[Editor's Note: This is a guest post from Joshua Thompson, CFP, EA, who has his own financial planning firm in Tampa, FL. In this post, he explains how to use a valuing system to compare various disability insurance contracts you may be considering. We have no financial relationship.]
Wearing dual hats as an advisor and as the spouse of an OB-GYN, I specialize in physician-specific financial needs, but I also have to evaluate for personal purchase the same products that I offer doctors. The purpose of this guest post is to help those without my knowledge of these products to be able to evaluate and compare the value of different disability insurance contracts. I am not going to go into the intricacies of each contract; there are other great posts on the WCI blog that go over the different terms and options that the “Big 6” offer.
With this in mind I am going to show you how I value contracts, especially for the mostly residents and fellows in Florida that I work with. The contract terms can and do vary between states and my recommendations would change based on state of residence or future employment. My valuation exercise today only considers 4 options: Guardian, Principal, Ameritas, and Standard insurance. I am an independent agent and am not tied to any of these companies in any way. I was not trained by any of these companies and I don’t have desk space, “free” rent, or any ties to their securities dealers. My only conflict of interest here is that I want to help young physicians with their disability insurance needs and get paid the commission from that sale. This example uses a 32 year old female cardiologist in Florida. Obviously features and prices vary for doctors of different ages, specialties, and states.
The highlighted parts of the spreadsheet are items that I feel are most important in a disability contract. The non-highlighted options are “extras” that the various companies may or may not offer but I wouldn’t consider these options as absolutely needed. The Standard price is an estimate; this is the endorsed program that my clients have access to so I am not allowed to price it out. It has been my experience that the pricing of that program is almost the same as the Principal price. The endorsed Standard option is a guaranteed issue program, so the buyers don’t have access to an inflation rider. I do have a multi-life group with Principal at the residency so that helps the price for females; again, I had to buy a contract for my wife and some of her partners. If you are in a residency program you may be in a similar situation where you have access to a guaranteed issue product without inflation protection.
Company financial strength is important. I don’t advise clients to purchase solely on financial strength alone but it should be considered in the valuation of a contract. There are 5 ratings agencies that rate the financial strength of insurance companies. There are 21 levels of ratings from AAA to C (there is no F) and there is no standardization between these ratings agencies. Enter the Comdex, the Comdex score is an indexed score given to insurance companies (with at least 2 ratings) that is used to compare the financial strength of the various insurance companies, the score goes from 1 to 100, the higher the score the better. If a company receives a score of 95 that means its indexed score is better than 95% of other insurance companies.
In addition to company financial strength I highlight the following as being most important in your disability buying decision:
- Maximum benefit period. You should have a contract to at least age 65. The price difference between “to age 65” and “to age 70” may not be much
- True own occupation for physicians
- COLA/Inflation protection
- Residual disability
The spreadsheet is for a 32 year old, female Cardiologist in Florida. The pricing and benefit structure for the policies shown on the spreadsheet are as follows:
- Benefit period is to age 67
- $5,000 per month/ $60,000 per year
- True Own- Occupation
- COLA (Cost of living/ inflation protection)
- Residual disability
In this case I take the maximum value of the contracts, i.e. a doctor buys a contract and the next month they are hit by a bus and cannot practice medicine ever again and received maximum, inflation-indexed benefits to age 67. The maximum benefit for this doctor (purchasing right out of residency/fellowship) with inflation protection is approximately $3,627,000. The values for maximum contract value and a 10 year claim period are approximate calculations (the results will vary based on birth month and disability start).
- Take this amount and divide it by the annual cost and this gives me the basis of value (maximum amount of benefit per dollar spent).
- Now, I added an extra 10% of value to the contracts that offer “specialty language”. Remember that while all the contracts listed (as well as MetLife and MassMutual) have “true-own” occupation for physicians, not all of them add the extra sentence to clarify that your specialty is “your occupation”. There is another post on WCI about Occupation Class ratings so you can see that when you buy the contract all the companies take your specialty into consideration. While I believe that “True- Own Occ” is what is most important I wanted to add some value for the companies that do go that extra step in declaring the specialty language. If you feel “specialty” is worth more then you can make your own adjustment.
- Next I make an adjustment downward for the companies with lower Comdex ratings. I took each company’s Comdex score (as of July 2104) and indexed them against Guardian's score and subtracted the percentage from each company’s base value.
- Next I made an 5% adjustment increase for items where Guardian is stronger than the other companies regarding residual and inflation protection, this is the Guardian Provider Plus contract
- Finally I added 2% value for a Principal benefit for lump sum payment for stroke, heart attack, and cancer. This is a payment in addition to disability benefits.
- These values are then added together to get the total value score. The higher the better. I then repeat the process for a more sensible 10yr claim.
The value proposition changes a little bit when valuing the contracts for males and different medical specialties.
All of the contracts are good contracts and you should certainly own a contract when leaving residency. All of the contracts would pay if you can’t perform your specialty and you wanted to work in another field. Disability insurance is nuanced and hopefully seeing this on a spreadsheet helps you visualize the differences.
[Editor's Note: I accepted this guest post because I think it shows a unique and useful way to think about each of the features of a disability insurance contract. Basically, he is taking the features he cares about, and assigning a value to each of them, then adding up the total. Obviously, these values may be different to each person. Each individual may also assign a value that is different from what an actuary may value that particular feature at. For example, how do you know that “specialty language” is worth 10%? You don't. It might be worth 1% or 20%. You would need large amounts of actuarial data that even the insurance companies may not have to truly price that feature. Even if the companies have it, they aren't going to share it with their agents or with you. So, while I like the idea of using a spreadsheet to compare each of your possible disability contract options, this entire process is subject to the “garbage-in, garbage-out” phenomenon. When you make your own spreadsheet, be sure to consider what features in the contract you really care about and enlist the assistance of your agent (who is being paid handsomely to help you with this purchase) in the process.]
What features in a disability contract are most important to you? How would you assign values to each of them when comparing a contract? What process did you follow when purchasing a disability insurance contract? Did you do anything this formal, or just ask the agent what he thought was best? Comment below!