[This is our third of five sponsored posts that will appear on the blog this year. There is one from each of our Platinum Sponsors ($3500+) of The White Coat Investor scholarship. 100% of that revenue goes to the scholarship winners. The difference between a sponsored post and a guest post is I give up the editorial control on a sponsored post to the writer. This one comes from Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF. He is well-known to readers from multiple previous guest posts and his long time sponsorship of the site. Thank you Larry for being the largest donor to the scholarship this year! He spent a long time brainstorming what he thought would make an interesting post for you this year and I think he did a great job. Enjoy!]
As an insurance agent that specializes in disability insurance and term life insurance for physicians, I am often asked to review and comment on both proposed, as well as, existing disability insurance policies. While this activity is certainly an opportunity to generate new business and gain new clients, I prefer to use it as an opportunity to share my knowledge and experience in the industry, as well as, promote “goodwill” in the medical marketplace – especially among those that follow the White Coat Investor Blog.
As such, below are several things that I take into consideration while evaluating existing policies and/or reviewing illustrations that have been presented when new coverage has been proposed:
# 1 Non-Cancelable and Guaranteed Renewable
Is the policy both Non-Cancelable and Guaranteed Renewable? Meaning, as long as required premiums are paid, the policy can’t be cancelled, premiums increased, or coverage terms changed until the policy expiration date (typically age 65). This combination provides the greatest degree of protection to you as a consumer.
While some companies only offer coverage in this manner, others, such as Standard Insurance Company, Ameritas and Northwestern Mutual also make policies available on a Guaranteed Renewable basis. Meaning, no provision of the policy can be changed by the insurance company, except for the premium, before the termination date (typically age 65). The premium can only be changed if it applies to all policies with similar benefits insuring the same risk class, which requires state insurance department approval.
# 2 Own Occupation
Does the policy contain an “Own-Occupation” definition of total disability? Typically, “total disability” or “totally disabled” means that due to an accident or illness, you are not able to perform the “material and substantial” duties of your occupation. This definition makes it possible for you to continue working and earn unlimited income, so long as your disability renders you unable to perform the “material and substantial” duties of your occupation.
At the time of this writing, depending upon your state of residence and medical specialty, there are only six companies that potentially offer this definition to physicians – Berkshire Life (a Guardian Company), Standard, MassMutual, Principal, Ameritas and Ohio National. Keep in mind that MetLife stopped selling fully underwritten individual disability insurance policies as of September 1, 2016.
Other definitions of total disability, including the Modified “Own-Occupation” (“Loss of Earnings)”, “Transitional Occupation”, “Transitional Your Occupation” (“Trans Occ”), “Medical Occupation” (“MOD”) or “Medical” Own-Occupation (“MOOD”) definitions can potentially limit the amount of disability benefits that you can receive in addition to the income that you earn in a new occupation or medical specialty.
# 3 Residual Disability Rider
Does the policy contain a Residual/Partial Disability Benefit Rider? While “Own-Occupation” is the most liberal definition of disability, and therefore best protects your specialty, there’s a potential problem associated with it. What happens if due to an accident or sickness, your physician says you can still perform the duties of your occupation but he requires that you work fewer days per week, fewer hours per day, limits the number of patients that you can see and/or the number of procedures that you can perform? Unfortunately, under these circumstances, if you are still performing the duties of your medical specialty (possibly incurring a substantial loss of income) no benefits would be paid at all! Therefore, your policy must contain a Residual or Partial Disability Benefit Rider. This rider typically pays benefits proportionate to your loss of income if you experience a loss of income of 15-20 percent or more compared to your pre-disability earnings. Additionally, if your loss of earnings were greater than 75-80 percent, then 100 percent of your monthly disability benefit would be paid. In some cases, this provision is built into a policy. In other cases, it is not and must be purchased separately.
# 4 A Recovery Benefit
Does the policy contain a Recovery Benefit? If yes, for how long? Is it for the entire benefit period of the policy or is it limited? Is it relevant to the medical specialty of the policyholder?
While any policy you purchase should include a Residual or Partial Disability Rider, what happens if you have physically recovered and have returned to work on a full-time basis but continue to experience a loss of income? This can easily happen if you are self-employed and compensated or an “eat what you kill basis” or a portion of your compensation is tied to productivity or RVUs. A Recovery Benefit is designed to do more to assist with your financial recovery following a disability–especially if your practice has been built on referrals from existing patients and/or other physicians. Should you continue to suffer a loss of income of 15-20 percent or more, compared to your pre-disability income, and there’s a demonstrable relationship between your current loss of income and your prior disability, some companies will continue to pay benefits to the age of 65 or longer. Others companies continue to pay for a limited period of time (typically 12, 24 or 36 months), which may or may not properly support your financial recovery. Therefore, if some or all of your compensation is tied to productivity, you should make certain that the policy you purchase contains a liberal recovery benefit.
