As a medical resident who is just starting out, you have likely heard about disability insurance, but you may not know a lot about what it is, and why it is important. In this series of posts, we will be discussing a few things that every medical resident should know about disability insurance.
In this post we will look at the likelihood of disability, and discuss how you can begin to protect yourself now and in the future. In subsequent posts we’ll address some of the key provisions to look for in a disability insurance policy, ways to make sure your policy meets current and future expenses, and ways to increase your disability benefits over time, as both your earning potential and financial obligations expand.
Likelihood of Disability
As a resident, you are beginning what will hopefully be a long and successful career as a physician. The possibility of suffering either a short or long-term disability is probably the last thing on your mind, especially if you are still young and healthy. However, the American Medical Association (AMA) reports that 60% of surveyed physicians have a colleague who has sustained a disability accident or injury. A Social Security Administration report shows that it is significantly more likely that a worker born in 1996 will become disabled during his or her career than die, and just over 1 in 4 of today’s twenty-year-olds will become disabled before they retire.
Protection Against Disability
The majority of young doctors under 40 are married, have children, are homeowners, and 75% report that they are their family’s primary breadwinner. Young doctors also face substantial student loan debt, totaling around $166,750, on average. With a resident’s salary averaging just $50,000 a year, it can be tempting to put off adding the additional expense of an insurance premium. However, with most young doctors having less than $50,000 in an emergency fund , it’s never too early to start planning to protect your family and provide for care in the unfortunate event you can no longer practice.
While many residents and doctors choose to take part in disability plans offered by their employers, these plans will often not provide adequate coverage, and any benefits you do receive will likely be taxable. In contrast, an individual plan provides coverage that is yours as you move from your residency and through (potentially) many different employers. Individual plans also typically allow you to adjust your coverage as your income potential grows. However, not all individual policies are created equal and it is important to carefully choose a policy.
In our next post, we’ll examine some key provisions to be aware of when shopping for an individual disability insurance policy.
 Robert Nagler Miller, Residents: Your disability insurance coverage may fall short, AMA Wire, April 4, 2017, https://wire.ama-assn.org/life-career/residents-your-disability-insurance-coverage-may-fall-short
 Johanna Maleh and Tiffany Bosley, Disability and Death Probability Tables for Insured Workers Born in 1996, Social Security Administration, Office of the Chief Actuary, Actuarial Note, No. 2016.6, October 2016.
 You, disabled? What are your chances?, The Council for Disability Awareness, 2015, http://www.disabilitycanhappen.org/chances_disability/
 2015 Report on U.S. Physicians’ Financial Preparedness, Young Physicians Segment, American Medical Association Insurance, https://www.amainsure.com/reports/2015-young-physician-report/index.html?page=5
 Kathy Kristof, $1 million mistake: Becoming a doctor, CBS Money Watch, Sept. 10, 2013, http://www.cbsnews.com/news/1-million-mistake-becoming-a-doctor/
 2015 Report, Supra.
 Miller, Supra.
 2015 Report, Supra
The Answer Is: It Depends
Whether your disability benefit payments are taxable depends on what type of policy or plan you have and how your premiums are paid. This post is not intended as tax advice—we’ve outlined some basic information below only. You should always speak with a tax professional regarding your particular situation.
Individual Policies: These are policies that you purchase yourself. Generally speaking, if you pay the premiums with after-tax dollars, the benefits you receive are tax free. However, if you pay with pre-tax dollars or deduct your premiums as a business expense, then your benefits will likely be subject to federal income taxation.
Group Policies: Group policies are those offered through associations such as the ADA or AMA. These types of policies offer special terms, conditions, and rates to members and function much like individual policies, with similar tax consequences. Generally speaking, if you pay the premiums (with after-tax dollars) then the benefits you receive are tax free.
Employer-Sponsored Policies: These types of policies can be less straightforward when it comes to taxes, as the payment of premiums can be structured several ways. According to the IRS website:
- If your employer pays the premium and does not include the cost of the premiums in your gross income, then benefits you receive will generally be fully taxable.
- If the employer only offers a policy, but you pay the entire premium without taking a tax deduction,
then the benefits you receive will generally be tax-free.
- If both your employer and you pay the premiums then the tax liability will generally be split.
If you are unsure what type of policy or plan you have, and you think your employer might be paying the premiums, you can look at your application (there is typically a portion that states who is responsible for the premiums) or talk to your HR department. For more information, talk to your accountant. You can also go to to the IRS website on disability insurance proceeds to find additional information.
It may be tempting to save money by enrolling only in a plan solely paid for by your employer, paying premiums with pre-tax dollars, or deducting premiums as business expenses. But keep in mind that, if you do become disabled, the amount of your benefits actually available to you will substantially decrease if you are required to pay income tax on them.
Selecting a policy is an important decision, and how benefits will be taxed is a significant factor to consider. With statistics showing that one in four dentists will be disabled long enough to collect benefits at some point in their careers, choosing to save now could hurt you financially down the road.