Buying Disability Insurance As a Medical Student

Let’s start by saying that I’m certainly not the only person on the internet that thinks it’s critical for all doctors to buy true own-occupation disability insurance that protects you in the event that you become disabled and can’t earn your full income. Your earning potential is too high and school is too expensive to not protect. There’s a good chance you’ve already (or will soon) hear about DI all the time because your eyeballs and attention are valuable and disability insurance agents sponsor a lot of podcasts and a bunch of blogs.

And that’s actually basically okay because that helps pay the bills for a lot of meaningful content out there; these folks are paid by the insurance companies (not you); and you need to use one to buy a policy anyway.

I bought my disability insurance policy toward the end of residency, but when I look back at my post-call exhausted driving, occupational hazards (e.g. sharps), and health scares, I feel fortunate to still be healthy and to have gone through the process unscathed. Though we haven’t needed to use it yet, it’s not hard to imagine a scenario where things didn’t pan out so well or where I or my wife developed a condition that prevented us from buying insurance in the future.

I have no doubt that the best answer to the question of “when to buy disability insurance?” is as soon as feasible. And I wondered more about the logistics of buying a physician policy as a medical student, something that no one really talks about.

So I asked Matt Wiggins from Pattern to talk with me and fill in the gaps. He made a video for you, dear reader (good for anyone but especially medical students and residents), and I’ve written a post breaking down how that works in medical school and detailing my thoughts. This isn’t a sponsored post (we don’t do those around here), but I do have a relationship with Pattern if you end up checking them out to get policy quotes. (It never costs anything to see your options; agents get paid a commission if you buy a policy.)

What is disability insurance?

A disability insurance policy will provide you with monthly paychecks if you become unable to carry out the duties of your job due to disability. The more you earn, the bigger a policy benefit you can purchase (and the more it costs in premiums). Disability insurance ensures that you are protected financially when things go wrong and you can’t work the way you used to.

A good policy for a doctor is called an own-occupation policy because it pays the full benefit if you can’t do the same doctoring job you were doing as a physician when you become disabled, even if you can be gainfully employed otherwise. If a surgeon hurts her hands and can’t operate, then she’s fully disabled even if she goes on to make even more money as a consultant or another kind of doctor. The problem with most policies bundled with your employment is 1) they don’t follow you when you leave your job and 2) they typically don’t have as strong a definition as own-occupation or what defines a disability. The practical matter is that a group policy just may not cover you in real life. The sorts of policies residents have while in training are notorious for letting you down when you need them most.

When you buy a policy, you will also choose from a variety of “riders,” which are essentially optional add-ons you can purchase a la carte. Each one makes your policy more expensive but also makes it more flexible. A common example would be a “future benefit increase” rider, which allows you to upgrade to a bigger policy in the future when your income rises without needing to go through medical underwriting. Even if you develop a medical condition that is sure to result in a disability in the future, the company still has to let you exercise the rider.

When is the right time to purchase disability insurance?

So you definitely need it. The question is just the timing. Ultimately, since you can’t predict the future, the real answer is as soon as you are eligible to buy the right kind of policy and can afford it. The first part has a real answer, the affordability part is a little fuzzier.

There are two long-term financial benefits to grabbing a policy early:

— Cheaper rates based on Age and Health (you’re never younger or probably healthier than you are right now)

— Discounts from University or Training-program affiliation (range anywhere from 10-40% off the premium and will typically last the life of your policy even after you leave)

For many, a good solution is to get a very small policy towards the end of medical school. You can lock in $1,000/month in coverage for $20-$40/month, which would at least provide $1,000/month tax-free until you are retirement age should a disability happen to you in medical school. But the main benefit is that this small purchase would lock you into the ability to increase your coverage to much higher levels without the insurance company ever checking on your health again, which can be the difference between being future-proof or not. It’s all about who you are when you buy, not who you become.

How Things Differ for a Medical Student

A resident or attending buying disability insurance is able to buy an own-occupation specialty-specific policy. This is the kind that protects exactly what you do. A pre-match medical student will instead get a generic (internal medicine) policy. If you buy a policy after matching, the rate will be adjusted for the risk category (and procedures etc) of the field they’ve chosen. So an anesthesiologist, a higher-risk specialty, will have a higher rate than a family doc.

But there is some nuance. I asked Matt how that works if you specialize later on, and this is what he said:

When a doctor files an own-occupation claim, the insurance company looks to find out exactly what duties or procedures the doctor is doing at the time of disability, and that is the occupation that is protected. In other words, if a doctor buys a policy in med school and then goes on to an internal medicine residency, followed by a cardiology residency, followed by an interventional cardiology fellowship, they will be protected for the procedures they are doing as an interventional cardiologist even though they bought their policy well before they were an interventional cardiologist and their rates are cheaper than if they had purchased the policy later as an attending IC doc.

Interesting (and not what I would have expected at all).

So, if you’ve chosen a higher risk field like a surgical specialty or anesthesiology, then you’ll also save money in the long term by getting the rates of a less risky “generic doctor” profession upfront.

