[Editor's Note: One thing the pandemic taught us is that you need to have a rock-solid retirement plan. That’s just one reason you should attend the Physician Wellness and Financial Literacy Conference (WCICON23) from March 1-4. You can take a deep dive into our retirement workshops that will cover topics like financial independence, drawdown strategies, and more! And in between, play 18 holes on one of the two pro-designed golf courses or get in on the pickleball and wine-tasting action. You work hard, and you deserve to have a fruitful retirement. Kickstart and/or fine-tune your retirement planning at WCICON23 by registering today (Hint: early-bird pricing ends on November 7)!]
By Dr. James M. Dahle, WCI Founder
Most of the articles on this website about term life insurance and disability insurance deal with the front end: how to buy it, what kind of policy to buy, how much to pay for it, etc. There aren't many posts (this one and this one, for instance) about the back end—when and how to get rid of it. This post is going to be a little bit more personal. We're going to talk about our family and our policies and what we've done with them throughout my career and what we were doing with them when I originally wrote this post four years ago.
Today, we're going to revisit why and how I dumped disability insurance.
Insurance Is Temporary
The whole point of term life insurance and disability insurance is to cancel it when it is no longer needed, so you can save those premium payments. Insure well against financial catastrophe while you have a need; then get rid of it once the need is gone (since insurance, on average, always costs more than it is worth). A typical physician is going to have a five-figure monthly benefit from disability insurance and a seven-figure benefit from term life insurance. With the disability insurance policy, the goal is to have a benefit large enough that, after tax, you can both maintain your standard of living AND still save for retirement (because disability insurance generally stops paying at ages 65-67.) That usually means a benefit of $10,000-$20,000 per month.
With term life insurance, many high-income professionals want their family's financial life to be exactly the same with or without them. So, they buy enough that, when combined with their nest egg, their partner would have enough money to raise the kids, send them to college, and live the rest of their lives without ever having to go back to work. That usually means a benefit of $1 million-$5 million.
Some families do a little more or a little less, but the point is you probably need big, expensive insurance policies until you reach financial independence. At that point, when your nest egg would support you and your family for the rest of your lives, you can cancel the policies and use the premiums for something else—spending more, building more wealth, or supporting charitable goals.
What We Have Done with Disability Insurance
I bought my first individual disability insurance policy from The Standard as an intern in October 2003 for a monthly benefit of $2,500. That policy cost $948.70 per year (3.2% of the benefit). Almost half the cost was the riders, including a $5,000 Future Purchase Option Rider, an Indexed Cost of Living Rider, a Total Disability in your Occupation Rider (made it specialty-specific), and a Residual Disability Rider. As an active rock climber, there was an exclusion on the policy—it wouldn't pay if I was disabled rock climbing. It also excluded disability due to war, a concern of mine given my military commitment, and it limited payments to 24 months for disabilities due to mental disorders or substance abuse.
As a senior resident with a slightly higher income, I exercised $1,000 of that Future Purchase Option, and that cost an additional $363.05 per year (3% of benefit—cheaper because no FPO rider). I decided to keep paying the premiums on this policy while I was in the military. While the military provides a military disability benefit, it isn't anywhere near as robust as an individual disability insurance policy. It is particularly hard to buy insurance while on active duty, but The Standard assured me that it would pay me a benefit if I was disabled and it wasn't due to war. So, I kept the policy. Shortly after leaving the military, I exercised the other $4,000 at a cost of $2,066.67 (4.3% of benefit.)
Climbing Red Rocks while protected by only 1 of 2 disability policies
Although older and in a different state, I was still healthy and hadn't picked up any other bad habits, so I suppose I could have bought a completely new policy and saved that Future Purchase Option for later. But I didn't want to deal with the hassle and really didn't see a time when I would ever want a larger individual policy, especially one with a climbing exclusion. At that point, we were quite financially literate, and our net worth was rising rapidly (this was only about six months before the birth of The White Coat Investor.)
My new employer offered a group disability policy. It was fairly inexpensive, but most importantly to me, it didn't have a climbing exclusion. I bought a benefit worth $10,000 a month. I don't recall the exact cost, but it was dramatically cheaper than my individual policy. It was specialty-specific but not as robust of a policy. That cost gradually climbed over the years as I got older and changed from one company to another once or twice. It was also with The Standard, and it cost me $1,659.96 per year (1.38% of benefit).
My total coverage in the event of disability was $17,500 a month or $210,000 per year. That was still more than we spent at the time (you'd be surprised how hard it can be to spend money when you have no debt payments), and it would certainly allow us to maintain our lifestyle and still save for retirement.
Disability Insurance Changes
However, there was a problem. When I first wrote this in 2018, I figured $210,000 was probably more than I was going to be making from practicing medicine going forward. I was down to eight shifts per month (in 2022, that's changed to six shifts a month), and they were all during the lower-paying day and evening shifts (in my group, we heavily subsidize night shifts). In addition, I was earning a lot more income than that from my other work here at The White Coat Investor.
Remember that the way disability policies are written, companies pay you based on loss of income and/or the inability to perform the “substantial and material duties” of your regular occupation. If I cut off my right hand and could no longer intubate, I couldn't practice emergency medicine. But how much would my income have immediately dropped? Perhaps $200,000. Most disabilities that would keep me from practicing medicine probably wouldn't have much of an effect on our overall income. By percentage of income, my regular occupation is no longer “physician.” It's “blogger” or “podcaster” or “CEO.” If I can't practice but could blog, then we're looking at residual (partial) disability. My Residual Disability Rider says that it isn't going to pay squat if my monthly earnings are reduced by less than 20%.