# 5 COLA Rider
Does the policy include a Cost Of Living Adjustment (COLA) Rider? A COLA Rider is designed to help your benefits keep pace with inflation after your disability has lasted for 12 months. This adjustment can be a flat percentage or tied to the Consumer Price Index. One issue that I typically find is when a policyholder purchased a COLA Rider that is CPI-Tied with a maximum of 6% compound (and the other option has a maximum of 3% compound). In order for this to be worthwhile, the CPI-U (Consumer Price Index for Urban Workers) would have to exceed 3%.
Although costly, this rider can provide significant increases to your monthly benefit if you are disabled early in your career. That being said, if cutting the cost of coverage is an issue, this might be the first optional rider to consider excluding from your policy as it can add 10-15 percent or more to your premium. Along these lines, if you are not purchasing the maximum amount of individual coverage in which you qualify, you might consider removing the COLA Rider and simply purchasing a policy with a larger initial monthly benefit.
# 6 Future Purchase Option Rider
Does the policy contain a Future Increase/Insurability Option (FIO) Rider, Future Purchase Option (FPO), Guarantee of Physical Insurability (GPI) Rider or Benefit Update (BU) Rider? This rider allows an insured to apply for additional disability insurance coverage, regardless of their health, as their income rises. Essentially, you’re paying for the right to increase your policy’s monthly benefit without undergoing another exam, blood test, urine test, or answering any medical questions. This guarantees that any medical condition(s) that develop after the original policy’s purchase would be fully covered, and not subject to new medical underwriting.
It’s important to know if, when exercised, the additional coverage will be in the form of an increase to an existing policy or in the form of a new policy. It is also important to know if discounts that were included in the original policy will apply to the increases in coverage. An increase to an existing policy is best as it guarantees that all policy provisions remain the same and are issued using the same rate book as the original policy.
# 7 Occupation Class
What occupation class was the policy issued in and how long ago was it purchased? Insurance companies often change the occupation class assigned to various medical specialties. In the event that one’s occupation class has improved, and they are still healthy, in some cases, they can potentially “upgrade” the occupation class on their existing policy and lower their premium rates.
A good example of this is a Radiologist or Radiation Oncologist that purchased coverage from Berkshire Life prior to having at least five years experience in the occupation (which does not include residency or fellowship) and received an occupation class of 4M. Once they have been in practice for five year, they can use the “Move-Up Option” to classify for the more favorable occupation class of 5M and reduce their premium outlay. Please note that this upgrade took place in August 2009. However, Berkshire considered transitions for policies issued back to April, 2009.
Another option would be to potentially replace the original policy or policies, using the same insurance company, or another carrier to secure a more favorable premium rate. Of course, if the policy provisions have since changed or you are considering a new carrier altogether, you must take other factors, besides the premium rate, into consideration before making a final decision.
# 8 Discount
Was the policy purchased with a discount? In most cases, discounts are available via your hospital affiliation or through a professional association. If the original policy was not purchased with a discount and a discount is now available, this could warrant a replacement. This is no more apparent when a policy was purchased by a female physician without a unisex rate, which typically provides a savings of 40-50% off of the normal female rates.
Keep in mind that Principal stopped offering unisex rates to Medical/Dental Students or Residents/Fellows as of Monday, February 6, 2017. A 10% discount off of gender distinct (male/female) rates is now available to those institutions that have an existing discount plan in place or for new ones that are established. However, unisex (gender neutral) rates and a 20% Multi-Life discount continue to be available to Attending Physicians and Dentists working for employers or institutions that have an existing discount plan in place or for new ones that are established. However, in many cases, MassMutual now offers policies with unisex rates and a discount. Standard Insurance Company also makes this available to Residents/Fellows, in a limited number of institutions, via their Guaranteed Standard Issue (GSI), Graduate Medical Education (GME) Plan.
# 9 California or Florida
Was the original policy purchased in California or Florida? It is not unreasonable to think that most physicians would rather be on the beach than in clinic or the operating room. Therefore, claims experience has been extremely poor in these states. Policies are typically also 10%-20% more expensive with less liberal contract provisions.
As a result, if your original policy was purchased in one of these states, it is possible that you can purchase a new policy, from the same carrier, with more liberal contractual provisions with a lower premium rate.
# 10 Mental/Nervous Coverage
Does the policy provide unlimited coverage for claims related to mental/nervous and/or substance abuse disorders? While some carriers will cover claims for mental and nervous conditions in the same way as other disabilities, the majority of companies limit these claims to a maximum of 24 months (either per period of disability or over your lifetime). This limitation is invoked if the primary cause of disability was solely a psychiatric or substance abuse disorder or diagnosis including, but not limited to, post-traumatic stress syndrome, anxiety, depression and or alcohol abuse/addiction. Although many physicians will opt to purchase a policy with the least amount of restrictions, some willingly accept a policy with this limitation in order to take advantage of the cost savings associated with it. Others, like Anesthesiologists or Emergency Medicine Physicians, may simply have no choice.
