Speaker 1 (00:02.306)
Welcome to the Physician Family Financial Advisors Podcast, where physician moms and dads turn today's worries about taxes, investing, and extra money into a comfortable feeling of financial security. I'm Ben Utley.
and I'm Nate Rennecke. Today's question is from Patty, a physician mom who wants to know how should physicians prepare for a disability? And in today's episode, there may be some industry jargon in here and it's somewhat necessary, you know, along with other definitions about some products that physicians need to prepare for a disability. But I want to be really clear before we start on exactly what you need. Really you need to get your insurance straightened out.
You need an emergency fund and you need to watch your debts That is really how a physician should prepare for disability and and we'll get a little bit more into that so Then I think a lot of physicians may know this already, but physicians really need disability insurance but it's this sort of elusive topic that to be honest sometimes is it's kind of a downer and maybe people don't want to look into what it is or all the
details about it so we're going to do that for him today will you tell us a little bit about disability insurance
Yeah, I agree with you. Insurance is a downer. And I think it's because, you know, it's money that you pay out and the only way you get it back is if something bad happens and then you might not get all of it back. And it involves a contract, you know, because the policy is a contract which involves lawyers. And I don't know any physicians who like lawyers. and there's paperwork to get it. And sometimes you have to stick and bleed and pee in a cup. That's not fun either. So.
Speaker 1 (01:45.134)
I could see why anyone would not like disability, the topic of insurance, especially physicians who, you know, some of your livelihood comes from the insurance companies and let's admit it, they're not nice folks to play with, right? So I think that's what's behind disability insurance. But the reason to have disability insurance is because you worked your tail off to get your credentials to be able to practice medicine. You know, you went to med school and then you went through your training and maybe fellowship and
And here you are today and this is the the engine that drives the Kind of the financial bus of your life, know, it's you have your whole family seated in there and your livelihood and You that bus crashes and you don't have insurance and it's bad news, right? So you need a backup in case you're unable to practice due to accident or illness Which is typically how they define disability
Okay, so there's a lot of nuances to disability insurance. One of the things that I was thinking before we start, I get some questions about is how to pay it. So you mentioned the big payment and it's pretty, you know, relatively expensive, I would say. So what's the best way to go about paying for disability insurance?
Yeah, so when you pay premiums for disability insurance, you have some options. So they're known as modes of premiums. One mode is annual premiums. Another mode is quarterly premiums. I think some insurers offer semi-annual modes and some of them also offer a monthly premium mode. Now, insurance companies want to get paid. And so if you pay them upfront, then you can get a discount, which is to say you pay your full annual premium upfront.
Usually the discount is about 5%. If you pay them over the course of the year, monthly at a time, then you pay a little bit higher rate, okay? So listeners are probably thinking, ah, I should kind of bundle and save, right? I should pay it all in one chunk. But what I recommend people do is actually go ahead and spread that money out over monthly payments because of time value of money. So for example, if the premium is $1,200, know, $100 a month, but you could pay, let's say $1,100 upfront,
Speaker 1 (03:59.906)
then there's a little discount there, but you could also take that $1,100 and do something else with it. You could invest it and earn a return. You could pay off debt and save interest. So that is your ability to use that money. gives you the time value of that money. Whereas if you pay that on a monthly basis over time, then you maintain the use of that money yourself rather than giving to the insurance company. So that's one reason to pay on a monthly basis. If you become disabled, then...
you're likely to be in a position where you might forget to pay the bill and that bill might come due at a time when you're unable to pay the bills or someone else is not aware of them. So I like to see people go for that automatic monthly premium because it kind of gets kids done no matter what happens if life gets in the way.
So the way that you describe that and the kind of the way that I think people may think about their insurance agent is like, if you don't pay your bill, you're not going to get you're not going to get the benefits and the big bag insurance people. who are these people? Who should we buy our disability insurance from?
