A Primer on Disability Insurance for Doctors

Introduction

Disability Insurance is a boring and expensive but critical component of a physician’s financial plan.

While life insurance pays your beneficiaries when you die, disability insurance pays you when you can’t work due to a medical condition. It insures your most valuable asset: your future earnings potential in a profession after you spent years investing in yourself.

Upfront Summary

  • Disability insurance helps you pay for your life (and lifestyle) when you can’t work.
  • You (ideally) want an individual, portable, noncancelable, guaranteed-renewable, true own-occupation specialty-specific policy.
  • You want that policy as soon as you can afford one, and you want to include at least a few “riders” (options).
    • One is a “future benefit increase” option or equivalent phrasing, which will let you buy more insurance as your income increases without needing to undergo additional medical underwriting.
    • Also important is a “partial” or “residual” disability rider, that will pay you if your income falls because you can’t work full-time or perform certain tasks (e.g. a surgeon who can’t operate to make their full income but can still see patients in clinic).
    • Another is a “cost of living adjustment” (COLA) rider, which will help mitigate inflation.
  • You’ll want a big enough policy benefit to help prevent a lifestyle shock should you become disabled while also still being able to save enough for old age (“retirement”), since the policy you choose will likely stop paying benefits around age 65.
  • The whole thing will probably cost more than you will enjoy paying, but you’ll always have the option to cancel the policy whenever you want once you’re financially secure and don’t need the benefits.
  • Before you get that magical policy, you may want to lock in some basal coverage by securing a Guaranteed-Standard Issue (GSI) policy first, which doesn’t require medical underwriting (see below).

Defining Disability

At its core, disability insurance provides a monthly benefit if a medical condition prevents you from working. The definition of disability varies among insurance policies, so the details are everything.

Some policies have an “Any Occupation” definition, which means you only receive benefits if you are unable to work in any capacity, not just your current profession. This is the narrow definition used for social security disability and generally isn’t going to protect you against many typical disabilities. Even if you qualify for the Social Security Disability Insurance (SSDI) program, if you get a job, you lose the benefits.

Many disabilities, including those that might stop you from performing the specific job duties of practicing medicine in your chosen specialty, may not meet this strict definition of total disability.

Then there’s “Regular Occupation” (aka Modified Own Occ), which usually means that you’re 1) unable to perform the duties of your regular occupation, 2) are receiving regular medical care, and 3) not working in another job of any kind for money. This is more useful but still relatively limited.

Most physicians should instead pursue a true “Own Occupation” policy that will pay benefits if they cannot perform the material duties of their specific medical specialty, even if they can or do theoretically work in another field.

A surgeon who can’t operate because of low back pain could easily find work but would still be disabled using a true specialty-specific own-occ definition. Note that even here the details vary. Guardian’s “enhanced” Own-Occ definition would pay benefits for this scenario, but potentially others might not if you could still make almost your full income in a related clinic.

The ability to still work while disabled can be critical for both your financial security (since your policy will not replace your full income) and your well-being (since work can be meaningful).

Insurance companies often quote that one out of seven doctors end up using their disability policy or even that one in four is able to use their stronger own occupation policy. Those big fractions and a doctor’s high income are why disability policies are relatively expensive.

Limitations of Group Coverage

While employer-provided disability insurance is a valuable benefit, it often has limitations that can leave physicians insufficiently protected. Group policies often have a more restrictive definition of disability, cap benefit amounts, and lack portability if you change jobs.

Additionally, benefits paid by an employer policy are usually paid pre-tax and therefore subject to income tax, reducing the effective coverage. (Most individual policy premiums are paid after-tax, which yields tax-free benefits).

On the positive side, group policies are generally guaranteed issue (meaning no medical underwriting is required) and may offer unisex pricing. They also tend to be less expensive than individual policies thanks to their larger size, pooled risk, and the employer’s contribution.

But you can’t take even a good plan with you if you leave. And if you develop a condition while employed but leave your job before you become disabled, you won’t be able to qualify medically for a new individual policy.

For these reasons, it’s a good idea to supplement employer coverage with an individual policy. It’s better to buy a small individual policy that you can increase in the future if needed than to pay for an extra benefit from your employer’s group offering.

Any new policy you purchase for yourself will take into account the benefits of current policies you hold in determining how large a benefit you can purchase (they don’t want you to be “overinsured”), but a group policy from a new job won’t change your individual policy benefit once you’ve purchased it. It is what it is.

