If you’re trying to be financially responsible, you need to think twice before making big purchases. Whether you’re considering a new car or a fun vacation, you might find yourself asking whether it’s really the wisest use of your hard-earned cash. You might even find yourself questioning things like insurance – is income protection worth it? To answer that question, you need to look at the numbers.
Breaking Down the Cost of Paycheck Protection
According to Life Happens, individual long-term disability insurance typically costs around 1% to 3% of a person’s annual salary. If you’re earning $200,000 a year, you might pay about $2,000 to $6,000 a year for coverage, or about $166 to $500 each month.
This might sound expensive. Indeed, the monthly premiums might be higher than what you pay for certain other types of insurance, such as auto insurance. However, when you break down the numbers, you can start to see that disability insurance provides good value. This is because disability insurance protects your income, and that’s worth a lot more than your car. It’s even worth more than your house. Without your paycheck, all your other assets are put in jeopardy.
The Value of Your Career
Some disability insurance policies offer benefit periods that last until you reach retirement age. To determine whether a disability insurance policy is worth the cost, you need to look at the value of your career.
If you’re still a resident or fellow, you might not be earning the big bucks yet. According to AAMC, the average stipend for a first-year resident was $59,279 in 2021. Even residents and fellows with more experience under their belt don’t usually break out of the five-figure salary range.
But this will change. As your career advances, your earning potential will increase substantially. Your specialty will make a big difference, but physicians across all specialties can expect to command impressive incomes. According to Doximity, physicians specializing in family medicine have an average annual compensation of $273,865, while physicians specializing in radiation oncology have an average annual compensation of $544,313.
59,279
273,865
544,313
8,505,000
12,110,000
According to the Average Doctor, a primary care physician might make $8,505,000 gross on average over the course of a 35-year career, while a specialist might make $12,110,000.
That’s a lot of money, and you’re working hard to earn it. You’ve also invested a lot in your career, both in terms of time and money. If a disability prevents you from realizing this earning potential, your finances could go into the red fast. A disability insurance policy could replace a substantial percentage of your lost income, helping your family maintain the lifestyle you’ve worked so hard to create.
You probably insure many of your other valuable assets, including your car and your house, and maybe even your jewelry and your family vacations, and these items are probably worth a lot less than $8.5 to $12 million. It makes sense to protect your most valuable asset – your paycheck – when you sit down and crunch the numbers.
Crunching The Numbers on Income Protection’s Worth
Let’s say you earn $250,000 a year as a doctor. If you work for 35 years, you’ll earn $8,750,000.
250,000
X
35
=
8,750,000
Now let’s say you buy a disability insurance policy that costs 3% of your annual income. You’re paying $7,500 a year, or $625 a month, for coverage. With a monthly income of more than $20,000, that amount is very doable – but what if you never need to use it? What if these premiums are wasted because you never experience a disability?
Well, that would be fantastic. When you buy insurance, you generally don’t want to have to use it, but you get it anyway, just in case.
The Social Security Administration says that more than one in four of today’s 20-year-olds will become disabled before reaching retirement age. In contrast, only one in eight of today’s 20-year-olds will die before reaching retirement age. You’re twice as likely to experience disability than you are to experience death during your working years. That’s something to think about if you’re willing to pay for life insurance but not disability insurance.
Even if you’re in good health now, you could be struck with a disability tomorrow. You could be injured in a car crash or skiing accident. You could be diagnosed with cancer or a heart condition. And don’t forget about mental health disorders. Depression and anxiety are common causes of disability.
And speaking of the Social Security Administration, don’t count on receiving Social Security Disability Benefits. The Social Security Administration uses a very strict definition of disability, and the majority of disability claims are denied. The benefits are modest, too. In 2022, the average monthly benefit is $1,358.
Individual disability insurance provides the coverage your income deserves. It doesn’t have to break the bank, either.
How to Control Your Paycheck Protection Costs
Your income is worth protecting, and the odds of disability are high enough that disability insurance just makes sense. Nevertheless, it’s understandable that you don’t want to pay any more than is necessary. After all, you have a lot of other ways you want to spend your money – things like your children’s college tuition, the mortgage for your house and a boat where you can make life-long memories with your family.
Of course, without your paycheck, you might not be able to afford any of those things.
The good news is that there are ways to lower your disability insurance costs without sacrificing the coverage you need.
One of the best ways to secure good income protection rates is to purchase coverage as early as possible. Your age and health are key factors that can impact your disability insurance rates. By securing coverage when you’re young, you can lock in good rates. If you wait, you might not be able to get as good a deal, especially if you develop any health conditions. And remember, disability can strike at any age, and doctors can become patients in the blink of an eye. To make sure you have coverage when you need it, it’s smart not to wait.
In fact, if you’re still a resident or fellow, that can be the best time to buy disability insurance for doctors. By purchasing coverage during a graduate medical education program, you can lock in low rates and benefit from discounts. When you get a policy with a future purchase option, you can increase your coverage as your income increases – without having to undergo additional medical underwriting.
There are other ways to reduce your costs, but you need to consider the impact on your coverage and whether the savings is actually worthwhile. For example, you can increase the elimination period, which is the amount of time you have to wait after experiencing a disability before you can receive benefits. If you have enough savings to cover the lost income for a while, this might be a good way to lower your premium.
Shorter benefit periods can also result in lower costs, but this means your benefits could dry up before you’re ready to go back to work. With some disabilities, you might be able to recover in a couple of years or so, but others are permanent. Given this, you might need coverage that lasts until retirement age.
You can also combine different types of coverage to secure maximum income protection. For example, if you have a group disability insurance policy through an employer, you can layer individual coverage on top to optimize protection.
So, What Do You Think – Is Income Protection Worth It?
We think so. If you’d like to go over your income protection needs, contact us.