Yeah. so there are a number of ways to buy disability insurance. There are at least seven or eight carriers that I can think of. I would not buy my disability insurance from just a general lines agent, the same person that you get your auto and your home and all that stuff through. I wouldn't buy it through them because they're not going to have a, typically not going to have a physician specific policy. What you need is one that is, is designed for physicians and there are a wide number.
of agents out there who specialize in disability insurance for physicians, and many of them also do life insurance for physicians. the question is like, what difference does it make? What most people do not recognize is that the cost of insurance, the premiums for insurance in any given state are regulated at the state level by the state's insurance commissioner. So from one company to another,
Speaker 1 (05:57.07)
from one product to another, from one rating class to another, the premiums are going to be the same. So if you go to agent A, you get product A in your rating class A with Pell's and Whistles A, that's gonna be the same premium if you go somewhere else, with the exception that some agents have what's known as a multi-life discount. So let's say that you're working at a large regional hospital and
A particular agent happens to have three or four other people that are already insured by that same company A. All right. So if you were that fifth person and they have a multi-life discount, you're going to receive that multi-life discount, or at least you have a shot at it. If you go to an agent who does not do a lot of physician business, then the chance of them having that discount is much lower and there may not be a discount. They might not even be aware of the discount and the better disability insurance agents will actually dig for those discounts. It's just.
a hallmark of how they do their business.
Mmm. I gotcha. Okay. The other types of agents that I'm thinking of are I've been described as independent agents. Is that right?
Yeah, I don't think that that really makes a, yeah, I guess. so if you have an agent that sells for one company, that's going to be the company that you're going to hear about. And there is a company out there that everyone tends to bump into and their, and their, first years of training that may or may not be the right way to go. And they may or may not be able to offer you a broad range of policies and products. You know, I mean, if you're, if you're a hammer salesman and you're talking to this hammer salesman, you're going to hear about hammers, right?
Speaker 1 (07:31.31)
But if you go to a hardware store, you're to hear about hammers and all kinds of other things. So I think having an agent that doesn't have that inherent conflict of interest, which has a variety of, of, uh, issuers to choose from will be helpful. And like I say, there's only like, Oh, five or six issuers that are reputable that are prepared to do a physician oriented business.
So whenever I'm talking to a physician and they're kind of probing about disability insurance, they'll oftentimes ask me the question, ask me questions about their group policy at work. Right. In your experience, have you ever seen a group policy be enough insurance for a physician?
I think if the group policy pays correctly, which is to say if the physician is disabled in the right way, that a group policy could in fact be enough. Because the enoughness of things depends on how much you earn. And these group policies typically cover 60 or 65 percent of your pre-tax earnings. Which, you you look at that and you think, well, that's not everything that I'm making, but you're not spending everything you make because a big chunk of it goes to the government in the form of taxes.
What I see with group policies is that the definition of disability is very narrow, which is to say it might not be an own occupation definition of disability. It might be disability that pays for the first five years. There might be exceptions. It might be integrated with social security or other welfare benefits, in which case you're not really getting as much insurance as you would if you went out and you paid for this on your own in an individual freestanding policy. You know, I say it's kind of like jumping out of a plane with a
with a parachute that has holes in it. It's better than just jumping out of the plane without a parachute, but it's not the gear that you would choose if you're going to put yourself in a situation like that. The other thing that's important to remember about group disability insurance is that the premiums might be tax deductible to the employer, which means that the benefits might be taxable, which means you might have to pay tax on the benefits if you are disabled, which reduces the amount of disability you would receive.
Speaker 2 (09:38.646)
Right, so 60 % of pre-tax, then you pay taxes versus if you pay it yourself, which sometimes you may even have to ask your employer to do that. Exactly. pay that relative to you going and getting your own policy, it's much more inexpensive at work usually. And you pay that yourself every month and it's tax free.
Yeah, so what you said there was kind of nuanced. So want to, I want to bring that out and unpack it. So, some employers, well, many employers pay the cost of group coverage. Okay. Some employers will allow you to, to be taxed on their payment of that premium, which makes it such that the proceeds, you know, if you do become disabled, that you get your benefits without paying taxes. So you'd want to ask your HR department, Hey, is it possible for me to be taxed on this, the premiums that you pay?
And if they say yes, that's definitely something that you want to do. I mean, it's a slam dunk.
Awesome. Okay. I want to go back to something you said. You said, knock. Tell me more about that. So
Own occupation is a class of disability triggers. Typically the definition goes something like you are, you're defined as disabled if due to an accident or illness, you're unable to perform the material duties and then of your own occupation, which is to say that if I'm an interventional cardiologist, I'm unable to do the duties of being an interventional cardiologist because if I'm not able to do that, I might be able to be,
Speaker 1 (11:13.694)
a medical director, you know, or I might be able to render some form of primary care or something else, in which case, if it's not an ONOC policy, I wouldn't be considered disabled. The broadest definition is the one that says you're disabled due to the fact that you can't do any, can't perform any tasks or duties in the economy, and that's the definition that Social Security uses for disability.
