Safeguarding Your Future
A PRIMER ON LIFE AND DISABILITY INSURANCE.The New Physician
Right now, as a busy, time-crunched medical student, you may not have even stopped to consider your need for life or disability insurance. But perhaps you should. Along with buying a home, paying for your education and saving for retirement, purchasing insurance is one of the most significant economic decisions you’ll make and here’s why.
THE LOWDOWN ON LIFE INSURANCE
Most people purchase life insurance to meet the future needs of a spouse, child or elderly parent. Some buy life insurance to build up cash reserves for the future when retirement or college tuition expenses loom.
To take out a life insurance policy, you need to be in reasonably good health. You may have difficulty getting coverage if you’re in poor health, or if you work in a high-risk occupation. But you may still be able to obtain insurance, though at a higher cost, even if your occupation or health condition makes you a less-than-perfect risk to insurers.
Insurance companies determine your risk level by reviewing personal information about you. Applications are reviewed for health factors (smoking, weight, heart disease, etc.), family history, occupation, gender, as well as a person’s financial situation.
Insurance should be part of an overall financial plan. It’s worth taking the time to assess your net worth, review your spending habits, determine how much you need to save for retirement and estimate how you’ll pay for your children’s education before you determine how much life insurance you need.
You should save about 5 percent to 15 percent of your gross income to meet financial needs over the long term.
Make sure your savings plan includes buying life insurance that’s equivalent to about five to eight times your current wages. So, if you earn $50,000 a year, you should have between $250,000 and $400,000 of coverage.
A well-drawn insurance plan looks at the assets you need to take care of your spouse, children and, in some cases, your parents. This amount may decrease over the years.
Ideally, your goal is to buy or adjust your amount of insurance to cover any shortfall between your family’s estimated income and expenses after your death. If we assume that the policy death benefit could be invested at 6 percent annually, the general rule of thumb is that you buy $100,000 in insurance for every $6,000 shortfall in annual income.
DO YOU REALLY NEED DISABILITY INSURANCE
As a physician-in-training, you’ve already committed considerable time, energy and money to building your career. In the not-too-distant future, working as a physician will provide you with an important source of income to maintain a certain standard of living. In a way, your ability to work is your most important financial asset.
No one wants to consider the possibility of becoming so sick or injured that they can’t work for a living. But if you were to become disabled, you would have several options to maintain your lifestyle. You could live off savings and investments. A liquidation of your assets also would be possible. Other options include getting a loan or obtaining eligibility for Social Security benefits. A final option could be relying on other family members or relatives as a source for financial help.
For most people, these alternatives are undesirable. Becoming dependent on others or relying on a final cash source could put you in an extremely uncomfortable, if not vulnerable position, especially if you have a long-term disability.
Disability income insurance helps you and your family cover the period of time when you’re disabled and unable to earn an income. This type of insurance can help provide a monthly benefit to replace your lost income while you’re ill or injured and unable to work.
So how do you decide how much insurance you need? Disability policies can be complex and difficult to compare. The key is finding a package that provides you with the greatest amount of financial protection for the most reasonable cost. Generally, there are three primary considerations you’ll want to take into account before choosing a policy.
Replacing your lost income. This is the most important function of disability coverage; and the most fundamental element of your protection plan is the definition of disability. It tells you under what conditions you’ll receive benefits to replace lost earnings.
A good policy should consider you disabled and eligible for your full monthly benefit if you are unable to work in your own occupation and choose not to work in another. Some of the better policies will even pay you a proportionate benefit while you’re working until you’re earning at least 85 percent of your former income.
Protecting your future insurability. Because your income will probably increase throughout your career, you’ll need additional disability protection. To purchase more coverage, however, you must be in good health—and that doesn’t always continue throughout your prime working years. A policy that provides future insurability benefits, allowing you to increase your coverage as income increases without providing medical information, can solve this problem.
Look for flexibility in choosing future insurability benefits. If you expect your income will grow gradually over time, then an indexing feature, which gradually increases the benefit in line with your rising income, will work best for you. On the other hand, if you expect rapid growth in income, you’ll want the flexibility to purchase additional amounts of coverage when your income increases occur.
Inflation protection. Inflation can have a devastating effect on the value of your monthly benefit if you’re disabled for a long period of time. Most policies offer an inflation protection or cost-of-living agreement that helps you maintain the purchasing power of your benefits throughout your disability.
When comparing inflation protection options, select a policy that provides “real” inflation protection—such as those that offer increases based on the Consumer Price Index, not an artificial percentage chosen by the insurance company. Choose increases calculated on a compounded, rather than simple, basis. Finally, make sure the inflation protection option doesn’t have a limit that caps increases in the benefit once your monthly benefit has doubled or tripled.
In the short term, yes, there are a lot of factors to weigh before purchasing life and disability insurance. But in the long run, the right policies will provide you and your family peace of mind.
Anthony J. Leahy is a manager with the Minnesota Life Insurance Company, which has provided AMSA members with group term life insurance for more than 30 years.
This column is sponsored by the Educational Finance Group, which offers the AMSA Advantage Educational Loan program.