One other less thought about assumption in life is that disability insurance (DI) for the vast majority of physicians is a complete and absolute waste of money. Why? While there are physicians that incur DI claims before the age of 65, for most, no DI claim will arise over their lifetime (which is a good thing).

See if this sounds familiar. You just received your DI insurance premium ($5,000) and you say to yourself, "I really did not want to pay that premium last year, but I did in case I got disabled." You did not get disabled, and in hindsight, you see the premium as a complete waste of money. Now it is time to pay the premium again, and you have the same decision to make (then you go ahead and pay the premium out of fear that you will get disabled).

How would you like to purchase "free" DI? If the answer is not yes, you probably did not understand the question.

While there is no such thing as free DI, there is a program that comes very close. Here’s how it works.

Let’s assume you are a male physician age 45 years old. Currently, you have a DI policy with a $10,000 a month DI benefit and the premium every year is $5,000. You’ve been paying that premium for 10 years now and will continue to pay that premium until you reach age 65.

If you purchased return of premium DI (ROP DI), your new premium, instead of being $5,000 is now $6,930 every year. Instead of looking at the rest of your life, let’s look at the next 10 year window. For a traditional premium of $5,000, the total amount paid after 10 years will be $50,000 and the return of premium after 10 years will be $0. Compare that to a ROP DI premium of $6,930, for which the total amount paid after 10 years will be $69,300 and the return of premium after 10 years will be $55,447.

With the return of premium, you got back from your DI carrier $55,447, which was not your entire premium paid but instead is 87 percent of your 10 year premium. Was the insurance free? Let’s continue to look at the numbers.

If you did not purchase return of premium DI, you would have had an extra $1,930 to invest in the stock market each year for 10 years. If you assumed the gross investment return was eight percent, you would have approximately $26,216 in a brokerage account at the end of the 10 year period.

When you compare $26,216 to the $55,447 you received tax free from your return of premium term, you would have done $29,231 better with the return of premium DI at the end of 10 years than investing the difference in premium in the stock market (which has no guarantee). So, by purchasing return of premium term, the DI insurance was not only free, but you received back $55,447 which was more than your traditional DI premium over that 10 year period.

Why isn’t everyone purchasing return of premium DI?

I think there are two answers. First, the commissions for insurance agents are less with return of premium DI. Second, there are only a handful of companies in the country that have it; and unless your local agent is contracted with those companies, they will not be selling it to you. Return of premium DI has been approved in Pennsylvania as of October of 2004.

There are other options. Besides getting a return of premium on your policy at the end of the 10^th year, you have the option of letting that money continue to grow at the insurance company (currently at 4.5 percent with the company I use) where it will build up to a much larger number that can be used at a later date as supplemental retirement income.

The other option that will seem more advantageous at first allows the physician to direct the insurance company to pay the future premiums with the built up equity. If this option is chosen in the above example, the insurance company would promise to pay the next 10 year’s worth of premiums for the physician.

If you are not getting excited, you should be. I’ve just indicated that you can pay DI premiums for 10 years with a return of premium option and not have to pay a DI premium for another 10 years.

More numbers: while it may be exciting to not have to pay DI premiums for 10 years, it is actually more financially beneficial to continue to pay the premiums and receive a return of premium for a 20 year period. For a traditional premium of $5,000, the total amount paid after 20 years will be $100,000 and the return of premium after 20 years will be $0. Compare that to a ROP DI premium of $6,930, for which the total amount paid after 20 years will be $138,600 and the return of premium after 20 years will be $132,303.

If you decided to have the insurance company pay your premiums for the next 10 years, you would have saved $5,000 a year with a traditional policy. However, because return of premium DI is more expensive than traditional DI, you only saved $30,700 in traditional DI premiums over that 20 year period: $100,000 in traditional DI premiums minus $69,300 (the second 10 year ROP DI premium) equals $30,700 in saved ROP DI premium.

If you kept paying your premiums and asked for a return of premium in year 20, you would have done $58,462 better than by paying the traditional DI premium of $5,000 and investing the difference in premium of $1,930 in the stock market.

While it might seem obvious, there is no return of premium if you get disabled and the claims payments exceed what you would have received as a DI refund (although with the company I use the company does suspend premium payments while disabled). That means if you paid the higher premiums for the same $10,000 a month benefit and got disabled you would have done better by paying the lower premiums non-return of premium DI.

What should you do? This brings us full circle to the opening statement of this article where I indicated that the vast majority of physicians do not get disabled and therefore feel like their DI premium was a complete waste of money. I would submit to every reader that if you know for a fact you will be getting disabled in the next 20 years, you should buy regular DI with no return of premium. However, if you are in the majority and are tormented by paying DI premium you know will never be put to use, then I would suggest that you seriously consider return of premium DI.