So I mean, you have to be really, really dinged up to be able to get social security disability. So don't rely on that. You need to have, you need to have either group or some individual coverage.
Okay, so ONOC and that is a little bit personal, right? Because sometimes you'll have, you'll be a physician will have a specialty that if they can't do that job, they can't do any job. And then alternatively, there's some physicians that if one little thing happens to their right hand, you know, surgeon, then they're out of luck if they have any other.
Yeah, exactly. And then also remember that there are degrees of disability. So there's a thing known as partial or residual disability where, you know, maybe instead of doing 100 % of your job, you can only do 50 % of your job. You know, maybe you can only work half the day or maybe you could only work two out of four days, in which case you'd be considered partially disabled. And, you know, some group policies do not regard partial disability. They're like, you can work so you're not disabled.
But the private policies that you can buy typically have a partial disability feature in them. And there's a lot of features that you can have in these policies. And I think that's really a discussion to be had with a competent disability insurance agent.
Speaker 2 (12:58.306)
Right, okay. Okay, so that's disability. There's more. mean, you can go down, it's a contract, like you said, so you go down that list and talk about many definitions in there, but how else? mean, Patty wants to know, how do you prepare for disability? So other than just getting disability insurance, what are some of the other ways to prepare for bad things to happen?
think the next step as we outline in the beginning is talk about the emergency fund. so Patty had a fairly in-depth question.
And so I'm kind of translating that for our listeners to make it applicable and meaningful for the folks that are listening here. Essentially, your question is like, you know, what about after the disability happens? Like, if I'm disabled and unable to walk, I might be in a chair. What about paying for wheelchair ramps? What about paying for door modifications? What about paying for grab handles and those kinds of things? I don't know that disability insurance pays for that or not. And I know that those things are costly, but I know that they're
They're also not deal breakers for physicians who have savings. But I think an emergency fund goes a long way toward paying for those things. So, you know, Nate, you typically do the emergency fund planning that we have. So tell me like, how much money do I need to have in an emergency fund? hear three to six months worth of living expenses. Like what's a living expense and why three to six months? Why not, you know, two to 17 or something like that. Right.
Right, right. Well, so I'll start with the why three to six months. And to be honest, in the hundred of emergency funds I've planned for, maybe 60 % do land in that three to six months. But the reality is three to six months is a rule of thumb that talking heads on the radio tend to
Speaker 2 (14:58.574)
because they're not talking to a real person, which is not a terrible thing. mean, three to six months for most people in this country would be a fantastic start. But for physicians, three to six months doesn't represent much. For example, the average family that spends a few thousand dollars a month, let's say $5,000 a month, if they had three months of expenses, that could replace their roof, which might be their most costly emergency.
But for a physician who's about to go on disability insurance and lose $20,000 a month in income, $15,000 won't get you much. So I think planning for an emergency, have to look at your own life and say, what's the most costly emergency that I could have? And do I have the ability to create a fund that can cover me for that? And in my experience, I said 60 % of the time it's three to six months. Well, about
80 % of the time, the most costly emergency a physician can have is going on disability. mean, maybe it's job loss, something related to disability, and then maybe a big, huge surprise tax bill. But usually it's that disability. And the times that it's far more than six months for physicians tends to be because they don't have their disability right, they don't have the insurance that they need, and so they're covering themselves for job loss.
If you get your disability insurance, you will have to consider your elimination period, right? And your elimination period is how long you wait before your long-term disability insurance kicks in.
