Kristin was a rising star within the orthopedic sports medicine group at a major hospital in Portland, Oregon. At 35, she had spent over half of her life training to perform surgery on athletes, including many who played for Portland’s Trailblazers, Thorns and Timbers. Then one day, while she was out on her road bike, her life took a dramatic turn. As she was racing across railroad tracks not far from her house in Southeast Portland, her front wheel somehow got caught and twisted in the crossing. She was thrown forward and over the handle bars. She landed badly and, while she was wearing a helmet, still suffered a major brain injury.

Kristin is slowly recovering from her accident. But she’s unable to practice medicine and it’s not clear that she’ll ever return to the operating room. Fortunately, through her employer she has excellent group health insurance which will cover the vast majority of her medical bills. However, the basic group disability insurance she had through the hospital replaces a fraction of the income she was earning before the accident. So, even though Kristin didn’t live a lavish lifestyle, she’s having to make major changes to her life.

This is a fictional story and not about one of our clients. But we hope that you, as a successful, young professional, take heed. If you’re an attorney, an engineer, a dentist, an accountant or a physician, with high earnings and a nice lifestyle, this could be you.

Valuing Your Future Earnings

Unless you’ve somehow already managed to accumulate a net worth of several million dollars, your most valuable asset is your ability to earn your income. Let’s imagine that Kristin was earning $450,000 as an orthopedic surgeon and that she planned to practice for another 25 years. If we assume that her earnings would increase at a modest 3% per year, the present value of her future earnings is over $8 million.

Group Disability Insurance is Inadequate

Now, you might say, surely she wasn’t living on an income of $450,000. Perhaps. Our experience with physicians is that their lifestyles often grow with their incomes. In addition, most of them are paying off student loan debt well into their 30s and 40s. But, let’s assume Kristin was living on $240,000 (i.e. $20,000 a month). If her group disability insurance paid 60% of her salary, up to $10,000 a month, she has a problem. The group disability insurance benefit is taxable. If we assume she’s in a combined (federal and state) effective income tax bracket of 35%, then she’ll receive $78,000a year, or $6,500 per month, after taxes from her group disability insurance. If she’s actually spending $20,000 a month, there is a gap of $13,500 per month. Unless she received a large inheritance somewhere along the way, she has a pretty big problem.

Protect Yourself with Individual Disability Insurance

Young professionals can insure against the risk that they’ll become sick or hurt and unable to work, and therefore lose some or all of their income. Disability insurance protects your income. We would argue that it’s the most important form of insurance you should own. Why? As we’ve seen, you’re insuring your most valuable asset: your future earnings. For young professionals, the risk exposure is very commonly several million dollars. In addition, the probability that you’ll actually file a claim on your disability insurance is far greater than it is for many other forms of insurance you’ll carry (e.g. fire, earthquake, flood, or personal liability). There are many ways young professionals can become disabled and unable to work, including accidents, strokes, cancer, mental illness, and substance abuse.

Social Security Disability Insurance

If you’re wondering if you can rely on the government to provide you with disability insurance, we’d suggest that it’s unlikely. If you’ve not worked for 40 quarters (i.e. 10 years), you’re probably not eligible for Social Security disability benefits. If you are eligible, you have to qualify and that’s not likely because the definition is very narrow. The government defines disability as “the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” As a well-educated professional, you’ll very like be able to work in some other capacity even if you’re unable to work in your chosen profession. If you’re eligible and you do qualify, the amount you’ll receive is minimal. The maximum benefit is $2,788 per month. These benefits may be taxable to you, depending on your other sources of income.

Selecting Individual Disability Insurance

So, you should buy a personal disability insurance policy that will “wrap around” the coverage your employer provides. Your personal disability policy will be “portable.” Portability means that if you change jobs you can take your personally-owned coverage with you – it’s not tied to your employer. The policy will have a much more generous definition of disability. Ideally, it should provide benefits as long as you can’t work in your chosen profession. The benefit period should be until age 65, at which point you can transition to Social Security and begin using your retirement savings. The benefit amount should be large enough to meet your basic needs. Because you’ll be paying for the insurance, the benefit paid to you will be tax-free. As a young professional, you should also consider policy riders that will increase your benefit for inflation, and give you the right to buy additional coverage (as your income increases) without having to go through underwriting again.

Work with an Expert

If you need help thinking through disability insurance, consider working with a CERTIFIED FINANCIAL PLANNER™ (CFP®) or Chartered Life Underwriter® (CLU®). A CFP® can help you develop a comprehensive financial plan, of which income protection is one component. A CLU® is typically an insurance agent who can help you identify the best disability insurance policy for your circumstances.