Personal Disability Income Insurance: What Every Physician Needs to Know
By Jeffrey W. Kirshner, CPA/PFS, MBA
Physicians have always led the way with their patients on the basics of preventive medicine and how to treat and avoid medical disasters. I want to talk to you today about applying this philosophy to you, and preventing financial disasters.
Background
I cannot proceed with this article without some personal background. Yes, I will get around to some of the fine points and the details of this type of coverage soon. But, frankly, if you don’t understand the importance of protecting your ability to earn money during your career in medicine, then policy features and details don’t matter. You see, my life would have been totally different had my father not been properly covered.
My dad was diagnosed with Crohn’s disease in dental school and had to drop out twice. After finally graduating, he started his own practice in Phoenix, Arizona. He was married and had 3 kids by the time he was 25. He did well in his practice, but due to his health history, he was unable to get disability insurance for many years. He felt that even under the best of conditions, no matter how he did the math, he was always 6 months away from bankruptcy if his income were to stop due to disability. If he had a recurrence, how would he pay his bills, support his family and save for my and my sisters' college, let alone pay his office rent, salaries and other overhead?
After being in remission for 15 years, he was finally approved for personal disability insurance to help replace most of his income if he couldn't practice due disability. He was also approved for business overhead expense disability to cover his office expenses. Five years after he was approved, he had a recurrence. I was in high school at the time, and I remember very clearly my dad spending more time at home or in the hospital than at work. And even his days at work were uncomfortable at best. These were very stressful and difficult times. His doctor said he would do better without the stress of managing staff and dealing with patients (what stress???) and that he should consider stepping away from the career that he loved.
So, he went through the claims process and was approved. Fortunately, everything was done correctly. A large portion of his income would be replaced, he could sell his practice for its full value, and he could work in another occupation if he wanted to because of the true own-occupation definitions in his disability contract. I clearly remember his and my mother's relief that although his career in dentistry was ending, they were going to be alright.
He was born again at age 44, and I was a young college kid that had a giant weight lifted from my shoulders as well. I was able to stay in school, focus on my degree and not have to worry about where my parents' income (and my tuition!) would come from. I am eternally grateful to my father and his insurance agent for working so hard over the years to protect his most valuable asset, which was his ability to earn income in his profession.
At the age of 44, my father decided to change careers and enter the financial services industry. He talked to every doctor that would listen to him about their balance sheet and retirement planning, but he was uncompromising in his protection first philosophy. Retirement planning can unravel totally and completely without proper protection.
After I graduated from college, I earned my CPA and a Graduate degree in Finance and was enjoying a successful consulting career. Over the years, I saw the impact that my father had on many of his clients, so about 15 years ago, I joined my father's practice. In my financial services practice, I share the same core philosophy as my father that protection must come first, and for most of my clients, the majority of whom are medical professionals, their biggest asset is their ability to earn income in their occupation. We probably have 100 clients who have had disability claims from our office, and there is no better feeling than helping my clients during some of their most difficult times.
So that is where I am coming from, and why the message is clear. Now let’s touch base on some things to look for in a personal disability insurance policy. Each of these is a must, as far as I am concerned:
Non-cancelable and Guaranteed Renewable to age 65. This means that once a policy is issued, the company cannot cancel your policy, cannot change the definitions, and cannot change the rates as long as you pay your premium on a timely basis. With group coverage, you have exposure to these risks.
True Own-Occupation definition of total disability. This means that if, due to illness or injury, you cannot work in your occupation, then you are considered totally disabled even if you are at work in some other capacity. Some companies even offer “specialty-specific” coverage, which means that if you have limited your occupation to the performance of a single medical specialty, the company will deem your specialty to be your occupation. Frankly, I can think of no other profession that can get as easily disabled as a physician. Practicing medicine is a great profession, but the investment in your education doesn’t often allow you to earn significant income doing something else. Many companies say they offer own-occupation, but if you read the language you will see that you must be totally disabled and not working! This is a modified own-occupation definition of disability. Be wary. The difference between true own-occupation and any lesser definition can be very significant. My father would never have collected his benefit under a modified own-occupation definition of disability.
Residual Disability coverage. This means you will be eligible for residual (partial) benefits if you are still working in your occupation but have suffered a loss of income due to sickness or injury. Most claims are residual. Without this feature, you would most likely receive benefits only if totally disabled. I would advise you to compare the residual features closely between companies. If, when, and how much benefit you would receive if your income has been reduced due to a disability is directly dependent on the contract language. Don’t assume that residual from one company equals residual from another company.
Things You Need To Know:
The financial ratings of the insurance company are critical. All the guarantees of an insurance contract are backed up by the claims paying ability of the company. Be mindful of the fact that if you have a long term claim, you better hope the company will be there for you way down the road. In addition to very well-known A.M. Best and Moody’s rating agencies, check their Comdex ranking, which is a composite ranking. You may have to get this from an agent, or you should be able to go to the individual company’s site to access this information. Comdex will rate specific companies as compared to other companies. Generally speaking, a Comdex ranking greater than 90 is recommended.
