Student Loan Disability Insurance
Insurance companies and their agents are always coming up with new products to sell you. I came across a new one recently from a firm called InsureSTAT. They were offering you disability insurance for your medical school loans. The idea is that if you get disabled, this insurance kicks in and pays off your loans. Except you don’t have to use it for your medical school loans. You could use it for anything you want.
That’s right. The whole student loan disability insurance thing is just marketing. I don’t have anything against marketing. I do lots of marketing myself. But let’s dive a little deeper into this product so you can see what is going on.
Here are the cool things about this sort of a policy.
# 1 No medical questions or exam
If you have a medical issue, this might be a way for you to get some more disability insurance in place that you otherwise couldn’t get (see huge caveat under the minuses.)
# 2 Unisex pricing
Women generally pay more for disability insurance so they should look for unisex pricing whenever possible.
# 3 More disability insurance
Some people want more disability insurance than anyone will sell them even if they combine policies from multiple companies. Like a catastrophic disability rider, this allows you to get more than your income would justify.
# 4 Only have to be disabled for two years to get maximum benefit
The way this thing works is that for every six months you’re disabled, you get $50K as a lump sum to put toward the loans. So if you’re disabled for just 2 years, you maximize your benefit.
All right, enough of that positive stuff about insurance. Let’s get into the downsides.
# 1 You can only get $200K insured
If anyone needs student loan disability insurance (and probably nobody does) it’s the folks with the monster student loans. $200K is only average. Half of docs have more than that.
# 2 You have to qualify for a regular disability insurance policy
I quote from their website (you can’t make this stuff up):
Additionally, if an individual disability insurance policy has been secured via any major insurance carrier in the previous 12 months, OR, is in the process of securing a policy from InsureSTAT now, THERE ARE NO MEDICAL QUESTIONS OR EXAMS REQUIRED.
So if you just passed a disability insurance exam, then you don’t have to do it again. But everyone else does. Which probably includes you.
# 3 You shouldn’t buy insurance you already have or don’t need
What happens to your federal student loans if you become totally and permanently disabled? They go away. What happens if you have a temporary disability? You can go on hardship deferral. When you are no longer disabled, you should have the income to pay your loans off again. What if you have refinanced your loans? Well, it depends on the contract and the company, but sometimes they are also forgiven if you are permanently disabled (unless you have a co-signer, who would now be on the hook for it.) They also have hardship deferrals.
Whether you are in the federal programs or you have refinanced, the fact is you basically already have this insurance and now you’re buying it again. You’re really just making a bet that you’ll get disabled and get a windfall of up to $200K. But
since, on average, you will lose money on insurance, this is a bet you shouldn’t take. The company must charge enough to pay all its expenses, make some profit, and still pay out all the benefits, so on average, you’re losing money. You can buy insurance against almost anything and everything, but when you’re spending so much on insurance that you can’t save for the future nor live the life you wish to live, you’re just overinsured. I mean, you can buy fantasy football insurance for crying out loud. The incentive for an insurance company and its agents is always to sell you as much insurance as they can talk you into buying.
# 4 It’s expensive
While it’s particularly hard to compare apples to oranges (although you can rest assured the actuaries have already successfully done so), student loan disability insurance looks awfully expensive compared to regular disability insurance. Typical pricing for a young, healthy doctor for a good individual insurance policy is as low as 2% of the amount insured. So if you’re buying a $10K a month benefit, that might cost you $200 a month. But the insurance company could be on the hook for 35 years of $10K per month payments, probably indexed to inflation. The insurance company may be on the hook for $5 Million or more in benefits. How much are they on the hook for with this policy? No more than $200K. So what are they charging for that $200K? $66-77 per month. I’m no rocket scientist, but that insurance seems to cost 10 times as much for the maximum potential benefit.
# 5 That’s only the price for the first 5 years
Most docs buy an individual disability insurance policy with level premiums, meaning the premiums never go up. But these will be adjusted every five years. If you were willing to buy a regular disability policy with premiums that could go up every five years, then you’d get it even cheaper!
# 6 You don’t get any benefit if you are disabled less than six months.
Since you have to be continuously disabled for six months to get any benefit at all, you could have a pretty good disability and not get squat. The average length of a long-term disability is less than 3 years, so there are lots of disabled people who won’t get the maximum benefit and many who won’t get any benefit at all from this policy.
Student Loan Disability Insurance Is A Product Designed To Be Sold
In conclusion, while I applaud the entrepreneurial effort and think it would be perfectly fine for you to buy your regular disability insurance from InsureStat, I cannot help but conclude that student loan disability insurance is a product designed to be sold, not bought. I mean, why not have mortgage disability insurance, food disability insurance, car disability insurance, or vacation disability insurance. All compete for your dollars and all can be paid (if necessary) with the dollars you get from a regular disability insurance policy. Almost no one needs a specific medical student loan disability insurance and I think most will not want it once they understand how it works. It is just one more thing to spend money on at a time in your career when you have lots of competing needs for your cash. It’s a lot like a catastrophic disability rider. I think you would be better off just buying a larger disability benefit or even taking the money and investing it (or better yet paying off the student loans so you don’t need as much disability insurance of any kind.)
What do you think? Would you consider buying student loan disability insurance? Why or why not? Comment below!
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