People don’t buy disability insurance, but they should


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Through Dr. James M. DahleWCI Founder

Some time ago I had an interesting opportunity to attend a conference that few insurance agents and even fewer doctors attend. It was the annual meeting of the International Disability Insurance Society. It was inexpensive and it was in Salt Lake City, so when I was invited to attend, I decided, “Sure, why not?” This industrial group is small, but its mission is to promote disability insurance.

As the company writes his website,

“The International DI Society (IDIS) is an organization whose members are dedicated to providing disability insurance to individuals, families, business owners and employers to provide financial security in the event of unexpected disability. We are dedicated to increasing consumer awareness and improving the disability insurance industry by expanding our member resources, keeping abreast of industry trends and providing a community for producers, distributors, underwriters and insurers to build relationships and drive innovation.

Those present at the conference (and who are members of the company) are mainly representatives of carriers (i.e. insurance companies) and general insurance brokerage agencies (BGAs, sometimes called wholesalers ). You’re probably unfamiliar with BGAs, but they provide a lot of the back-office functions for an insurance agent and bring value to both independent agents/brokers and insurance companies, being paid with a small share of commissions for their efforts.

People don’t buy disability insurance

There was a lot of twist at the conference. Apparently there is far less disability insurance sold today than 30 years ago. The main buyers of this insurance, especially when it comes to individual policies, are doctors and dentists. Many employers of all kinds offer group policies to their employees, but there are apparently fewer of them than before (it should be noted that these group policies often have weak definitions of disability and do not properly insure a sufficient portion the employee’s income).

More information here:

How much disability insurance should you buy?

Problems with how disability insurance is sold

As a big proponent of disability insurance (at least until financial independence), I was surprised and a bit concerned to see that there is less for sale/purchase. The conference dove deep into all sorts of reasons why this is happening. Much of the responsibility lies with the insurance industry, but some also lies with employers and consumers themselves. Some of them are probably just an historical accident, and others are inherent in the nature of the product. Let’s discuss each of them.

Insurance industry issues

The insurance industry bears much of the blame here. While people are far more likely to be disabled than to die young, the vast majority of marketing dollars go to life insurance sales, not disability insurance sales. Disability is the major risk we face. Companies have also been far too slow to streamline their processes and embrace technology. One of the biggest complaints I get from investors in white coats is that it takes weeks or even months to get a disability insurance policy. We’re used to shopping on Amazon with a click of a button, but buying disability insurance usually requires meeting with an agent; to do a blood test ; fulfill a huge demand; having this agent navigate his way through a Byzantine bureaucracy of underwriters; and, assuming you’re still interested two months later, getting you to sign a policy and WRITE A CHECK.

What else do you write a check for these days? Katie and I go most months without writing a check, yet it’s the only way to get disability insurance. No credit card, PayPal, Venmo or ACH transactions. The industry must solve these problems. Its failure to do so literally hurts American families because it prevents them from buying a necessary insurance product.

Employer issues with disability insurance

Employers sometimes offer disability insurance to their employees. But the truth is that they are doing a poor job. It’s often left to a lowly HR professional who may not understand its importance or, worse, the company decides to skimp on it and end up providing a lousy policy. Employers can actually provide relatively strong support, its own professional policy. They just don’t. And when they do, they do a lousy job of educating employees on the value of this important benefit. I mean, what’s more important? An annual $1,000 match on a 401(k) or something that would allow the employee to have a dignified standard of living for decades in the event of permanent incapacity? Some employees are not eligible to purchase individual policies. If their employer does not provide a group policy, they receive nothing at all. If the employer provides a crummy policy, all they get is a crummy policy.

Consumption issues

Typically, consumers don’t value their benefits package as much as it costs their employers. At The White Coat Investor, we have the world’s best 401(k). And we make sure our employees know and appreciate it. Because we spend A LOT of money there (in the form of employer contributions, not necessarily fees) instead of paying them more in salary. Employees really need to understand the value of their benefits.

