Disability insurance isnt exciting to think about, but worse than that is ignoring it until its too late to get it. Veterinarians should not skip out on this important insurance.
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“It won't happen to me.” That's what everyone thinks when they hear about someone becoming disabled and unable to work.
I don't blame you. I watched my wife go through veterinary school, and aside from some sleep deprivation, most veterinarians are healthy, able-bodied twenty- and thirtysomethings eager to start their careers. New graduates are used to working on just a few hours of sleep, granola bars and takeout food in their fourth year and even through internships and residency. Is it really likely that they'll become disabled and need to take time off work temporarily or even permanently? The reality is that one in four 20-year-olds will become disabled before reaching retirement age. That's not exactly a stat to ignore, especially if you have monthly financial obligations like rent or student loans.
AVMA members have the option to purchase short- and long-term disability insurance as a member benefit. But that may not be the best option for every person. Always shop the market for the best price and benefits.
What is disability insurance?
Disability insurance replaces a portion of your income when you become disabled and can no longer work due to an illness or injury. Typically, you can only replace up to 60% of your income, and depending on who pays the premiums, the benefit may be taxable. To understand how disability insurance works, we first need to break out the two main types:
Short-term disability covers the first 60 to 90 days after you become disabled. This coverage is usually offered through your employer, althrough it's less common if you work for a small practice where benefits are limited. A healthy emergency fund of three to six months of your fixed living expenses saved in cash can also serve this role if you don't have coverage through work. (Fixed expenses would include items like rent, car payments, student loans, groceries, insurance, etc.)
Long-term disability starts after a set period (usually 90 days) and is sometimes offered by your employer but more often purchased privately. These policies can provide coverage for a few years or even up to age 65.
3 features you want in long-term disability insurance
If you're in the market for long-term coverage, be sure to vet the insurance carrier (have they been around a long time?) and policy features to ensure you're getting a good deal and proper protection. Premiums typically range from 1.5% to 3% of your gross income, according to one estimate, and policy features vary. In my experience as a certified financial planner, I'd suggest you look for the following riders and protections as they are the most applicable to veterinarians and other highly skilled workers:
1. Own occupation. You worked long and hard to become a doctor. If you become disabled, an own-occupation policy will pay benefits even though you may be physically able to perform and earn an income in a different job or industry. For instance, employer-provided long-term disability insurance seems like a great perk, but it often has a restrictive definition of disability called “any occupation,” which makes it harder for benefits to be paid.
2. “Noncancelable” or “Guaranteed renewable.” This ensures that, as long as premiums are paid, the insurance company can never cancel your coverage. A policy without this feature would potentially be cancelable by the insurance company if a material change were to occur (you developed a chronic illness or the company decided to stop covering people in certain health classes).
3. “Income adjustment” or “Future purchase option.” These let you increase the coverage level on your policy to match salary increases without going through additional underwriting. (Premiums will still increase.) This is important for young doctors growing in their practice or for doctors finishing internships or residency.
Don't forget taxes
As mentioned above, taxation of benefits from disability insurance comes down to who pays the premiums. If you pay, the benefits are tax-free. If your employer pays, you're taxed on the benefits. Why does this matter? Because disability income benefits are already capped to roughly 60% of your income, paying taxes on that amount will only further decrease your benefit, making it harder to cover your living expenses. If you have an employer-paid plan through work, you should consider buying a supplemental policy to make up for the shortfall in benefits due to the taxes paid.
Protect yourself, protect your family and don't sleep on disability insurance.
Dan Routh is a fee-only financial planner with OId Peak Finance in Chapel Hill, North Carolina, and spouse of a practicing veterinarian. Routh specializes in working with middle- and late-career veterinarians and physicians. He can be reached at email@example.com or on Twitter @DanRouthCFP.