# 11 Still Qualified?
Does the insured qualify to purchase the amount of individual coverage they have in force now? In many cases, if one has an employer provided group LTD plan or will be eligible to participate in one within 12 months (assuming it is not voluntary) and their existing policy was purchased using “New In Practice” limits (these are amounts of individual coverage available to Residents, Fellows or “New In Practice” Physicians, they might be considered “overinsured” and no longer qualify to purchase a similar amount of individual coverage compared to what they currently own. At this point, one would need to determine how strongly they feel about potentially reducing their amount of individual coverage in order to purchase a policy with stronger contractual provisions and/or secure a lower premium rates.
# 12 New Medical Conditions
Has the policyholder been diagnosed with any medical condition(s) since the original policy was purchased? This may render one uninsurable or be the cause of a Medical Exclusion Rider (stating that the policy will not pay benefits for the general condition or area of the body) when the insurance company has identified an existing condition that increases the chance of you making a disability claim at some point in the future, when you have a specific medical problem with clearly identifiable symptoms, such as organ, joint or musculoskeletal disorders, when an impairment is severe, recent or very specific or likely to recur. However, in some cases, exclusion riders can be reconsidered if enough time has gone by that the underwriters feel convinced the medical problem will not recur or become aggravated again or the medical issue has been eliminated.
# 13 Graded Premiums
Does the policy have an annually increasing (Graded, ARDI) premium structure? Many policyholders purchased their policies several years ago and were looking to both maximize their coverage, as well as, minimize their initial premium outlay. However, in many cases, their financial situation has changed. Does it make sense to convert from a graded or ARDI premium to a level premium structure? Can a new policy be purchased with similar benefits at a lower premium rate?
Here are a few examples of some policies that I recently reviewed and some of the recommendations that were made:
29 YO OB/GYN
A policy was purchased by a 29 year old female OB/GYN Resident approximately 1 year ago (she just became an Attending Physician) with a monthly benefit of $4,500, payable after 90 days, to age 65. Also included was a Residual Disability Benefit Rider, a 3% Cost Of Living Adjustment (COLA) Rider, a $4,000 Catastrophic Disability Benefit (CAT) Rider and a $12,500 Future Increase Option (FIO) Rider. The monthly graded (annually increasing) premium was $159.67 (increasing to $179.20 on the first policy anniversary). The level monthly premium should she convert this year would have been $339.27. This included a 10% Student/Resident Discount.
A new policy was purchased from another carrier with a unisex rate and 20% Multi-Life Discount resulting in a level monthly premium of $160.50 (similar to what she was paying for the graded premium plan above).
35 YO Ophthalmologist
A policy was purchased by a 35 year old male Ophthalmologist in 2007 with a monthly benefit of $10,000, payable after 90 days, to age 67. Also included was an “Own-Occupation” Rider, a Residual Disability Benefit Rider, a Noncancelable Policy Rider and a 3% Indexed Cost Of Living Adjustment (COLA) Rider with an occupation class of 3P. I knew that the occupation class for Ophthalmologists had been upgraded to 4P since that time. The fixed monthly premium was $518.58. I became the servicing agent for his existing policy and upgraded his occupation class, resulting in a new monthly premium of $444.54 (a savings of $74.04 or approximately 14% less than what he was paying for the same coverage).
29 YO OB/GYN # 2
A policy was purchased by one of my clients that was a 29 year old female OB/GYN Resident while she was working in California with a monthly benefit of $5,000, payable after 90 days, to age 65. Also included was a Basic Partial Disability Benefit Rider, a 3% Maximum Cost Of Living Adjustment (COLA) Rider and a Benefit Purchase Rider (BPR). The monthly graded (annually increasing) premium was $148.13. The level monthly premium would have been $302.40. This included a 10% Student/Resident Discount.
This client relocated to another state and a new policy was purchased from another carrier with a unisex rate and 25% Multi-Life Discount. This resulted in a level monthly premium of $238.33. However, she was able to purchase a policy with a monthly benefit of $7,500 (50% more than what she owned), payable after 90 days, to age 65. Also included was an Extended Partial Disability Benefit Rider, a 3% Cost Of Living Adjustment (COLA) Rider and a $9,500 Future Insurability Option (FIO) Rider. This policy also provided 24 months of coverage for claims related to mental/nervous and/or substance abuse disorders per period of disability (compared to the lifetime limitation on her previous policy).