Elimination period: almost always 90 days. This is like a deductible; benefits do not begin until you’ve satisfied the elimination period. Premiums for shorter elimination periods usually don’t make sense. Longer elimination periods don’t save you enough to make any sense either. Better to use these premium dollars towards purchasing a longer benefit period. Your life won’t be any different years from now if you had benefits that began after 60 days, but what if they stopped paying you at age 65 when you might have qualified for graded lifetime benefits? A word of caution. Some companies require that you meet your entire elimination period with consecutive days of disability. Other companies allow you to satisfy your elimination period over an extended period of time, usually 7 months. This is called an “Accumulation Period.” If a policy requires that you meet your entire elimination period with consecutive days of disability, then your likelihood of collecting a benefit diminishes.
Benefit period: Again, some companies still offer graded lifetime benefits through an optional rider. If this is not available, at least look for a benefit period “to age 70” or “to age 67” or "to age 65” if at all possible.
Future purchase option: This means that you have the opportunity to purchase more coverage in the future without any further health questions or medical exam. Needless to say, you should purchase the maximum amount your income qualifies for in the beginning, but when your income increases, you can get more coverage, with only financial documentation required.
Cost of Living Adjustment (COLA) rider: If you have a claim that lasts a long time, your monthly benefit needs to be increasing every year to keep pace with inflation. Different companies have different riders and costs for this rider, and it is not in the scope of this article to address the details. To give you an idea of the impact of this rider, the potential benefit for a 30 year old physician with a $5,000 per month benefit to age 67 is $2,205,000. This is simply $5,000 per month times the number of months of benefit. The same example, by just adding a 3% guaranteed compounded COLA rider, has a potential benefit of $3,955,453. Know that this rider is costly and well worth it, especially if you are in the early years of your career. Remember, with the COLA you are just staying even with purchasing power.
Social Insurance Substitute (SIS) Rider: This is a rider that coordinates with payments received from Social Security. In my opinion, it was created to lower the premium costs, but it often results in having a lower monthly base benefit. I would avoid this if at all possible, and just get the maximum monthly benefit without this rider. After all, if you were to become severely disabled, wouldn’t you want to collect from both Social Security and from your individual disability policy? This is a very poor way to save very few premium dollars.
Group Disability Insurance: One of the biggest mistakes that a physician makes is to assume that his or her employer-provided group Long-Term Disability (LTD) benefit provides not only good coverage, but enough coverage. A typical group LTD plan will cover about 60% of the employee’s income, up to a certain monthly maximum. This could be expressed as covering 60% up to $10,000 per month in benefits. This would mean that everyone making $200,000 or below would have 60% of their income covered by the plan. When Group LTD is paid for by the employer, it is deducted as a business expense for tax purposes. That usually creates a situation where the benefits are received on a taxable basis when received by the employees. This further reduces the effective percentage of income being received. It’s one thing to have 60% of your income being replaced, but when you then have to factor in the loss of income taxes on that benefit, it amounts to something less than 60% of income being replaced.
While group LTD is the most popular type of coverage for most employees, it’s not always the best, and can have significant drawbacks. Those covered by an employer-provided LTD plan are usually not able to opt out of it, and many don’t want to because of the price – free. I often say that the most expensive disability policy is the one that doesn’t pay when you need it to, and group LTD is much less likely to pay benefits than an individual policy. If you have Group LTD that you cannot opt out of, then you should consider supplementing it with individual coverage to shore up your income protection.
Final Comments
Underwriting for this type of coverage is challenging. Declines, rated up, or modified offers with exclusions are all too common, probably about 30% of applicants. You should lock this up or review your coverage while you still have the option. It should go without stating, that you probably cannot improve your coverage after a health change. Also, you don’t become younger. Every year you begin a policy, the rates are higher. Look for an agent that specializes in disability income insurance for physicians. Some insurance agents and financial advisors may mean well, but may not understand the finer points of what to look for as it applies to physicians. Again, don't assume that group LTD you have from your employer or a policy that you have through your specialty association is necessarily good protection.
People often ask me, “How much disability insurance should I have?” The answer is quite simple: The maximum amount you qualify for, and if you can’t afford this, then get the most you can reasonably afford. Find a way to pay for the best policy you can get. Think about what you pay a year to protect the value of your car, what you pay a year to protect the value of your home. Your ability to work in your medical specialty is worth many millions of dollars, so look for a good, not an inexpensive policy. Through proper planning, whether it is, for example, raising your deductibles on your auto and home coverage or dining out fewer times each month, you should be able to afford the premium for maximum coverage
The views and opinions expressed herein are solely that of the author and do not represent the views or opinions of The Guardian Life Insurance Company of America, or its subsidiaries or affiliates thereof
2015-9800 (exp.08/17)