Most companies will only offer policies to fourth-year students, who can purchase a benefit of up to $2500/month (which would cost in the neighborhood of $60-$100/month in premiums for men and $75-$125/month for women). Once you match, you’d be eligible to increase to the resident benefit (which is 5,000/month across the board). But you don’t have to buy a policy at the maximum you’re eligible for; you can buy one that you’re confident you can afford.

Parting Thoughts

The idea that I could have skipped a couple of burritos and a latte and locked in disability insurance as a medical student is crazy to me. I waited until late in residency when we had more cash flow, but that was I think the wrong approach. I should have purchased a small policy as soon as possible. Even if I couldn’t afford the higher premiums to increase the benefit until later in training, at least I could have guaranteed that flexibility to do so upfront by being more proactive.

 

 

Student Loans Virtual Noon Conference

I gave a virtual noon conference today for MRI Online. It requires a free registration, but it’s one of a collection of great radiology lectures available for free. This is week 19 of the series.

My talk is permalinked here. It starts with discussing a brief history of student loans in the US as well as a pretty detailed discussion of PSLF including dispelling some myths including an explanation of the high rejection rate.

If you listen and notice me laughing at the beginning, that’s because my Zoom session crashed when I attempted to share my screen and I had to restart. Audio cuts out here and there but is nearly 100% intact, pretty good for a Zoom call. And if you listen to any of my podcasts or other talks this past year, you can safely assume I’m sleep deprived (babies are cute) compounded today as I ended up covering the early morning 6 am shift, but it definitely has some really some useful nuggets for those who like audio/video. It’s no substitute, however, for sitting down for a few hours and reading my ad-free totally-free book in whatever format you choose.

One participant asked a great question that I incompletely answered during the Q&A at the end. It was, essentially, what happens to student loan debt after a divorce in a community property state like Texas? The answer is that it usually goes back to the individual borrower, but, that’s only because all assets and debts that happen before the marriage remain individual property and revert back to the individual while all things that happen during the marriage are shared equally. Since most people in the US have just undergraduate loans and most people get married after college, most people won’t have to deal with their spouse’s loans after a divorce. But certainly not all, and this is more likely to be an issue for doctors, who may enter school married or get married while in school. Timing is everything.

Resident Retirement Contributions and PSLF: Pretax or Roth?

Saving for retirement, even as a resident, is a good thing. The absolute amount of money you can likely contribute is relatively small, but it does add up and over time it will compound to a larger amount. However, the most important reason to do so as soon as possible is to start the saving habit.

It’s important to make saving an automatic deeply-ingrained habit. It will serve you well when you make more money and help you make faster progress toward your savings goals of financial flexibility and a healthy retirement. If you think you should wait until you earn more money, the problem is that you can always spend more money, and some folks will simply need higher spending in order to make ends meet based on the decisions they’ve already made with regards to prior spending and borrowing, family planning, and the results of the match. So the most meaningful answer to the question of resident retirement savings is simply yes.

But if you can, let’s discuss the age-old question of pretax vs Roth.

The Options

In a traditional pretax account like the standard option for your work 401k or 403b, money is subtracted from your income in the year of the contribution. So you pay fewer taxes upfront. It then grows tax-free while in the account, and you’ll pay taxes on the distribution when you use it in retirement as if it were income.

Roth accounts are the opposite. You put after-tax money in, meaning you pay regular taxes on that money in the contribution year. The money also grows tax-free while in the account but then is also tax-free when you withdraw it.

Which contribution type is mathematically best has to do with your marginal tax rate during the contribution year while working vs during the withdrawal year in retirement. What’s important to realize is that mathematically, the two choices are equivalent when the tax rates are the same if the amounts contributed are adjusted on a tax-basis (ie, at a 10% marginal tax rate, $1000 pretax contribution is equivalent to $900 Roth, because the Roth has the taxes paid upfront).

The reason behind the idea that a resident should generally use a Roth option is because it’s assumed that you will earn less as a resident than you will want to spend in retirement (potentially true), not that you will simply earn less than you would as an attending (almost universally true).

Retirement Contributions and Student Loans

When it comes to student loans on an income-driven repayment plan, pretax contributions reduce your adjustable gross income, which reduces your discretionary income, which reduces your monthly payments the following year. Because PAYE/REPAYE uses a ten percent discretionary income calculation, every dollar you contribute reduces your payment by ten cents the following year (fifteen cents in the old IBR). If you achieve loan forgiveness via PSLF, then that bonus contribution match is truly extra free money on top of the PSLF windfall.

Additionally, if you are in REPAYE, the lower payments can result in more unpaid interest and thus a slightly better unpaid interest subsidy and lower your effective rate. Conversely, this would only matter if you did not get PSLF. Outside of this rate reduction, remember that lower monthly payments are really a good thing financially: they just mean less progress on your loans and more interest paid over time.

The impact here depends on how much you can contribute. If you have a high-earning spouse and can therefore max out a $19,000 contribution, for example, you’d save an extra $1,900 in payments the following year. That’s not chump change. But if you put $5k away? Just $500, or about $40 a month. Not necessarily anything life-changing there.