Okay, wait, let me, let me unpack that. that's, that's the industry jargon you warned us about. So elimination period is the amount of time that passes from the day that I'm disabled until the day that my benefits, but when I become eligible for benefits, not when they begin, right? So my understanding of this, Nate, is that, you know, if I'm disabled on January one, a six month elimination period that on, July one,
Speaker 1 (17:09.858)
I'm going to be eligible for benefits, but here's, here's the thing that I see as the, as the catch. Okay. It's kind of like getting a job. You know, if you get a job where you're paid monthly, you don't get paid on the day that you walk on the job. So you wouldn't get paid on July 1st, you get paid on, you know, the last day of July. And that's how disability insurance works as well. So if you have a six month elimination period at a minimum, you need a seven month emergency fund, because you won't see a drop of money from that policy.
until the seventh day, and that is if the policy pays. Because remember our friends at the insurance company are tight. They don't like to let go. And it's different than death where you're either alive or you're dead. Disability is one of those things where maybe you're disabled, maybe you're not. Maybe there are some days you can work. Maybe there's some days that you can't. The attorneys typically get involved in the settlement of these things and they can drag out for a long time.
So, you know, I think that if you have a six month elimination period, seven months would be the minimum emergency fund you would want to have. The typical elimination period is 90 days. So that would, that would be the four months worth of living expenses. And then a cushion on top of that, maybe, maybe imagine what the worst surprise tax bill is that you ever gotten, or maybe imagine like what it would cost, like you said, to replace the roof or, uh, you know, replace a functional car.
and make that the size of your emergency fund so you do have that cushion in your cushion because if you're a physician you know have the capacity to earn these kind of resources and have a real emergency fund so that's one thing you don't have to worry about.
Mm-hmm. Yeah, and so this is generally the path that the line of reasoning that people will go down. They will take care of their disability insurance, which by the way, if you have a longer elimination period, but you still have a good benefit amount, and sometimes you can get short term at work. Right. And so short term might cover you during that elimination period. So once you get your disability straightened out,
Speaker 2 (19:09.88)
The next question is, okay, so how much do I need? Do now, do I not need an emergency fund? Of course you do. There's the tax bill to consider, but the next big one is job loss. And so if you lost your job, how long do you get credentialed and be working again, that might be your most costly emergency. But here's the kicker. If I'm talking to a worrier and they are trying to plan for the biggest, all these emergencies stacked on top of each other.
They're going to end up with a big giant pile of cash that's not going to do them any good unless something terrible happens to them. So I think what's important is to be realistic about getting your disability insurance in place, know, paying your taxes throughout the year, and then staying strong with the most costly emergency plus maybe a month, right? Because you can buy a car for 10,000. It's not the average car a would drive, but in the face of an emergency,
You could buy a car for a month's worth of expenses. by the way, we need to talk about expenses for a moment. Okay, so we're talking about months. This is all in terms of months. How many months do you're waiting for your coverage to kick in? How many months have you lost your job? So we're talking in terms of months, but there's a multiplier to those months, which is how much do you spend in a month?
Okay.
Speaker 2 (20:33.536)
I didn't say save. When I say save, I also mean save for things maybe like vacation. So in a physician's budget, if they're doing a budget or if you look at more their take home pay, sometimes half of that isn't spent, it's saved on other things.
It's going to taxes and insurance. You're talking about like, what's the core? Like you want to cover like your mortgage or your rent, food, essential insurance. We're not talking about saving money for, you know, a $60,000 car. We're not talking about, you know, putting money toward college. mean, those are, those are things that are longer term goals. You're talking about like, what does it, what does it really cost us to get through?
a month and what would you ballpark that at Nate like if you were if you're looking at kind of the core expenses what do think that that would be for give us a range for like an average physician family where you see that core
So the range for a family, I think, is eight to 10,000. And 10,000 may sound, to some people may sound a bit high if you're not saving for things like vacations or cars, but here's the deal. A couple thousand dollars extra in planning purposes is not going to be difficult for the average physician to save for, and you can't really control those expenses during an emergency.
Right. And there's other ways to prepare for disability too. And so maybe we should talk about those because those kind of actually reduce the need for an emergency fund a little bit, right? Exactly. one of those is around debt. Nate, you are a debt guru. mean, there's nobody I know who knows more about banking and debt and getting out of debt and tamping down interest rates and refinancing and consolidating than you. I mean, you're our specialist. So lay it on me.
Speaker 1 (22:28.822)
If I want to be truly prepared for disability, what do do with my debts?
