disability insurance, principal, Northwest Mutual, long term disability

This post was originally scheduled to post earlier in the week. The same weekend, a 29 year old medical student was killed in a road accident while on the residency interview trail. This incident hit close to home for many reasons – I am the breadwinner for my spouse and three kids and this accident occurred close to where I live.

Life insurance is a product that will help my dependents should something unexpected happen to me. With three minor children, and a spouse who works part time (went back to work recently) and who sacrificed his career for mine, there are living and education expenses that the life insurance should cover. In the second part of this series, I share my life insurance buying experience.

Disability insurance is for me if I fall ill or hurt myself and ended up unable to work.  I had made the leap from having no disability insurance, to a brief encounter with Northwest Mutual and have finally settled on Principal. I wished I knew the following information when I first started looking at disability insurance policies. As the primary income earner in my family and with three minor children, having the correct type of policy is definitely very important. Some folks may decide disability insurance is not for them, but I still wished they knew the ins and outs of it.

While getting my disability insurance, many questions crossed my mind:

  1. Is it necessary?
  2. How much do I need?
  3. Are all companies the same?
  4. Is this insurance worth it? Disability insurance often costs a lot more than term life insurance.
  5. How do I get a good rate?
  6. Why do women pay more than men for disability insurance?
  7. Do I need an individual policy if my employer pays for a group policy?
  8. How long should I keep this for?

Is It Necessary? – Working Hard and Working Smart.

As a physician mom, I have underwent many years of training to get to where I am now. The monetary costs – of college, medical school, of doing the USMLE exams and traveling for clinical experience and residency interviews. The sacrifice of working very long hours for minimal wage in residency. I have reap the rewards of many years of sacrifice and hard work. Yet, if something unexpected happens, I could be living in poverty.

I purchased my first policy while heavily pregnant with my second child. I heard about Northwest Mutual (NW Mutual) from my office manager. Several other doctors in my group purchased insurance from this agent. They seemed happy enough with their disability insurance.

Not knowing any better, I set up an appointment with the agent. He seems nice. I knew next to nothing about finance and insurance. He tried to sell me the maximum amount that I qualified for – recommending a double policy: the primary insurance (I.e. NW Mutual) would cover the first 15K of my salary and a secondary insurance (by another company) will cover another 10K. I balked when I saw how pricey that would be. With being heavily pregnant and already with another young child, I decided to go ahead and purchased a policy that would cover about 30% of my current salary at that time. I was told Northwest Mutual was a mutual company ‘owned’ by the clients/policy owners, and as such, this was the best company to go with.

Many Options:

The second time around, I went with one of White Coat Investor’s recommendations – Jamie Fleischner with Set for Life. This entire transaction was done online. I requested a quote for disability insurance on her website and she got back to me promptly with quotes from different companies. She was attentive but not pushy. If you are interested in Jamie’s no-obligation quotes, click on the banner to request a quote.

How Much Do I Need? Read the fine print.

I was never told the disability insurance I purchased was on a ladder method – which meant that the policy rates start off low for the first few years, and will jump drastically after the fifth year. While this may make sense in some cases – more on that later – I was quite miffed this was not explained clearly to me. I did glance at the policy when it arrived in the mail, but in the midst daily living chaos, I did not review it in detail. The next year, as my policy was coming up for renewal, the agent recommended a ‘review’. He again tried to sell me a higher coverage policy. The agent also tried to get me to purchase a whole life insurance policy.

It was around the same time I started to learn more about personal finance. After reading many articles on disability insurance, I re-read my policy in detail. I found out about the jump in rates, which would occur when I turn 40 or so. I read about the lack of ‘true occupation’ for NW Mutual disability insurance through online forum and websites.

Are All Companies The Same? What Is True Own Occupation?

True own occupation definition is something to consider when purchasing disability insurance. This is defined as inability to perform your specific job description. You are a 40 year old orthopedic hand surgeon who injured your right hand and cannot perform delicate hand surgeries. You can still perform minor office procedures such as injections (which you had not done previously). In a true own occupation disability insurance, you can still receive your full benefit even if you change jobs and start an injection only practice or a non-surgical orthopedic practice. Many disability insurers have stop offering such policies, but the ‘Big 6’ Principal, Standard, Guardian, Mass Mutual, Ameritas and Ohio National (not available in New York or California).

Is This Insurance Worth It?

Frankly, this was a major reason why I did not purchase disability insurance initially despite being the primary income earner in my family. It was not until three years into being an attending physician that I bought my first policy. I consider myself lucky I did not become disabled or diagnosed with a chronic illness in the interim.

Since then, I have a residency friend who became disabled when diagnosed with lung cancer and had to stop work to get treatment. She has since passed, but had a tough time financially as she had no income when she stopped working. Another friend was diagnosed with inflammatory bowel disease. Albeit mild, when he tried to get life and disability insurance, he had to pay a higher rate and claims relating to his GI condition will be excluded. If I had known all these, I would have chosen to get disability insurance with a smaller monthly payout while in residency, and increasing the coverage as an attending.

How to Reduce Premiums?

I did not purchase with highest disability insurance coverage I could, which is normally 60 per cent of your current income (remember this is tax-free if you pay the premiums with post-tax monies). The cost of increasing your coverage beyond 60 per cent is quite pricey. You would typically need “laddered policies” – purchasing disability insurance from 2 separate companies.

As we are halfway to financial independence, I chose to purchase a plan with a lower coverage and with a longer waiting period (6 month waiting period instead of the standard 3 months). This is because we do have an emergency fund for 6 months of expenses if the unexpected occurs. There are different ‘riders’ you can purchase that will increase or decrease your yearly premiums.

  • Inflation Protection/Cost of Living Adjustment
  • Partial disability
  • Future Increase Option
  • Catastrophic Disability Benefit

How Do I Get a Good Rate?

Policy rates on disability insurance is much higher than life insurance. Rates are dependent on your age, health background and specific occupation. By working with an agent who can sell policies from different companies, you can compare different rates. If you have specific health issues that may affect your coverage, some agents could give you a rough quote without personal identifiers, so you won’t be flagged by other insurance companies if you are declined by one. This works for term life insurance as well.

Why do Women Pay More than Men?

Unlike life insurance, where men pay more than women, disability insurance rates for women are much higher. According to insurance underwriters, a typical women in their 30s are three times as likely to become disabled for 90 days or more (the common waiting period for most long term care policies). As such, disability policies are priced higher for women. Some agents/companies offer gender neutral rates for qualifying individuals. Others may offer gender neutral rates if you purchase such policies while still in training. It is important to know all your options as the policy rates can vary widely.

Do I Need an Individual Policy if My Employer Pays for a Group Policy?

Some large companies offer group disability insurance. Sometimes, the premiums are paid by the company and is offered as a benefit.  There are also voluntary plans that are partially subsidized by employers, but you pay part of the premium. Should you receive payout from such disability insurance, you must pay federal and state taxes on this. Group policies do not carry over if you change employers. If you are diagnosed with a chronic illness and change employers, there is a chance you may become uninsurable in the future.

How Long Should I Keep My Disability Insurance Policy?

Most disability insurance will pay the amount you are covered for until you recover from your disability or until the age of 65 (in cases of permanent disability). Hence, keeping your disability insurance at the age of 63 with the same annual premiums as a 40 year old, will give your less benefit if you become disabled. By their mid-50s, most financially savvy physicians are financially independent. Instead of renewing your policy annually, the main question to think about is if you are able to maintain your current lifestyle with your current assets if you no longer draw an income.

Is there anything else you would like to add about disability insurance? Please share your experiences by commenting below.

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