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. 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.
Catastrophic Coverage
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:
Rider | Recommendation |
Non-Cancelable/Guaranteed Renewable | Mandatory |
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.
What are your thoughts on Graded lifetime benefits? One of colleagues has it on her policy and it costs a lot more. I personally chose a benefit upto age 65 and I’m hoping that by that age my nest egg will be big enough that I won’t need to depend on disability benefits.
Thanks
Dave
I think if there is a plan for retirement you can skip the lifetime benefits My disability only pays to 65. But my portfolio now, assuming it doubles once every 10 years for the next 3 decades, will take care of me after 65. Another option is to get a rider that pays for a retirement plan.
As an FYI, if you have a Standard disability policy, it actually pays benefits to age 67 (not age 65). The occupational classification of a D.O. is the same as an M.D. and based upon medical specialty and job duties. Note, however, that different insurance companies may treat the same medical specialty differently and, as such, there can be a substantial difference in premium rates for coverage that is very similar. Finally, the monthly benefits available to residents and fellows has increased substantially since the time you purchased your coverage. At this time, the most common monthly benefit available to residents is $5,000 month but can be as high as $7,500 month for certain specialties in the last 180 days of their training.
Thanks for stopping by the site. I appreciate you looking it over and offering corrections. As I obviously don’t work day in and day out selling insurance, I’ll never be completely up to date on this rapidly changing field.
I know this site gives quality dependent articles or reviews and extra
data, is there any other web page which provides these kinds of information in quality?
Hi WCI,
What do you advise in terms of approaching the health insurance aspect in the case of disability?
For example, let’s say I am an employed orthopedic surgeon and due to carpal tunnel syndrome, I can no longer operate. I have read the WCI sections on disability religiously and have purchased the appropriate own-occ disability policy that pays me enough to address my fixed costs and even to save some of it.
However, since I can no longer work as a surgeon, I lose my hospital job and therefore lose my health insurance. Will I then be automatically be eligible for Medicare? I know that certain disabilities qualify for Medicare but I’m not sure if it would apply in this type of case.
Medicare would be ideal, but to be sure you’d need to have a disability policy big enough to cover that expense. I pay my own health insurance, so that is easily factored in to my needs as that expense wouldn’t change if I were disabled. If that’s a side benefit for you, then you need to factor it in when calculating how much DI you need.
I am working with AAFP Disability for some quotes; the best quote out of the 6 different companies they gave me was with MetLife. All the plans had own occupation language and the quotes included all the important riders you mentioned in these articles, and MetLife was about $400-500 cheaper per year than all the others (Guardian, Principle…). After doing the research I was ready to apply with MetLife today but then the insurance agent told me MetLife is no longer taking new customers for Disability Insurance after Sept 1, 2016 and is basically shutting that part of the company down. He did say they will honor the existing policies and will have support in place for those policies, but I was curious what your thoughts were. It sounds a little risky on the surface, but then again I suppose the existing policies/riders are legally binding and they would have to honor them right?
MetLife is a big company. I have a life insurance policy with them. They’re not going anywhere. If that’s the best policy available to you today, that’s what I’d get despite the plans to stop selling new policies this Fall.
Starting active duty air force pediatrics next week and am contemplating policies to apply for this week while still a civilian (reserve) resident. Looked into AMA insurance and not excited. AAP’s group program seems ok. Got some quotes from a insurance rep for Guardian, Principal and Metlife. I like Guardian but seems expensive and as a resident will only cover to $5,000 per month. I think I saw somewhere you had your policy during your active duty military time right? It seems like the military is not going to cover me well should something happen and I am weighing the benefits of the 10% Guardian and 30% Principal discounts for applying while a resident. With guardian I can get the “Future Insurability Coverage” rider for coverage up to $12,000 if I go with their Provider Plus. This would be nice as I wouldn’t have to go through underwritting to get it as I am worried that I could have back problems coming up in my future (FHx of problems and have been slightly already treating myself). Any suggestions? I read you went with Metlife? Why did you choose them and did you have any problems getting coverage during your active duty time minus the whole “act of war” clause?
DSH –
I would recommend that you speak with the agent about your current situation. The insurers you mentioned will not offer coverage to individuals with a known AD obligation. The only carrier that considers it, without highly restricting the benefit amount available to you, is Standard and not even Standard will offer coverage once you have your call-up orders (sounds like you do). I’m sure the agent you’re working with will be able to guide you further – I would just recommend bringing it to his/her attention if you haven’t already.
That’s unfortunate. Sounds like you’re a little late, the agent doesn’t know what’s going on, or the agent is trying to pull a sly one to get a sale.
I have metlife life insurance purchased while on Active Duty (and USAA Life Insurance) and Standard disability insurance purchased as a civilian resident. DI is expensive. Sounds to me like you know what you should do- buy the Guardian policy.
Great post – I have two questions:
1. I have a policy through mass mutual radius policy. Mass mutual offers a guarded retirement rider you can purchase where the policy will make retirement contributions on your behalf if you become disabled. Is this a rider that other companies offer and if so do you recommend purchasing this rider?
2. How different are the “quality” of the different policies. I know that most level term life insurance companies are all essentially the same so therefore go for the cheapest but I have been told that the contract language for disability policies can vary greatly and that certain companies such as Mass Mutual and Guardian may be more expensive but the contract language is more favorable compared to Ameritas, etc… Any thoughts.
1. Yes. No. I just recommend you buy more coverage if you can get it. Most of the retirement riders make you invest in their product.
2. That’s correct. Sit down with an independent agent and compare multiple policies for price and wording.
Hello, wondering if there are any thoughts on the new Student Loan Repayment rider available through Guardian/Berkshire. Background context: I’m a PGY1 in Orthopaedics, have about $400k in student loan debt, have a wife that makes just over $100k, and we have about $40k in savings and another $60k in retirement accounts. Would the Student Loan rider be worth it for me to add on? At the expense of another rider, such as COLA?
Also, any thoughts on graded vs. level monthly premiums?
I think it’s a little gimmicky, but I guess it’s fine if you cancel it when the loans are gone.
Personally, I’d prefer to spend the money on just getting a bigger policy since loans don’t last that long if you’re doing things right.
It certainly doesn’t replace COLA which I think is a necessity for someone buying a policy in residency.
If you expect to hit financial independence relatively early (age 50 or so) and then cancel your policy, I think you’re better off with graded. If you expect to hold it into your 60s, I’d go level.
You mention the catastrophic coverage rider may be worth it if it is low priced. Do you put a percentage on that? One quote showed the catastrophic coverage rider to be over 5% of the yearly payment, which seems fairly high to me.
Seems fairly high to me too.
1. Do companies let you drop riders? It would be great to get catastrophic as a resident, but cancel it as I build more wealth.
2. The policy I am looking at offers catastrophic for $120 yearly for $5k benefit. Thoughts on if its worth it?
1. Yes
2. I’d just buy a bigger base policy.