There is more to it, however. People don’t understand the value of their various assets and the importance of protecting the most valuable ones. Consider the strengths of a typical 35-year-old doctor:

  • Older car: $15,000
  • New Tesla: $80,000
  • Retirement account: $120,000
  • Brokerage account: $150,000
  • House: $750,000
  • Future earnings: $9 million
  • Total: $10.1 million

Future profits represent 90% of the assets of this doc. It’s not even close. But I bet they have full coverage on those cars. And the house is probably very well insured. They would even consider wallet insurance if it really worked and was available at a fair price. Yet they are reluctant to take out disability insurance.

“It’s so expensive!”

Well yes, because look at the value of what is insured. Moreover, it is actually used. Statistics suggest that between 1 in 4 and 1 in 7 people will become disabled at some point in their career. (The risk is about twice as high for doctors and dentists as for the average person.) The average disability claim lasts 3.8 years, but many people are permanently disabled.

Of course, being permanently disabled is a financial disaster. But even being disabled for 3.8 years would have a devastating effect on most of our savings. Imagine having an $800,000 nest egg at age 40 and ending up not working for four years before reentering the workforce. During these four years, you cannot make additional contributions to your retirement savings. In fact, you may be drawing $120,000 a year out of it to cover your expenses. You have considerably reduced the size of your future nest egg. The combination of not contributing and withdrawing reduces your nest egg to 65% from 47%.

disability insurance

Now, there are other risks to this future revenue stream. You could die, so you should buy some term life insurance to guard against this risk. You might also burn out. While you can’t buy burnout insurance, we do offer what we think is the closest thing to it. If you’re feeling crusty, you should check it out MD anti-burnout.

But disability is a huge risk that should be insured against. It shouldn’t be a product that has to be sold. It should be a product that is bought voluntarily, that people knock on the door to buy.

Historical accident

It used to be that there were many insurance companies, and they all had a lot of captive agents selling their products, including disability insurance. Industry consolidation has resulted in significantly fewer insurance companies and, therefore, fewer captive agents. The disability insurance industry is a very small thing. The conference included just about every carrier and BGA, and I don’t think there were even 100 people in the room.

Most policies are sold by a tiny percentage of agents. Pretty much every major player in the medical space (which is the biggest space) is on our list of recommended independent agents. They all know each other and call each other by their first names. However, the fact that there are so few means that there are many people who don’t even know that disability insurance exists or how much of a risk they are by not having it. These people shouldn’t be spending their time doing marketing at all. They would literally have to spend all day writing claims as fast as possible to get everyone insured covered.

The nature of the product

Of course, part of the problem is simply the product. Life insurance is easy to understand. You are either alive or dead. If you’re alive, it doesn’t pay. If you are dead, you are. And there’s actually a certificate produced when someone dies attesting to that fact. It’s black and white.

Disability, unfortunately, is 50 shades of grey. So naturally, the policies for protecting against this risk are considerably more complicated and harder to understand. In addition, proving that you were disabled and still are requires time, visits to the doctor and sometimes the assistance of lawyers. This makes it a harder product to sell and buy. It just requires more time, attention and effort from the agent selling it and the consumer buying it. It could be streamlined a bit with better industry standardization, but I wouldn’t hold your breath because every company wants to be different. This obstacle is not going away anytime soon.

More information here:

What disability insurance riders should physicians purchase?

Education, Education, Education

Time and time again, this theme came back to the conference. People just need to know more about disabilities and disability insurance. It’s a product that should sell. It should be bought, not sold. Insurance agents need to know more about this. Financial advisors need to know more about this. And consumers need to know more about it.

I guess that’s where we come in as investors in white coats. When talking about finances to your peers, colleagues and interns, be sure to also talk about disability insurance. And when it comes time for someone to buy it (i.e. as soon as they make money) be sure to send it to the right guys in the industry to make sure that buys the right fonts at the best possible price.

Have your current policy appraised or get this essential insurance in place today!

What do you think? Why are so many people uninsured for disability? What can we do there? Comments below!


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