Future-Proofing Your Path as an APP: Deciphering Your Life and Disability Insurance Options

Future-Proofing Your Path as an APP: Deciphering Your Life and Disability Insurance Options

Our Honeymoon

Our honeymoon was off to an amazing start. We were exploring a new town, visiting national parks, and were hitting the ski slopes on day 3, when my wife hit a patch of ice on one of our last runs down the mountain. The result… a torn ACL. This presented a myriad of challenges for my wife, who’s a Physician Assistant spending the majority of her day on her feet in the clinic or the operating room. Safe to say, our family learned the importance of disability insurance very quickly.

The fun parts of financial planning, like investing and saving money on taxes all are a moot point if you and your family aren’t adequately protected.

In general, insurance is the shift of economic risk from you to an insurance carrier in case of an accident, health issue, death or disability. There’s several other very important insurance programs like home, auto, umbrella, health, etc. that we’ll cover in future posts. Today, we’ll be focusing on the two that have potentially the biggest economic impact on you and your family: death and disability.

First off, no one wants to talk about dying, but it’s a part of life. You can either plan for it or not, but it’s going to happen someday. As a financial planner, I’ve seen the positive impact that life insurance can have. I’ve also seen what a disaster a family’s finances can become in the absence of life insurance.

So when do I actually need to get life insurance?

Generally, you don’t need to get insurance unless you have family that is depending on your income for their wellbeing. If you’re 22, single with no one relying on your income to make ends meet, you probably don’t need life insurance. On the flip side, if you have young kids that rely on your income for financial stability, you’re most likely going to need to get coverage. ?

As a young parent, passing away is the last thing you want to think about. Most people avoid thinking about it all together or say to themselves, “I’ll look into it when life slows down” or “I’m young and healthy, I’ll take my chances. I can always get it later if I need to.”

If your family is relying on your income, please, please, please don’t put off getting life insurance.

How much life insurance do I need?

Most times when I bring up life insurance with a client, they say something along the lines of, “I have life insurance through work.” Getting insurance through work can be great, but it also comes with some downsides. For example, most life insurance coverage obtained through work caps out at 1-2 times your current income. Additionally, if you leave your employer the coverage doesn’t automatically stay with you, you will need to convert it to an individual policy from the group plan your employer has.

In most cases, I like to think about group coverage as coverage in addition to what you have on an individual basis.

When we talk about coverage amounts, we want to think about how much income you would need to replace for your family if you were to pass away. For example, if you make $75,000/year, you may only bring home ~$4,000/month after taxes. Assuming this, we can then back into the true insurance coverage that you would need.

There are several schools of thought on coverage amounts, but I like to use the 4% rule. The 4% rule is a mathematical formula used to determine what your asset level would need to be to generate a 4% return in a low/moderate risk portfolio.

If you were to pass away, the idea would be to put the life insurance benefit amount into a low/moderate risk investment portfolio that you could use to generate income to replace your salary. Using the 4% rule, you would also be able to preserve most of the principal to make up for the lost retirement and social security benefits your significant other would otherwise miss out on.

If you need to replace $48,000/year of your income for your family, you could back into the coverage amount by dividing $48,000/4%. This would get you a total life insurance coverage amount of $1,200,000.

What type of life insurance do I need (Term vs. Permanent)?

For the vast majority of individuals, term life insurance makes the most sense. Term life insurance covers you for a specific period of time after which point your coverage goes away. Using the scenario above, let’s say you purchase a $1,200,000 30-year term policy. Assuming you make on-time premium payments, your $1,200,000 of coverage would remain in place for 30 years from the date your policy becomes active. Beyond the 30th year, the policy has no value.

Why would you do this?

Since term is covering you for a shorter-term (compared to a permanent policy that would last your lifetime) the premiums with term insurance are significantly cheaper. This helps minimize your insurance costs creating more room in your budget for savings/investing.

I also have clients opt for level-term premiums so that you can lock in the same rate for the entire term of your policy. There’s some term policies that start off cheaper initially and then rise in cost as you get older, generally costing you more money than a level term policy over time.

Most people don’t need permanent life insurance. That being said, there are always caveats. For example, if you’re looking to provide an inheritance to your beneficiaries or charities, life insurance is one of the most tax-efficient ways to do so since life insurance proceeds aren’t generally includable in the beneficiary’s taxable income when received. Additionally, if you have a child with a disability who is relying on your income and will need financial support when you pass away, permanent life insurance can help solve the income void.