33 YO Radiologist
A policy was purchased by a 33 year old male Diagnostic Radiology Resident with an occupation class of 4M with a monthly benefit of $5,000, payable after 90 days, to age 65. Also included was a Residual Disability Benefit Rider. The fixed monthly premium was $145.27. Since he had been in practice (out of fellowship) for more than five years, I knew that he qualified for the “Move-Up” Option and would now qualify for a more favorable occupation class. I became the servicing agent for his existing policy and upgraded his occupation class to 5M, resulting in a new monthly premium of $114.71 (a savings of $30.56 or approximately 21% less than what he was paying for the same coverage).
29 YO Plastic Surgeon
A Guaranteed Renewable policy was purchased by a 29 year old male Plastic Surgery Resident approximately 4 years ago with a monthly benefit of $4,000, payable after 90 days, to age 65. Also included was a Proportionate Benefit (Residual Disability Benefit), a 3% Indexed Income Benefit (COLA), a Future Increase Benefit (FIB) and a $5,000 Additional Purchase Benefit (APB). The policy contained a Medical Occupation Definition (MOD) of Total Disability. The ARDI (annually increasing) monthly premium was $127.63.
A new Non-Cancelable, Guaranteed Renewable, “Own-Occupation” policy was purchased from another carrier with a monthly benefit of $4,000, payable after 90 days, to age 65. Also included was an Enhanced Residual Disability Rider, a 3% Compound Cost Of Living Adjustment (COLA) Rider, an Automatic Increase Benefit (AIB) and a $12,000 Guaranteed Insurability Option (GIO) Rider. The 5-Year Term (lower level monthly premium for five years and annually increasing thereafter) was $92.03 (the level premium was $138.29). This included a 10% Association Discount. The plan is for him to convert to a level premium after her completes his training to lock into a lower premium rate over his career. This policy also offered unlimited coverage (no limitation) for claims related to mental/nervous and/or substance abuse disorders.
27 YO Dermatologist
A policy was purchased by a 27 year old female Dermatology Resident approximately 4 years ago with a monthly benefit of $5,000, payable after 90 days, for 10 years (she originally applied for benefits payable to age 65 but this was reduced based upon medical history). Also included was an Enhanced Residual Disability Rider, as well as, a 6% Cost Of Living Adjustment (COLA) Rider. The Future Increase Option (FIO) Rider was not available (again, based upon medical history) and the policy was issued with an exclusion rider for claims related to mental/nervous and/or substance abuse disorders along with a 25% rating (substandard premium charge). The monthly premium was $118.86. This included a unisex rate and discount.
Since this insured was doing her fellowship in a hospital that offered a Guaranteed Standard Issue (GSI), Graduate Medical Education (GME) Plan, I provided her with the contact information for the “endorsed” agent in order to request an illustration of coverage that I could review with her.
She subsequently purchased the policy with a monthly benefit of $5,000, payable after 90 days, to age 67. Also included was an “Own-Occupation” Rider, a Residual Disability Benefit Rider, a Noncancelable Policy Rider, a 3% Indexed Cost Of Living Adjustment (COLA) Rider and a $10,000 Future Purchase Option (FPO) Rider. The level monthly premium was $166.24.This included a unisex rate and 15% Guaranteed Standard Issue Discount.
30 YO Plastic Surgeon
A policy was purchased by a 30 year old female Plastic Surgery Resident approximately 4 years ago with a monthly benefit of $1,000, payable after 90 days, to age 67. Also included was a Residual Disability and Recovery Benefit Rider, a Future Benefit Increase (FBI) Rider and a Benefit Update (BU) Rider. The level monthly premium was $47.21.This included a 10% Mental/Nervous and Substance/Abuse Disorder Limitation Discount.
Using the same insurance company, she purchased a new policy with a unisex rate and 20% Multi-Life Discount, as well as, added a 3% Cost Of Living Adjustment (COLA) Rider. This resulted in a level monthly premium of $34.19 (a savings of $13.02 or approximately 28% compared to what she was paying for less comprehensive coverage).
As you can see, there are a number of reasons to potentially review your existing coverage to make sure it still meets your individual needs, goals and budget.
Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF is the founder of Physician Financial Services, a New York- based firm specializing in income protection and wealth accumulation strategies for physicians. He can be reached at (516) 677-6211 or by email to [email protected] with comments or questions.
These are the personal views of the author and may not represent the views and opinions of The Guardian Life Insurance Company of America or its subsidiaries or affiliates thereof.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 355 Lexington Avenue, 9th Floor, New York, N Y 10017-6603, 212-541-8800. Securities products and advisory services are offered through PAS, 1-516-677-6200. Financial Representative, The Guardian Life Insurance Company of America, New York, NY (Guardian). PAS is an indirect wholly owned subsidiary of Guardian. Physician Financial Services is not an affiliate or subsidiary of PAS or Guardian.
PAS is a member FINRA, SIPC
2017-45949 Exp. 9/19