In contrast, Roth contributions have no impact.

How Taxes Work

2019 tax bracketsSingleMarried Filing Jointly
10%$0 – $9,875$0 – $19,750
12%$9,876 – $40,125$19,751 – $80,250
22%$40,126 – $85,525$80,251 – $171,050
24%$85,526 – $163,300$171,051 – $326,600
32%$163,301 – $207,350$326,601 – $414,700
35%$207,351 – $518,400$414,701 – $622,050
37%$518,401+$622,051+

Taxes are progressive. You don’t simply pay your marginal rate on all your earnings based on your total income. You pay the rate on each bucket of money as it fills up. But since pretax contributions are a deduction, they do reduce your taxes at the marginal rate.

So, looking at the chart, a single resident making $55k would be in the 22% bracket, and with the standard deduction their effective tax rate about 12%. Let’s say you then as a married couple wanted to retire on $100k a year? Well, with a $24k standard deduction that would actually get you a marginal tax rate of 12% and an effective rate of about 11% (using 2019 tax brackets as a guide). In this scenario, therefore, pretax could win right off the bat (the marginal rate is what matters here).

There are three important nuances here:

  1. We don’t know what taxes will look like in the future.
  2. Distributions are taxed as income, so not every dollar is taxed the same.
  3. You may need less money in retirement than you think.

We don’t know what taxes will look like in the future

I suspect tax rates will overall be higher in the future, at least at the top marginal rates. The current rates are at historic lows, deficits are rising, and income inequality is reaching a tipping point. That doesn’t necessarily mean they’ll be higher at the level you end up retiring at, but it’s certainly a notch in the Roth column.

Distributions are taxed as income, so not every dollar is taxed the same

As we just discussed, taxes are progressive and each bracket is filled sequentially with rising income. So the first dollar pays almost nothing while the final dollar pays the full marginal rate. In retirement, you can utilize a combination of social security, Roth, and pretax money to minimize your tax burden. You do not need to pay taxes on an income of $100,000 in order to spend $70k after taxes in retirement like you would have during your working years if you have money in both types to utilize. You can use pretax at the lower tax brackets and Roth to fill in the rest to prevent paying the higher rates.

That’s one good reason to do a Backdoor Roth as an attending, even when you earn too much to contribute directly.

You may need less money in retirement than you think.

In retirement, you should have no debt and significantly decreased monthly expenses. No student loans. Real estate taxes, sure, but no mortgage. Probably no car payments, at least for a while. Maintaining a similar quality of life in terms of discretionary spending will be significantly less expensive even with some increased leisure spending.

The Fuzziness and Flexibility of Extra Money

The 10% PSLF “match” has nothing to do with tax savings. It’s extra after-tax money you get to play with the following year due to lower required monthly loan payments. So it’s letting you hold on to money you would have spent. That makes it fuzzy. But it also makes it valuable, because it’s money that you can do whatever you want with. You can certainly invest it by increasing your contribution to your retirement. You could even do that pretax again, getting a token 10% of that amount back the following year. But regardless, the money is a good reason to understand the idea of the time value of money.

The time value of money is the finance principle that money now is worth more than the same amount of money later due to its earning potential (ie it can be invested and earn interest). So while it’s possible, like in our above example, for this extra money to merely improve the tax inefficiency of using a pretax account when you hope to spend more in retirement, if it ends up a wash it still may be better to have that money now than later.

One thing to consider, outside of math, is simply where the extra money will help you more. If you do a good job saving for retirement, the few thousand bucks in changes related to tax optimization may not be meaningful because you’ll have more than enough anyway. On the flip side, having smaller IDR payments frees up money now on a monthly basis in these leaner years at the start of your career.

That’s putting money in your pocket to get rid of high-interest debt like credit cards, build up an emergency fund, save a little for an important purchase, make life and disability insurance affordable, or pay for your own HBO subscription (speaking of, have you priced out your options for own-occupation disability insurance yet? Because you need to).  My point is here is that it’s not always prudent to let the tax tail wag the living your life dog.

You can, of course, split the difference and invest some of your contribution in your work pretax account (say up to the match) and then whatever else you can afford into a Roth IRA.

Conclusion

it’s literally impossible to know what the correct choice is mathematically. Any calculation involves a ton of assumptions. It’s possible the machines will have taken over and everyone will be on a universal basic income and most tax revenues will come from the immortal cyborg of Jeff Bezos. It’s also absolutely possible that future tax rates will be sufficiently high that Roth becomes the optimal strategy regardless of the extra money pretax contributions can give you right now.

However, that doesn’t necessarily make it the right choice for you. Personal finance is personal. The increased cash flow now may be more valuable in practical life impact than more money later that you may not need or get to utilize.

Personally, if you’re really planning for PSLF, I think pretax makes a lot of sense (though Roth is never bad!). If you’re not planning for PSLF, then, by all means, these are almost certainly some of the best years of your career for Roth contributions. And lastly, if you’re struggling to make your IDR payments and don’t see how you could contribute to your retirement at all, then pretax may make it slightly more feasible for you.