Short-term vs. Long-term Disability

Long-term disability insurance is the primary focus for most physicians. These policies typically have a waiting period (“elimination period”) of several months before benefits begin, but they provide coverage for an extended period, often until retirement age.

In contrast, short-term policies (often provided by employers) may only pay benefits for a few months up to a year. With a solid emergency fund, decent credit cards, or some loving family, you likely will not need to purchase an additional short-term policy outside of whatever comes with your job. The purpose of these policies is to pay you immediately and keep you solvent before the “elimination period” for your long-term policy is over and those benefits kick in. Note that a common 90-day elimination period means that benefits begin on that date, not that you’ll receive a check on that day (usually will be a month or so later).

Unless you opt for a long elimination period to save on premiums or are living at the edge of your budget, most physicians can “self-insure” against a short-term disability.

Policy Details

In general, the more useful the policy is, the more it costs. For example, own-occupation costs more than any-occupation.

BENEFIT PERIOD AND AMOUNT

When selecting a policy, you’ll need to choose a benefit period, which is the length of time you’ll receive benefits if you become disabled. For young physicians, a benefit period that lasts until at least age 65 is desirable. You’ll also select a benefit amount, which is the monthly payment you’ll receive if you’re unable to work.

This is typically a percentage of your pre-disability income, usually capped at 60-70%. Physicians in training are usually eligible to purchase a flat $5k/mo benefit policy. (For reference, the maximum SSDI benefit in 2024 is about $3,600/mo.)

In most cases, premiums are waived while you are disabled.

Note: if you’re not working, you’re also not saving for retirement. Since a typical disability policy might pay until age 65, this means that your insurance benefits need to be enough to live off now and to save for possibly making it into old age.

RIDERS

Other factors that influence how useful and expensive your policy is are the “riders” (options) you select. Think of riders like a la carte options you can add to the policy.

When choosing a policy, you’ll start with a base own-occupation and add the extra features. Here are some common examples:

  • Residual Disability Rider: Provides partial benefits if you experience a loss of income due to partial disability.
  • Future Benefit Increase or Purchase Rider: Allows increasing coverage without additional medical underwriting.
  • Cost of Living Adjustment (COLA) Rider: Increases benefits annually to keep pace with inflation. Note that this increase kicks in after being disabled. Inflation that occurs while you’re working can still erode the functional value of your monthly benefit.
  • Catastrophic Disability Rider: Provides additional benefits for severe disabilities affecting daily living activities.
  • Automatic Increase Rider: Automatically increases coverage each year for a specified period.
  • Non-Cancelable Rider: Ensures policy cannot be canceled, and premiums cannot be increased, as long as payments are made.
  • Guaranteed Renewable Rider: Ensures policy remains in force with paid premiums; insurer can raise rates for a class of policyholders.
  • Return of Premium Rider: Refunds a portion of premiums if no claims are made by a certain age.
  • Student Loan Protection Rider: Covers student loan payments if you become disabled.
  • Unemployment Waiver of Premium Rider: Waives policy premiums during periods of unemployment.

Be aware that some carriers’ base policies include things that are riders for other carriers and vice versa. “Guaranteed Renewable” and “Non-Cancelable” are must-haves that are often included in a base policy. Whether part of the default policy or something you’re choosing to add on, you need to compare costs for equivalent policies/features.

At the risk of being repetitive, the three I would personally make sure to have:

  • A residual disability rider (which pays a partial benefit if you can still work but have a loss of income due to disability)
  • A future [benefit] increase option (which allows you to purchase additional insurance when your income rises without new medical underwriting)
  • A cost of living adjustment (COLA) or inflation rider (which increases the monthly benefit with inflation–beginning once you start receiving benefits–helpful given the potentially big difference in purchasing power between money when you get disabled and the potentially-up-to-decades after)

If you purchase a policy as a student, trainee, or even attending making less money than you will be in the future, the future benefit rider is important. It allows you to buy a small policy now to lock in insurability while you’re healthy and then buy more insurance when justified by your higher income. Note: this is an option; you aren’t obligated to buy more insurance. If you are confident the monthly benefit you’re offered is sufficient for your needs, then you can forgo this option.

