Disability insurance is a well-known and valuable tool for protecting future income. In most cases, an individual can get insurance that pays up to 60% of her current income if she becomes disabled. This can be especially valuable for high-income professionals like physicians, who would have a difficult time finding work at a comparable salary in the event of a disability.
As valuable as this resource is, traditional disability insurance has a significant gap for a specific type of professional: those who have recently completed or nearly completed their training, but do not yet receive the salary they expect to eventually earn.
New Professionals Program
For new professionals, the ability to earn your future income, or human capital, may be your largest (or only) asset. Also, medical residencies generally involve long hours and low pay – especially relative to what you can earn later. Traditional disability insurance that pays 60% of current income doesn’t accurately reflect the medical resident’s future earning power.
Disability insurance under the new professionals program provides the ability to get a salary based on future income, rather than current income. In fact, current income isn’t considered when determining benefits – it’s based on a formula.
Let’s consider Nicole, a hypothetical fourth-year ER resident. She’s making $60,000 per year and has a group disability policy provided through the hospital that would cover up to 60% of that salary. She purchased a disability insurance policy using the new professionals program, which gives her an additional $6,500 monthly benefit if she becomes disabled. It also continues to provide a partial, residual benefit if she’s able to return to work at lower pay. This policy would cost her $4,698 per year with the level premium option. However, she also has a graded premium option, which costs less at first, but increases slightly each year. This would initially cost her $2,172.
Nicole completes her residency the next year and receives a contract with a $360,000 salary. She already has a disability insurance policy in place with a future increase option (FIO) that can increase the benefit without having to undergo additional medical underwriting. Also, she can choose to continue paying premiums on the graded option, or she can switch to the certainty of a level premium.
Protecting Your Most Valuable Asset
Most insurance providers now offer disability insurance through the new professionals program. It’s available to various medical professionals, as well as CPAs, attorneys, engineers, architects and others. Medical professionals are generally able to enroll in the program as early as their third or fourth year of medical school. The available benefit starts around $2,500 per month and gradually increases throughout the residency to a maximum of $5,000 to $7,500 per month, depending on the specialty.
For non-medical professionals, benefits are generally lower (around $4,000 per month), and are available for about two years after graduating.
As Nicole’s example shows, the future increase option and the graded premium option are two additional components beyond the benefit that can make this particularly appealing to young professionals. When the professional starts earning a higher salary, the FIO allows the benefit to increase to the level of a standard disability insurance policy, without having to go through additional medical underwriting. Likewise, because younger people are less likely to become disabled and use disability insurance, the graded premium option allows for much lower premiums in the first years, when the professional has less disposable income.
According to Mark Maurer, CFP®, CEO of LLIS, an insurance advisory company, “With medical professionals, generally one or two years after finishing the residency is a great time to review both the future increase option and changing from graded premiums to level premiums.”
The benefits of disability insurance in general, and with this specific program, will vary for different people. However, the ability protect your ability to earn a future income – especially when you’re young – makes this something young professionals should consider when planning for their financial futures.