Hi, I'm Billy Gwaltney and this is the CYA podcast. This show is for the physician who understands the importance of protecting everything you've worked so hard to achieve. Each week I'll bring you tips and advice to help you cut through the clutter and misinformation and show you exactly what you need to preserve your income and way of life. If you're ready to achieve the peace of mind that only financial security can bring let's get started.
(00:29): Welcome to today's episode of the cover, your assets podcast. This is your host, Billy Gwaltney, and I'm very excited to be with you today. We're going to cover a topic that comes up quite a bit. The title of today's podcast topic is as an attending physician, how much private disability insurance can I purchase? This comes up. I get asked this question a lot by clients that purchase their policy as a resident or fellow, and they're transitioning to being an attending physician, their income's going up substantially in most cases.
(01:02): And they would like to do what they know they need to do, which is increase their coverage. If the policy is structured correctly in medical screening and all that has been completed, then the policy would include the future insureability option, or it could be called something else on, on your policy. But it's the, what allows the client to increase the coverage based on their new salary, without any additional medical screening required with the same discount structure in place, and also with the same definitions in place. So that's a valuable asset. And so I get asked, okay my income's going to be higher on one to increase coverage. So I want to read through a particular live case where a client recently reached out to me and asked a really good question. He is starting out with an attending salary of 240,000. It'll eventually double over the next few years.
(01:57): That's the starting guarantee as his employer is not providing any employer disability. And so the calculation is relatively straightforward. And so the top companies have a formula that they use to calculate how much coverage an attending physician can purchase based on their salary. That's a part of it. That's the biggest part of it. The other part that does factor in is any employer, long-term disability, not short-term, but long-term disability. And again, in this client's case, he doesn't have any. And so the formula indicates that based on a salary of 240,000, he can increase up to a total of 11,200 per month of coverage. So he has a $5,000 policy with one of the top carriers. He has the ability throughout his career through the future insureability option to purchase up to an additional 15,000 for a total of 20,000 of private true specialty on occupation, disability coverage.
(02:59): And so right out of the gate, he can go from 5,000 to 11,200. And so he emails me this question as a follow-up to communicating that he says, I definitely would like to proceed with increasing my coverage. However, I expected to be able to be insured for more with a salary of 240 K 11,200 monthly is only 134,000 as a resident. I was covered for the whole 60 K salary at 5,000 a month. Why is this different? And that is an excellent question. That is a very common question that we get. And even though we may have discussed kind of how this would work when he originally purchased the policy, you know, two years ago or a year ago, or whenever it was a lot of time can pass and they need ref, you know, clients need refreshing and kind of say, okay, Hey, help me understand why this is the case.
(03:54): Okay? And so I want to walk through this. He had 240,000 of salary. The insurance company will allow him to go from 5,000 a month to 11,200. Some people assume that, Hey, if I'm willing to pay for 20,000 a month, surely an insurance company who wants my business will give me 20,000 a month. They'll just have me pay a higher rate. Why wouldn't they do that? Why would they turn down business? And so the answer is pretty straightforward with all the top companies bottom line. They do not want to overinsure someone, if they can help it. In other words, they don't want to provide any individual with too much of an incentive to get creative about how to become disabled. And that may sound odd, but it's true. And so the companies utilize a formula to calculate how much coverage is available for purchase based on a specified income.
(04:47): Okay. Now it's important to keep in mind that dis disability benefits from this private specialty coverage would be non-taxable income. So if in other words, it's all spendable cash, no income taxes, state, federal, or local, or owed on that policy, assuming you do not deduct the premium. That's what allows policy benefit to be non-taxed is that the premium for that policy is paid from say your checking account, and it's not deducted. So it's after tax premiums that are paid, which leads to a non tax benefit. Every accountant I've ever spoken with has said, it's a no brainer, do not deduct a disability premium so that if you do become disabled, the entire benefit would be spendable cash. Generally for clients, the bottom line of a formula for clients, they want to maximize their coverage. Insurance companies will allow them to have somewhere in the range of 80 to 90% of their post-tax income.
(05:46): Okay. So that can vary depending on what state you live in. If you live in a state with a high state income tax, or you pay local income taxes, then, then that net could, we could get you closer to 100% of your net pay, but bottom line insurance companies don't want to over insure someone if they can help it. So for this, if you do the math for this particular client, 240,000 of a pre-tax income at a say, just a 30% combined state and federal tax bracket results in 168,000 of post tax or net spendable income for that salary. And if you multiply that by 80%, that puts it at a little bit more than 134,000 of net income that could be insured. And so this particular client is right at that 80% mark now as his income increases and he enters into a higher tax bracket, we would likely be able to get him closer to an a 90% of his net pay, but also we can increase the coverage to keep pace with that higher income.
(06:53): Okay. And so it does vary depending on what state you live in the lower income tax, or maybe no income tax state that you may live in your net, you would be closer to the 80% of your net pay. If you're in a high income tax state, you could be closer to 100%. Please don't get bogged down in these numbers. I went through, I know it could be difficult to hear these numbers, and it makes sense without looking at it on paper. But if you want to kind of have a rule of thumb, if you want to maximize your coverage, generally about 80 to 90% of your post tax income could be the maximum insurance benefit. All right, it's important. It's vital to factor in that if someone becomes disabled contributions to retirement accounts, typically stop with an employer. So you want to make sure you have enough if possible, to continue making some contributions towards future future living expenses.
(07:49): After the benefit period, in say at age 65, you also want to just remember that whatever you don't access. So for this particular client who has a total of 20,000, that he can end up having insured, he's going to be able to bump up to 11,200 in this, in this particular case, as his income increases say to 400,000 or 500,000, he'll be able to continue to increase in access the remaining part of that future insureability option to get him to the 20,000 or much closer to the 20,000. Another rule of thumb. If you want to factor this in to maximize a $20,000 non-taxed or post-tax disability benefit typically takes a pre-tax income of about 625,000, somewhere in that ballpark, it depends on if you have group long-term disability through your employer, that factors in, but just figure somewhere in the 600 to 625,000, a hundred thousand ish range, I wish it was just something concrete.
(08:55): I also understand that it would be great if you could have more coverage to keep pace with that, but we're just not at that point yet, based on insurance, company's comfort with possibly having to pay benefits to you or to any one person for 25 or 30 years, they don't want people getting creative about how to become disabled. And that really is what factors into that. Perhaps you're listening to this and saying, I feel slightly more confused than I was when I started. And my apologies for that I would be happy to have a specific conversation with you about your situation. You do want to talk to your broker about that calculation, making sure that it's, that it makes sense to you, that you know where it's coming from, insurance companies publicize what those amounts would be. So for any given salary, you can find out how much coverage you could have for that particular income. So it's not like some kind of state secret or anything. It's just a little weird when you do the math, ultimately comparing a post tax, non or non tax benefit to a pre-tax income. The math is going to look a little odd perhaps. And so feel free to text me anytime to arrange a conversation or to ask questions, be happy to, to help. My number 7 0 4 2 7 0 2 3 7 6. Again, that's 2 7 704 2 7 0 2 3 7 6. We glad to discuss your situation until next time again, this is Billy. Gwaltney grateful for your time and see you next time.
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