This is the fourth in a series on disability insurance. Previous posts can be found here. This post will discuss the riders on a policy frequently considered by physicians. Remember when faced with the decision of whether or not to purchase these riders that the advice you receive from your disability insurance agent isn’t unbiased. His incentive is to sell you as much benefit as possible and as many riders as possible. Each will increase the cost (and value) of your policy, and thus the size of his commission. So it is best that you get some unbiased information about the value of each of these.
Future Purchase Option
This rider allows you to buy more benefit in the future as your income goes up. For example, when I first bought a policy in residency all the company would sell me was a $2500 benefit because my income was so low. Obviously, $2500 a month isn’t much to live on. But the company (Standard) was willing to sell me a $5000.00 future purchase option rider for $90 a year, or about 9% of the cost of the policy at that time. It was very easy to do this. With my policy I had the opportunity to increase the benefit once a year up until the time I turned 41. Between ages 41 and 50 I could get part of the benefit, but not all $5K. I didn’t have to prove I was still in good health or that I didn’t engage in any risky activities. All I had to prove was that my income had increased sufficiently. This portion of my policy, however, DID cost more than the initial portion, because I was now older and, per the actuaries, more likely to become disabled. Sometimes, being an attending in your specialty can put you in a more risky occupational class than being a resident, and will also cost more for this reason. The one savings I did get is that I didn’t have to pay for the FPO rider on the $5K (actually $4K since I exercised $1K just before residency graduation). I bought the original policy at age 28. I exercised $1K FPO at age 30. I exercised the last $4K at age 35. The cost of the policy I bought at age 28 was about 3.2% of the benefit, at age 30 it was about 3.0% (no FPO), and at age 35 it was about 4.3% (again, no FPO rider.)
If you’re curious about occupational classes, here is the basic outline:
NE- Not eligible. Think armed forces, pilots etc.
1A- Roofers, furniture movers, painters etc. Very high risk of disability.
2A- Electrician, Plumber, Farmer. High risk of disability.
3A- Sales Clerk, Speech Therapist etc. Moderate risk of disability.
4A- Biologist, pharmacist, librarian. Low risk of disability.
Ophthalmology, anesthesia, emergency medicine, dentist, osteopathic physician, general physician, psychiatrist, and physician assistants are generally 3A.
Dermatology somehow managed to get itself into the 4A category. Beats me what category they put you in if you’re a D.O. AND a dermatologist. See this list for more details. If it makes you feel any better chiropractors are 1A and homeopaths/naturopaths are 2A.
So, should you buy an FPO rider? I think it is worthwhile if you are a resident, a fellow, or a young attending anticipating a large increase in income soon. Otherwise, I’d just buy a larger policy initially and skip the FPO. It’s usually only good for ~ 10 years anyway. For the same price as the FPO you could have a 10% larger policy. The main benefit is that you save the hassle of buying a whole new policy and you don’t have to prove insurability again. You really don’t get it any cheaper than you otherwise could later (assuming you’re still insurable.)
Cost of Living Rider
This is a rider that physicians often add to their policies. It is basically an inflation adjustment to the disability benefit. Keep in mind it doesn’t begin adjusting UNTIL you get disabled. For example, if I buy a $10K policy now, and then become disabled 10 years from now, it will pay out $10K that first month (well, the first month after the 90 day waiting period.) Then each year the benefit will be adjusted with inflation. This is important if you become disabled relatively early in your career and then stay disabled for a long time. It is also pretty expensive. My COLA rider costs $760.21 a year on a $7500 policy. That’s about 0.84% of the income protected, or about 23% of the cost of my entire policy. So what do I get for that?
Nothing for the first year of benefits. Then benefits are adjusted up with the CPI-U, or the government’s rate of inflation that it uses for Treasury Inflation Protected Securities, but with a maximum of 6% a year. It also allows me to purchase that greater benefit (like a future purchase option) if my disability ends after a few years, which would be useful if I then became disabled again.
I bought this rider originally at the recommendation of the salesman selling me the policy. In retrospect, I think I’d prefer to have a 23% larger benefit for a couple of reasons. First of all, most disabilities don’t last for years and years. Second, if you get disabled in your 50s or 60s like most people who get disabled, those inflation adjustments won’t add up to much if your benefits only go to age 65 like most policies.
Of course, the younger you are at the time of disability, and therefore at the time of purchase, the more useful this benefit could be. In fact, for policies bought in residency, when the company WON’T sell you a larger policy (due to inadequate income), this is one way to get a larger benefit (eventually) than you can buy as a resident. And the risk of becoming disabled in your 30s and remaining that way for 30 years without any inflation adjustment could be pretty catastrophic. This rider presents a tough decision. I suggest if you’re buying the policy within the last 10-15 years of your career that you skip it. If you’re buying it during residency or the first few years out of residency, I suggest you get it. If you’re somewhere in between, consider buying a larger policy instead if you can justify it with your income.
Non-Cancelable and Guaranteed Renewable Rider
If your policy is not non-cancelable and guaranteed renewable, you’ll need to buy a rider to get these important features. It’s important to understand these terms.
Conditionally Renewable – This means the company gets to decide what the conditions will be for you to renew your policy, and at what price. You DO NOT want a policy that is conditionally renewable. In fact, it would be unusual for a salesman to even try to sell you one.
Guaranteed Renewable – This means the company can change your premium, so long as they change it for everyone in your state, your policy year, or your occupational class. But they must renew the policy at some price.
Non-Cancelable and Guaranteed Renewable – This means the company cannot change anything about the policy- not the premiums, not the monthly benefits, and not the policy benefits up until age 65 (or whatever the specified age in the policy is.) Even if you change occupation to something in a more risky class with a lower income, the benefit will remain in place at the same price.
My policy technically wasn’t non-cancelable, but the company gave me the non-cancelable rider for free. That’s my favorite price. I recommend against buying any policy that isn’t non-cancelable and guaranteed renewable.
This is a new issue with disability insurance. It can either be part of the policy or a separate rider. Catastrophic coverage basically means you get additional money above and beyond the disability benefit if your disability is so bad that you cannot perform at least 2 activities of daily living, such as dressing, bathing, toileting, or feeding yourself. You might get another 50% of the disability benefit. This is supposed to cover the cost of an in-home assistant (think CNA) to help you with those activities. I bought my policy before the companies came out with this, so I don’t have it and am unable to provide much pricing info about it. But if you want to get a first-class disability insurance policy, you may want to pony up a few bucks for this one. Depending on the price, this might also be a place to shave a few bucks off the cost of the policy.
In summary, here are my recommendations on riders:
|Residual Disability||Highly recommended|
|Specialty specific (if necessary)||Highly recommended|
|Cost of Living Adjustment||Recommended in residency/early career|
|Future Purchase Option||Recommended in residency|
|Catastrophic Coverage||Recommended if inexpensive|
Stay tuned for part 5 of this series. I’ll discuss how much disability insurance to buy, how to pay for it, when to cancel it, and a few small tricks to keep the costs down. Part 6 will discuss other types of disability policies, including group disability policies, key-man policies, overhead expense policies, and retirement savings protection policies. The final part will discuss the various disability insurance companies and show you how to compare policies.