Let's say emergency medicine provides 20% of my income. If I lose the ability to do EM but can still do The White Coat Investor, I'm only going to get 20% * $17,500 = $3,500 per month or $42,000 per year. And I'm paying $5,038.38 per year for it (12% of benefit.) That's starting to feel a little steep, especially since we were into the net worth range where we really didn't have much of a need for additional income. It seemed dumb to overpay for disability insurance at that stage.
So, we dumped it. That gave us another $5,038.38 after tax per year to invest, spend, or give away.
What We Did with Life Insurance
Let's turn to life insurance. My first life insurance policy was sold to me during medical school by a “friend” (working as an intern at Northwestern Mutual for the summer.) It was a $280,000 term policy and a $20,000 whole life insurance policy. I don't recall the premiums, but they weren't very high because there wasn't much insurance there and I was young and healthy. As an intern, I upgraded. However, I discovered that just like with disability insurance, the term life insurance companies didn't like the fact that I climbed. I ended up with an overpriced policy through Minnesota Life. The base policy itself wasn't too bad; it was the extra $1,000 per year that I was paying simply for going climbing every now and then. However, it was basically a five-year policy that would go up in price every five years. (Remember, I wasn't particularly financially literate when this was sold to me.) The idea my “advisor” had was to upgrade it to a whole life policy when I became an attending.
Once I joined the military, I could buy a policy from the Serviceman's Group Life Insurance (SGLI) program. It wasn't level term, but it was very cheap AND it covered death from acts of war, which my other policy did not cover. It provided a $400,000 death benefit.
I was more financially literate at this point and I was also living in coastal Virginia, where cliffs to climb on were few and far between. Since I hadn't been climbing in a long time and didn't have any climbing planned in the next few months, I could secure policies without a climbing waiver. The first one I got was a $750,000, 20-year level term policy through USAA that I still have. I bought that in 2007 just before deploying. I really hadn't been climbing in a year at that point, and I was headed to the Middle East. Unlike the crummy, overpriced Minnesota Life policy, this one didn't exclude death from acts of war and included a couple of unique military features—an Accidental Dismemberment Rider and a rider that guaranteed my ability to buy 2X my face value in term life upon separation from the military. All for $387.50 a year, about 1/4 of the price I was paying Minnesota Life for $500,000 in coverage. Total coverage at this point was $1.15 million.
A year later, I realized that I was probably still underinsured. I used the term4sale.com site to find an agent and another policy. The agent tried to sell me a more expensive policy and even VERY briefly mentioned whole life insurance (he regretted that), but it didn't take long for him to realize all I was going to do was buy a cheap $1 million, 30-year level term policy as quickly as possible. I still wasn't really climbing, so that wasn't an issue. Within a few weeks, I had a $1 million, 30-year level term policy from Metlife. I still have that policy. It costs $749 per year and I could keep it at that price until 2038 if I wanted to. Total insurance: $2.15 million.
Upon leaving the military in 2010, we decided we had enough of a nest egg that we could just let the $400,000 SGLI policy go without converting it to a VGLI (same thing, but for veterans) policy or buying more insurance. Ever since then, we've had $1.75 million on me. We have never bought insurance on Katie. She wasn't working for pay from 2004 until the last couple of years as she's taken on WCI duties, and I always felt I had enough income that I could have paid for whatever household assistance I would have needed in the event of her untimely death.
We also finally dumped the whole life policy at about this same time. Yup, I held on to that stupid thing for seven years. My overall return was -33%. At least it was a tiny policy.
Why I'm Not Cancelling My Term Life Yet
If I'm canceling my disability insurance, why did I not cancel my term life insurance? Three reasons really.
First, the disability insurance wasn't really going to pay much of anything if I got disabled. If I died, the term life was still going to pay. That's the main reason.
Second, we were still in the financial independence gray area, at least without selling The White Coat Investor—which is highly illiquid and whose value is highly dependent on my ability to work in it, at least for a year or two after a sale. We got past that gray area a year or two later, but if I died, I think Katie would appreciate an extra $1.75 million in cash.
Third, term life is much cheaper than disability insurance, and with level premiums, it actually becomes a better deal each year. In retrospect, I wish I had bought annually renewable term insurance since I obviously won't have a need for these policies anywhere near as long as they will last. But I was only paying $387.50 + $749 = $1,136.50 per year for $1.75 million in coverage. That was dramatically less than the disability coverage was costing. In addition, with a level term policy, you're actually overpaying for coverage in the first few years (since you're less likely to die) and underpaying in the last few years. I suspect that fact makes some people hold on to the last 5-10 years of their 30-year level term policies even if they're retired and no longer actually need the policy. It has just become a much better bet than it used to be. We do consider dropping them every year though. Maybe this year is the one.
What do you think? Have you dumped your disability and term life policies? What issues did you take into consideration? If you haven't dumped yours, when do you plan to? Comment below!
[This updated post was originally published in 2018.]
The post Why I Dumped My Disability Insurance Policy at 43 Years Old appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.
