify for $25,000 in monthly benefit (that’s not taxed), that may actually be more than what your monthly expenses are, and you could be over-insuring. This is a waste of money on disability insurance premiums that could be better spent on investing or enjoying your life.
How do I calculate how much disability insurance is ideal for me?
To be honest, the insurance companies and disability insurance agents want you to insure as much of your income as possible, as they make more money in premiums.
However, the point of disability insurance is to allow you to maintain the lifestyle that you worked so hard to build if something happens to eliminate your ability to earn money as a physician. This means that your monthly benefit should cover your monthly expenses, as well as the amount of money you’d like to save for retirement and otherwise.
Therefore, when deciding how much disability insurance benefit you need, it’s actually not as important to think about replacing your income as it is to think about how much money you (and as applicable, your family) spends in a month. You should look at your physician budget for your non-discretionary expenses as well as your discretionary expenses and calculate how much you need to run your household on a monthly basis, giving yourself room for vacations, retirement savings, etc.
Don’t forget to think about how your expenses may change during disability
Unfortunately, depending on what your disability is, you may see your monthly expenses increase. While some people address this by adding a catastrophic disability rider to their policy that provides extra benefit if you can’t do a certain number of ADLs, others plan for this separately by giving themselves a buffer in their policy to afford to hire more help or make changes in their house.
Conversely, others may feel their financial needs would decrease as they may not vacation as much, need to live in the same high cost of living area if work isn’t a factor, or they won’t be paying as much in taxes or spending as much on clothes and commuting for work.
What amount of disability insurance benefit do most physicians get?
As you likely suspect, physician budgets look very different depending on the cost of living in their area, what their spending habits are, how much childcare they need, and more. While we commonly see most physicians picking amounts between $7,500 and $20,000 for the monthly benefit, most physicians at early stages of their careers do seem to want at least a five figure amount, with the majority of physicians in the communities voicing numbers between $10,000 and $15,000 for the monthly benefit.
Let’s look at the outliers in a little more detail.
Those who opt for less than $7,500 usually do so because they don’t qualify for more based on income or because they have too much benefit through their employer sponsored disability insurance policy that precludes them from getting more on their personal. Or, they may be well on their way to financial independence or have alternative revenue sources that they think would continue despite disability, such as income from real estate investments.
Those that opt for more than $15,000 typically are high income physicians or physicians with a lot of debt or in a very high cost of living area that result in a lot of monthly expenses or monetary needs.
A not great reason to not get more disability insurance is because you’re relying on your spouse to support you if you are disabled. Remember, relationship dynamics can change a lot during disability, and in general, death and divorce happen, so we don’t recommend counting on someone else for your financial security. Read about other reasons why physicians mistakenly opt not to get disability insurance.
Can I change the amount of disability insurance benefit that I pick later?
Yes, definitely. Many physicians do this. If you’re at early stages of your career, you should very strongly consider having an insurance rider that gives you the option to increase your disability insurance benefit, as this will allow you to increase your benefit as your income increases, without having to go through medical underwriting again. We’ll talk more about exercising this below.
If you find you no longer need as much disability insurance benefit, you may as well save some money on premiums. This most often happens as you become more financially stable and have more money in savings, usually when you approach retirement or financial independence. Read more about how to decrease or even drop your disability insurance.
How do I know how much to increase my policy by when they contact me about my future benefits rider increase option?
The insurance company or your disability insurance agent will contact you to show you options for your increase. Many will typically show you the most that you’re eligible for preferentially, because again, it’s to their benefit to make more money in premiums. But the fact is that you may not need the full amount that you’re eligible for. It’s important to know that you can elect to take half the coverage, or other variations in between 50-100% and still retain your future benefit increase option.
Therefore, ask yourself, what is my current savings amount and net worth? How comfortable am I at this stage dipping into savings if I were disabled? How much have I been spending on a monthly basis over the past year, and how does this compare with the benefit amount? Have I reached a point where I no longer need to save for retirement but I just want to cover my expenses so I don’t have to dip into savings?
At some point, you’ll realize you have enough benefit to support your lifestyle until the point where you feel comfortable dipping into savings. At that point, it’s completely reasonable - and smart - to stop increasing your policy and invest that money elsewhere instead.
Conclusion
While how much disability insurance need is somewhat subjective based on your comfort level, it makes sense to calculate those needs based on things like your current monthly expenses, how much you need to save for retirement, how you expect your expenses to change during disability, and your monthly income from other sources that you suspect will persist even if you were disabled.
If you need help navigating this further, don’t hesitate to contact one of our recommended disability insurance agents for doctors to discuss your needs and buy your policy.
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