A residual disability rider is also, in my view, a must-have. It is more common to be limited by disability than to be totally unemployable in your profession. My mother was partially disabled early in her career and received benefits for many years.

Some policies have different thresholds of lost income for triggering residual disability (e.g. 15 vs 20%). Additionally, some policies exclude or limit claims for mental health and substance abuse-related disabilities. You’ll need to weigh your options to see which balances your needs and risk tolerance.

COST

Disability insurance feels painfully expensive. Expect to pay between 2-5% of your annual benefit for a comprehensive policy (men lower, women higher, cheaper when younger). The high cost is because you might actually use it. I don’t know if the often-quoted “1 in 7 (or 4) doctors uses theirs” statistic is accurate, but the number is high enough that a good policy is also psychologically valuable for peace of mind. Umbrella insurance, by comparison, is comically cheap because you’ll only ever need it in the event of a catastrophe.

When comparing policies, consider the definition of disability, benefit amount and period, cost, exclusions, and optional riders.

One common recommendation is to choose a base policy with a true own-occupation definition, a residual disability rider, a future purchase option, and an inflation rider, with a 90-day elimination period. But the right policy design will depend on your specific needs and budget. So a typical $5k/mo resident policy will probably be somewhere in the low $100s/mo for men and more on the $150-225/mo spectrum for women.

It’s also essential to evaluate the financial strength and reputation of the insurance carrier. A policy is only as good as the company backing it. I don’t see any reason to consider a policy outside the Big 5 (see below) if you can afford it. A weaker policy is less likely to be useful and therefore should cost less.

“You” Factors

Disability insurance premiums are based on a variety of individual factors including age, gender, medical specialty, state of residence, and health history in addition to the policy features.

In general, the younger and healthier you are when you purchase a policy, the lower your premiums will be. Also, men have it cheaper than women (unisex pricing is dead).

Certain medical specialties are considered higher risk than others, which will also impact rates. Insurers assign an “occupation class” to each profession, which is essentially a measure of the risk associated with that particular job (the exact class assigned to a given job is variable across companies and not standardized across the industry). For example, anesthesia– with its access to highly addictive and dangerous medications–is higher risk than family practice.

If you have a pre-existing medical condition, it can affect your ability to obtain disability insurance. Some insurers may decline to offer you coverage altogether, while others may include an exclusion rider for any disability related to your pre-existing condition. Occasionally, an insurer may offer you a policy with higher premiums to offset the additional risk. If you have any significant medical history, it’s crucial to find a good independent broker/agent to shop around and compare how different carriers will handle your specific situation.

If there is any meaningful chance you’ll be denied a policy, you should absolutely look into getting a Guaranteed-Standard Issue (GSI) policy before applying for your own individual insurance policy. GSI policies are essentially a hybrid between an individual policy and the typical group policy you get through your employer: they are individual and portable even if often more limited in the details, you can take them with you when you change jobs, and they do not require medical underwriting. They are increasingly commonly offered by employers including many schools and hospitals.  The main reason people are denied for a GSI policy is a history of being denied insurance,  so lock one of these in first before risking your insurability for all time, especially during training when you’re likely to have access to one.

UNDERWRITING

The medical exam is usually fairly straightforward, similar to a standard physical. It may include a blood draw, urine sample, height/weight measurements, and blood pressure check. The labs and physicals are sometimes waived for physicians under 45. The insurer will also review your medical records to assess your health history and identify any pre-existing conditions.

The underwriting process can take several weeks to a couple of months, depending on how quickly you provide the required information and how long it takes the insurer to review everything. It’s important to be forthcoming about your health history during this process, as undisclosed conditions could potentially invalidate your policy later on.

Be honest with your agent upfront, and they should help you figure out the best plan of attack.

When to Purchase Coverage

Ideally, physicians should purchase an individual disability policy early in their careers, while they are young and healthy. This locks in insurability and lower premiums.

When you’re an attending, the policy size will be limited by any group coverage you receive from your job. Residents and fellows can usually secure a standard policy (e.g. $5k/mo) that isn’t offset by employer-provided policies, and 3rd/4th year medical students can also purchase smaller $2k or 2.5k/mo policies. If the rates for those seem higher than you can afford, you could always buy a cheaper $1000/mo policy just to lock in insurability on the order of ~$25-40 bucks a month.

