By Travis Christy, White Coat Insurance
As a physician or dentist, you understand the importance of being prepared for unexpected health challenges. Disability insurance serves as a safeguard, protecting your income and investments in your education and career. However, as your professional journey evolves, so do your financial needs and circ*mstances. Knowing when to adjust your disability insurance policy (or drop it and cancel it completely) is crucial for maintaining the right balance of coverage and cost.
When to Consider Dropping Your Disability Insurance
A few years back, I collaborated with an agent whose client, a medical professional, was diagnosed with ALS. This diagnosis had the potential to cause significant financial strain, a burden that was substantially alleviated by having disability income protection in place. It's vital to consider, if faced with a similar situation, whether your finances could withstand such an impact. If there's any uncertainty in your ability to cope financially, it's wise to maintain your disability insurance policy. The policy was purchased to protect your income. As long as you are working and relying on this working income to pay your bills, you need to make sure that important working income is protected.
Keep in mind that once you drop your policy, you may not have the option to purchase that policy again at the original price since you will now be older and most likely less healthy. Therefore, you MUST be confident that you are financially independent and are no longer reliant on any income.
However, there are certain circ*mstances where it might be prudent to reevaluate the necessity of this coverage. Let's explore a few scenarios where letting go of disability income protection could be a viable option.
#1 Achieving Financial Independence
The prime factor in deciding to drop your disability insurance is reaching financial independence. If your assets and passive income streams sufficiently cover your living expenses and you're no longer reliant on your active income, maintaining disability insurance may become redundant. Keep in mind that this is something to consider if the risk of suffering an extended sickness or injury would not cause a strain and would still allow for a comfortable lifestyle.
#2 Approaching Retirement
If you're nearing retirement age and your policy benefits will soon expire (typically around age 65), it might be time to reassess the necessity of your policy. Consider whether your retirement savings can adequately support your lifestyle if you had a significant health event and you had to retire tomorrow.
#3 Substantial Financial Windfall
Receiving a large inheritance or other significant financial gains could alter your need for income protection. However, ensure that this windfall is secure and substantial enough to cover potential long-term needs—including those mentioned above—before dropping your coverage. If you were to become sick or hurt and you needed additional medical care, would your finances cover the additional costs you could possibly incur—even a catastrophic event like the ALS example from above?
More information here:
Why I Dumped My Disability Insurance Policy at 43 Years Old
When to Modify or Reduce Your Disability Insurance Coverage
Throughout my career in the insurance industry, I've frequently encountered situations where clients or agents have sought advice on cost-reduction strategies for their disability plans. These inquiries often arise due to decreased cash flow or because certain features of their policy are no longer necessary. For instance, it's not uncommon for individuals, such as physicians, to pay off student loans or mortgages ahead of schedule. In such cases, it might be sensible to reevaluate the necessity of certain policy riders, like a student loan rider or a cost of living protection rider. The key takeaway is that there are circ*mstances where it's more practical to adjust or scale back an existing policy rather than completely discontinuing the coverage.
#1 Changes in Financial Responsibilities
Life events, like paying off major debts (student loans, mortgage) or changes in family dependency (children becoming independent), might reduce your need for extensive coverage. It could be a reason to consider evaluating your disability policy and seeing if it makes sense to reduce the benefits. Maybe that $10,000 a month benefit can be reduced to $8,000 a month, potentially reducing the cost of the policy by 20%.
#2 Adjusting Benefit Periods or Riders
You can potentially decrease your disability insurance premiums through a couple of methods. First, consider adjusting the benefit period or removing certain riders, like the Cost of Living Adjustment (COLA), if they seem unnecessary. The COLA rider is particularly vital early in your career, as it helps your benefits keep pace with inflation. However, as you age into your mid- to late-50s, you might want to reassess its necessity.
Another approach is to shorten the benefit period. If your policy initially covered you until age 65, 67, or 70, you might switch to a five- or 10-year benefit period. It's important to understand that with a five-year benefit period, for example, your policy doesn't become a five-year term contract. You remain covered, usually up to age 65, but the policy will only pay out for five years for each disability claim. This change can significantly reduce your premiums, especially for older policies.
For those over the age of 55 or 60, reducing the benefit period could be a wise decision, allowing you to allocate the saved premiums elsewhere. However, if you're younger, it's crucial to carefully weigh the risks associated with a reduced benefit period before making any changes.
#3 Salary Adjustments
If your income changes significantly, either increase or decrease your coverage accordingly to match your current financial scenario. If income goes up, it may warrant looking into increasing your current disability income protection by either exercising a future purchase option or going through full medical underwriting. However, if your income has decreased, you could decrease your benefits to match.
Replacing Your Disability Insurance Policy
In another instance, I collaborated with a physician who had purchased a disability policy years earlier and who was now in his 50s. The policy's premium had significantly increased over time due to its initially lower-graded premium structure, and the anticipated dividends, which were supposed to offset this increase, did not materialize. Fortunately, we identified a more cost-effective alternative with superior disability definitions. Additionally, since the doctor was still in good health, transitioning to this new policy was a sensible move. It's important to note that if his health had been compromised, switching policies might not have been a viable or advisable option.
Though it’s not typically the most common or prudent option, sometimes replacement makes sense.
#1 Better Market Options
If new policies offer better terms or lower premiums, consider replacing your existing policy. If your policy is several years old, replacement may not make sense at all because the current premiums being paid may be much lower than the current age-based rates. In addition, as mentioned above, medical underwriting and potential exclusions on new policies also are a risk when buying disability insurance. If your health has changed and your current rates are quite a bit lower, it might be in your best interest to stay put.
#2 Evolving Professional Risks
Changes in your medical specialty or job role might necessitate a policy with different coverage specifics or occupation classes. If a medical occupation class becomes more risky, carriers will typically lower the occupation classification and raise the cost for those doctors when buying new policies. It’s important to ensure your new policy matches or improves on your current professional risks. Sometimes existing policies can be improved depending on carrier rules and guidelines when a physician has a few years of experience or if there’s a switch in medical specialties.
More information here:
People Aren’t Buying Disability Insurance, But They Should
How to Cancel Your Disability Insurance Policy
There will be instances where it may make sense to cancel a disability policy or contract altogether. Here is how it can be done:
#1 Contact Your Insurance Provider
Obtain the necessary cancelation forms, either online or through direct contact with the insurer or a trusted advisor.
#2 Complete and Submit the Forms
Fill in the details accurately, including the policy number and desired cancelation date, and submit the forms as instructed.
#3 Cease Premium Payments
If you have automatic payments set up, remember to cancel these with your bank.
Before changing your disability insurance, it's crucial to seek advice from an advisor. We recommend choosing from our network of trusted advisors, who are well-equipped to evaluate your existing policy. It's important to understand that once changes are made or a policy is dropped, reinstating it or adding back certain features can be challenging, if not impossible. This is because you may need to undergo medical underwriting again, and some features might no longer be available from the insurer.
Our advisors can conduct an in-depth review of your financial circ*mstances, ensuring that any modifications to your insurance work with your overall financial plan. This is particularly important for physicians, for whom disability insurance is a vital component of financial security. Expert guidance is indispensable when navigating these significant decisions.
Obtaining quality disability insurance is a must for any physician, so you can be sure to protect your hard-earned income. Get a quote from one of our recommended insurance agents and cross this task off your to-do list today!
What do you think? Have you cut back on, dropped, or changed your disability coverage? Why or why not? How much more did you pay or save? Comment below!
[This updated post was originally published in 2016.]
