How much disability insurance should a double income couple get? The correct answer can be two, one, or even zero. Find out why!
Today’s classic is republished by White Coat Investor. You can see the original Here.
Doctors all think their financial questions are unique, but the truth is they are the same 50-100 (mostly 30) questions that every other doctor needs to learn the answer to. A common question I get, about which I have never written a blog post, concerns dual doctor couples and occupational disability insurance.
How should dual doctor couples take out disability insurance?
“My husband and I are both doctors with high earning potential, but I am still on a scholarship and will be doing academic research. I’m reading your Financial Boot Camp book and Chapter 1 is the butt kick I needed. I am curious to see what level of disability insurance you will recommend for households with two doctors. We will always be able to live comfortably on just one of our incomes, and disability in either of us would be fairly rare. Would we miss out on someone’s income if it were gone? Sure, but we live under our circumstances and would adapt accordingly. Should we take our monthly cover number and split it in half? Or does my husband have more insurance coverage because men can be insured more cheaply? “
There are options for disability insurance, but no correct answer
I have never been able to answer this question satisfactorily and the reason for this is that there is no right answer. Or rather, there is a REACH of correct answers, and the range is incredibly broad. Let’s talk about all the options.
# 1 Don’t buy disability insurance at all
Let’s start at one end of the spectrum. This is the end where the two documents basically act as the other’s disability insurance. If one of you becomes permanently disabled, you live on the other’s income. Not a big deal, is it? Obviously, disability insurance (at least before we became financially independent) was a much bigger deal in our household with a doctor and teacher who stayed home to look after our four children than it was in this couple’s life. It was a huge piece of the financial puzzle. Not so much for this couple.
Some people will be very comfortable with this option. Certainly, it has the benefit of thousands of dollars in saved premiums and avoids the hassle of applying and qualifying for disability insurance. And a couple with two docs should theoretically be able to achieve financial independence (where you can cancel disability insurance anyway) much sooner than a single doc or a couple with one doc. With a typical doctor’s tax burden, if a person stops working, you won’t even lose an entire second salary, you probably only lose 50-60% of it. Before going down this route, however, there are a few things to consider.
Things to Consider Before Canceling Your Disability Insurance
First, some dual doc couples cannot live on just one salary without significantly changing their lifestyle. If you’re a super saver living on half your income, that’s not a problem. But what if you both need income to cover your downtown San Francisco rent? This disability insurance doesn’t look so crazy anymore, does it?
Second, the loss of that income has financial consequences. Sure, maybe you can still stick to your lifestyle and maybe even continue to save appropriately for retirement, but that extra income went SOMEWHERE. Maybe extra savings for past financial independence, maybe for charity, maybe for a family member in need, or maybe for a really fun vacation. It might still be worthwhile for you to get this insurance just to cover these things.
Third, life happens and things change. Maybe in a few years you will start spending more. Your investment returns may not be as good as you hoped they would be. You might become a one-doc couple if one of the partners decides to stay home with the kids. Maybe you’re getting a divorce. Maybe one of you will die. Perhaps there is a huge lawsuit over policy limits that wipes out a lot of wealth. Perhaps the doctors’ earnings will go into the pot. Who knows? But purchasing additional disability insurance could provide additional protection in these situations.
Fourth, the disabled partner may no longer be able to perform other household chores that he was performing. Borrowing them is also associated with costs. And imagine that the disabled partner also needs some kind of family doctor’s assistant. Wouldn’t it be nice if there was a source of income to pay for these things?
Fifth, and perhaps most importantly, what happens when you BOTH are handicapped in a fiery car wreck at the same time. While the chances are obviously much less than the chances of either of you being disabled, the chances are not zero. If you choose not to do so, you may no longer be able to have insurance cover in the event of double disability.
# 2 Buy maximum disability insurance for both partners
Now let’s move on to the other end of the spectrum. That means treating every doctor as if they were single and spending a large portion of their income. The obvious advantage? Well, if either of you becomes disabled, your income will not go down as much and you will be protected from life changes as much as possible. The obvious downside? Well, individual disability insurance isn’t cheap. It would not be uncommon to pay 5% of the amount of money being hedged. So if you pay a monthly benefit of $ 15,000 for each of you, that could be about $ 18,000 per year. That’s basically a 401 (k) post. $ 18,000 a year at 8% for 30 years adds up to over $ 2 million.
= FV (8%, 30, -18000.0) = $ 2,039,098
# 3 Buy maximum disability insurance from a partner
Of course, many couples look at this disability insurance bill and try to find a way to at least bring it down, even if they’re not comfortable eliminating it completely. One solution could be to only insure one partner. If both of you are disabled, there is still a single doctor-like income to live on. Of course there is some risk that the “wrong” person will be handicapped (or die, or divorce, etc.), but the premiums should be at least halved.
Who do you insure? Do you insure the least likely to cut back on work or become a permanent home parent (usually the man in the US)? Do you insure the person most likely to become disabled (often the woman)? Do you insure the person who can be insured most cheaply (usually the man)? Do you insure the one who earns the most? Do you insure the self-employed or the employee? Some tough choices that every couple must make on their own. Just think about the consequences of each option and see what you are comfortable with.
# 4 Purchase disability insurance for each partner
Here is another commonly chosen option. Look at our situation. We have NEVER taken out “Maximum” disability insurance. We didn’t think we needed that much coverage. I generally recommend buying “enough” coverage. That said, enough to both cover your living expenses and save enough to meet your retirement / college goals as most policies stop paying out by ages 65-67. As a rule, you can take out disability insurance that covers 60-70% of your gross income. Given that disability benefits are usually tax-free, this is more than enough income for good savers.
Two doc pairs can do the same thing and are likely to need even less coverage. This eliminates the possibility of the “wrong” person being hindered. In addition, in the event of a divorce, you have at least some insurance coverage for the future. And the cost of coverage is much lower.
There are plenty of places you can save here. Maybe you just use your employer’s group policies. That could cut your insurance costs by 80% or more. Perhaps you are more likely to buy a policy with tiered (rather than tiered) premiums (since you will become financially independent sooner). Maybe you are not buying some of the drivers, such as: B. the Cost of Living Rider, the Future Purchase Option Rider, the Catastrophic Disability Rider or the Retirement Benefit Rider. Maybe you just buy a smaller monthly benefit. Maybe you accept a 2 year limit on mental / nervous conditions or you may accept a policy that only has a 5 year payment to lower the premiums.
There are many ways to skin this cat and you must do what you are comfortable with. I suspect that many couples could cut the cost of coverage by 50-75% from the cost of “maximum coverage for both” while still having coverage that is acceptable to them.
# 5 Purchase some of the disability insurance from a partner
Here’s another one that can really help you cut the cost of coverage. Maybe you just get a group policy or a barebones policy for one of them. It includes some of the disadvantages of buying coverage for only one of you and some of the disadvantages of buying limited coverage. But in the case of a double disability, it offers a little something.
Now you can see what I mean when I say there is no right answer. But there is a right answer for you and I am curious what it was. So if you are a high income couple please reply to the survey or leave a comment.
What do you think? Are you part of a high-income couple? What was your solution to the disability insurance dilemma? Comment below!