In general, permanent life insurance compared to term policies and have higher internal expenses which can eat into any potential ‘return’ your policy may have if there is an investment component to it. While permanent life insurance can offer substantial advantages in specific situations, it's crucial to assess whether it aligns with your actual needs.

Group Disability Insurance

For many, some form of both short-term and long-term disability insurance is provided by your employer. If you get disabled, you will become eligible for short-term disability insurance after a short waiting period (usually around 14 days).

Coverage varies depending on your companies’ plan, but usually short-term disability insurance covers you for the first 3-6 months after your waiting period is met. If you’re still disabled after the short-term disability coverage expires, you’re typically going to qualify for long-term disability insurance coverage through your employer. Coverage lengths can vary for group long-term insurance (anywhere from 2-years all the way until you reach age 65).

Generally, group short and long-term disability insurance will provide a maximum benefit of 50-60% of your pay (usually excluding bonuses). Additionally, if your employer is paying your premium coverage, the actual disability payment that would be paid to you would be taxable as income.

[You can see who’s paying for the insurance on your paystub]

If you’re paying a portion or all of the premiums, the benefit when paid out would be tax-free proportionate to the amount of premiums you’re paying. Ex. If you pay 50% of the premium, 50% of the benefit would be tax-free the other 50% would be a taxable benefit if you get disabled.

Individual Disability Insurance

For most individuals, group disability insurance will provide adequate benefits in the event of a disability. For individuals in specialized fields, like medicine, individual long-term disability insurance should be considered. One of the main reasons is that an individual policy can have more favorable definitions of what is considered a disability than a group policy would have.

For medical providers, unless there’s good reason not to, I typically recommend that they look at disability insurance policies with an own occupation definition of disability vs an any occupation definition of disability. An own occupation rider protects you so that if you can’t go back and do the same job as you were before the disability, the policy would still pay out.

Ex. Let’s say you’re an emergency medicine physician assistant and get disabled. With an own occupation rider, your policy would pay out if you couldn’t go back to your position as an Emergency med PA, even if you could be a teacher or preceptor at a local PA school.

Instead, if your policy has an any occupation definition of disability, the policy would only pay out until you could go to work in some capacity even if it’s not in medicine. Ex. If you’re able to drive Uber but still not able to function as a PA, your benefit would typically end now that you could go back and do any job. ?

NOTE: Most group policies have an any occupation definition of disability which is less favorable for you as the beneficiary.

There are a whole host of other ‘bells and whistles’ that you can add to individual long-term disability insurance policies. It’s best to consult with an insurance expert for the best options that would pertain to your situation.

NOTE: Typically, I don’t have clients get individual short-term disability. If you have an emergency fund, this would provide a similar benefit to a short-term disability policy.

Wrap up

So, what did we learn? Insurance is important, but there’s not a one-size-fits-all.

Your insurance needs depend on several factors such as income needs, current assets, family size, and more. It's also important to understand how insurance agents get paid. Most insurance agents will receive a commission based on the product that they sell you. The higher the coverage amount and/or number of protection features within the policy will generally increase their commissions. That being said, not all insurance agents are out to get you. It's important to do your own due diligence to get a rough idea of the types of coverage you may need to protect your family.

If you’re not sure whether you need coverage, feel free to reach out to me at [email protected] or schedule a meeting with me at https://www.advancedpracticeplanning.com/contact . While I don't sell insurance, I can help you get connected with an independent insurance broker to ensure that your needs are met.


DISCLOSURE: While I have a background in insurance planning, I do not sell insurance policies at my firm, Advanced Practice Planning, LLC. When searching for an insurance agent, I would look for an independent insurance broker who represents more than one company. This allows the agent to shop out the products available to help you select the best program for you. Just remember that most insurance agents are going to receive a commission for the insurance product they place for you. Typically, the higher the coverage amount you get, the higher commission they receive. This creates an inherent conflict of interest for the insurance agent, so just be aware of what you’re getting yourself into. If you need recommendations of independent insurance brokers, please reach out and I can help you determine the coverage amount that is appropriate for you and then get you in touch with someone (or an online service) to help you place your insurance policy.


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