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\u2019s 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. <\/p>\n
Kristin is slowly recovering from her accident. But she\u2019s unable to practice medicine and it\u2019s not clear that she\u2019ll 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\u2019t live a lavish lifestyle, she\u2019s having to make major changes to her life.<\/p>\n
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\u2019re an attorney, an engineer, a dentist, an accountant or a physician, with high earnings and a nice lifestyle, this could be you. <\/p>\n
Unless you\u2019ve somehow already managed to accumulate a net worth of several million dollars, your most valuable asset is your ability to earn your income. Let\u2019s 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. <\/p>\n
Now, you might say, surely she wasn\u2019t 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\u2019s 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\u2019s in a combined (federal and state) effective income tax bracket of 35%, then she\u2019ll receive $78,000a year, or $6,500 per month, after taxes from her group disability insurance. If she\u2019s 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. <\/p>\n
Young professionals can insure against the risk that they\u2019ll 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\u2019s the most important form of insurance you should own. Why? As we\u2019ve seen, you\u2019re 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\u2019ll actually file a claim on your disability insurance is far greater than it is for many other forms of insurance you\u2019ll 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. <\/p>\n
If you\u2019re wondering if you can rely on the government to provide you with disability insurance, we\u2019d suggest that it\u2019s unlikely. If you\u2019ve not worked for 40 quarters (i.e. 10 years), you\u2019re probably not eligible for Social Security disability benefits. If you are eligible, you have to qualify and that\u2019s not likely because the definition is very narrow. The government defines disability<\/a> as \u201cthe 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.\u201d As a well-educated professional, you\u2019ll very like be able to work in some other capacity even if you\u2019re unable to work in your chosen profession. If you\u2019re eligible and you do qualify, the amount you\u2019ll 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. <\/p>\n So, you should buy a personal disability insurance policy that will \u201cwrap around\u201d the coverage your employer provides. Your personal disability policy will be \u201cportable.\u201d Portability means that if you change jobs you can take your personally-owned coverage with you \u2013 it\u2019s 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\u2019t 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\u2019ll 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.<\/p>\nSelecting Individual Disability Insurance<\/h2>\n
Work with an Expert<\/h2>\n