Yeah, I believe that you should have a healthy fear of debt. Getting out of debt opens up your options. Okay, so you want to get closer to that $8,000 number rather than the 10 for your monthly out go. You should probably pay off your debts. You should pay off your student loans. And there's a balance between preparing for this catastrophic emergency
and getting on track for everything else in your life. So I don't necessarily think it's right for every physician to stop everything they're doing and get out of debt as fast as they can, which happens to be my story, which is that's what I wanted to do. But I do believe that you should not take your debts lightly.
So let us say I heard you talk about getting out of student loans. And we're talking about disability and aren't all student loans discharged when you become disabled.
This is another nuanced question. It's a great question. first of all, if we're speaking in terms of federal student loans, you can get federal type benefits in relation to those loans. So you become fully and totally disabled, then yes, they can be discharged. But you just put a lot of caveats in there for the insurance companies and the federal government does that as well.
Speaker 2 (24:03.518)
own occupation description of disability when it comes to your student loans. You would have to be totally and fully disabled, which is a very strict definition.
You're talking about like blinded in both eyes. Yeah. Right. That kind of fully disabled. It sounds to me like the social security definition of disability, like can't do any work in the economy. It sounds like what it would take to have your student loans, your federal student loans fully discharged, right? So what about private student loans?
Private student loans, I have not seen private student loans that get discharged upon disability. Then again, private student loans can qualify for bankruptcy sometimes. So it really depends. That one I'm not, it would depend on the company. There are some companies that discharge your student loans upon death as well as others that don't. So you'd have to check, but.
The point is student loans are a tough nut to crack when it comes to getting out of them because of disability. Yes. Yeah. Yep. They're like other debt. So there's that's the student loan side, the mortgage side, a great way to reduce your monthly out go and to kind of open things up, be able to have less in your emergency fund is to pay off your student loans, pay off all your other debts, your cars and you know,
They're like other debt,
Speaker 2 (25:33.484)
Relatively quickly, it would be a good idea to pay off your mortgage and yeah by relatively quickly. mean, you know 10-15 years get out of all your debt, right?
Because on the retirement side, we talk about saving for retirement, at the same time you're looking at paying off a home, you get that extra dollar. Do I put that toward paying off my house? Do I put that toward paying off my debt? Should I save that and invest it for retirement? And guess if you have a balanced approach to this, which is to say, I wanna be debt free, I wanna have my house paid off in 15 years rather than 30, then.
you know, you have the ability to probably have the ability to save toward retirement at the same time that you have your, you're kind of aggressively paying down your debt so that, you know, if something does happen and you do become disabled and you do still have that debt, at least you have some assets that you might be able to use to, to cover those debts or to service the debts.
That's right. And for Patty's question specifically, imagine you had the typical house, you know, in preparing for this and you had to buy a ramp or something like that. Well, and so you're upgrading your current house. Well, imagine you had a paid off house and you could sell it to get a house that's more conducive to someone with a disability. Right. The paying down debts is huge and it's a way to protect
Mm-hmm.
Speaker 2 (27:00.812)
your assets as well.
like it. So, Patty, to kind of answer your question and to help out the other listeners, the things that you need to do to prepare for disability is one, to have some solid disability insurance, and you can find a solid disability agent to help you with that. Second thing is to build an adequate or more than ample emergency fund. The third thing you'd want to do is take a look at your debts and see if you can get those debts under control or paid off in a timely fashion.
Well, that's all we have for today. Again, I want to thank Patty for her question. We're seeing an increasing trickle of folks calling us and emailing us their questions. I really appreciate it. I know it takes a little bit of extra time for you to do that. It's nice. We like feeling like we're not just sitting here in front of the mic talking to no one. It's great to get some feedback and hear your voices and hear your questions. So with that said, please do contact us.
So the first way you can do is send your email to podcast at physicianfamily.com. We will reply to your email. I promise. Even if it's with the silly, hey, I don't know, but we will reply. Second way is to visit us on the web at physicianfamily.com slash podcast or physicianfamilypodcast.com. The third way, which is the way that we really like, cause we could actually hear your voice is to call us on the physician family answer line. And that number is 503-308-8733. Again,
Thanks for listening.
Speaker 2 (28:34.836)
Thank you for listening to the Physician Family Financial Advisors Podcast. Is there a question you would like answered on our next show? Go to PhysicianFamily.com to record your question. While you're there, sign up for our newsletter and gain access to tools you can use to turn worries about taxes and value, extra money into a life-feeling of financial security. That's PhysicianFamily.com.