A matched medical student will buy a policy with the occupation class of their upcoming residency; a pre-match student will get a generic occupation class (which is still own-occ for whatever they eventually do). This means that a medical student going into a risky profession may secure lower rates by getting coverage early, but one doing something like family med would not.

Overall, the pre-attending years are an optimal time to establish portable, individual coverage while you’re healthy.  If you have a signed job contract, companies can use that to determine your coverage level (but you might not be able to afford the higher premiums yet).

Different agents have access to different discounts, mostly based on the number of policies they sell to an insurer from a specific institution. This usually has nothing to do with being in “training” but rather that some trainees leave their big institutions for the real world and will lose access to those discounts (10-20%). So while there is often a rush to buy a policy at the end of residency, there is nothing magical about that time, and the access to discounts may or may not be better as a student, trainee, or attending. It depends on where you are, what else you do, and who you buy from. You don’t need to wait until the end of training to buy a policy if you can afford one earlier.

Again, before trying to buy individual coverage, it’s a good idea to see if you can secure a GSI policy first. They’re generally useful, portable, and affordable, and–importantly–they don’t require medical underwriting. Lock in one of these before you pursue an individual policy and you won’t be blindsided by uninsurability. Once you get approved for a better individual policy, you can drop the GSI (which also typically cost more).

Choosing an Agent

You can’t just buy a policy directly from the insurance companies themselves. All policies are purchased via an agent or through a professional association like the AMA that is using a captive agent to act like one. In all cases, the middleman is being paid a commission by the insurance company for your business. (That’s why the AMA will find you and send you insurance mailers forever). The agent’s commission is indirectly included in the cost of your policy, but you will never pay an agent directly. There’s no extra cost to buying a policy and no cost to drop one.

Some agents are “captive” and only represent a single insurance company (e.g. Northwestern Mutual), while others are independent and can offer policies from multiple carriers. You want to buy insurance through an independent agent who can get your quotes from each of the big 5 insurance companies: Ameritas (Union Central), Guardian (Berkshire), Principal, MassMutual, and Standard. No matter what you choose, the agent will make a bunch of money.

While you can purchase a policy through an organization like the AMA, association policies are a form of group plan that are often less expensive than individual policies but have more restrictive terms and lack the stability of an individual policy.

Reviewing, Increasing, & Dropping Coverage

If you purchase a future increase option, you’ll be able to increase your coverage amount without additional medical underwriting. This can be a valuable feature, but it’s still wise to review your coverage periodically to ensure you’re not paying for more than you need.

The older you are and the more money you have saved, the less of a monthly benefit you’ll need to be okay in the event of a disability and less valuable riders like the COLA will be.

When reviewing your coverage, consider factors like your current income, your fixed expenses, any new debts or dependents, and your progress toward financial independence. You may find that you need to increase or decrease your benefit amount, or that you’re comfortable extending your elimination period to reduce premiums.

When in doubt, you can ask the agent you purchased from if you can exercise your rider and increase coverage. They’ll look at your income, your current policy, and whatever coverage you have from your job and tell you. Just be aware that they have an incentive to tell you to buy more whenever they can.

When you’ve saved enough to be financially independent (i.e. ready for retirement) and don’t need to work, then you also have enough money to drop disability coverage. You may choose to keep your policy as long as you work, but at this point you have the money to self-insure.

Summary: This is Important

Disability insurance is a huge business and a very common purchase among physicians.

For physicians, your ability to earn an income is likely your most valuable asset, and disability insurance is the best way to protect that asset and ensure financial stability for yourself and your family.

While no one likes to think about the possibility of becoming disabled, the reality is that it can happen to anyone at any time. By securing a comprehensive disability policy early in your career, you can have peace of mind knowing that you’re prepared for whatever the future may hold. I personally find this to be a valuable if difficult to quantify benefit.

Literally everyone who has ever written anything vaguely about personal finance for physicians has talked about disability insurance. Part of that is because it’s important. Part of that is because it’s a large lucrative industry with advertising behind it. People get paid for referrals, and I’m not an exception.

While I’ve been writing here for a very long time before finally making this post, I also have a financial incentive to cover this topic. I don’t have a long list of agents clamoring for your attention, but I do partner with two independent companies: LeverageRx and Pattern.

You should check in with at least two companies/brokers/agents before making this very big purchase. And if you have access to a GSI policy, it would be prudent to lock that in first and then replace it once you secure a better policy.

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