[Editor's Note: Today is the last of our five 2019 WCI Scholarship sponsored posts. It comes to us from long-time scholarship supporter Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF of Physician Financial Services. I recently had the opportunity to chat on the phone again with Larry and am always impressed with his desire to serve you and make sure you get the best policy for you even if it doesn't result in a commission for him. Thank you for supporting those who support this scholarship.]

larry keller disability insurance

Lawrence Keller

Purchasing an individual disability insurance policy is often one of the first steps in creating a financial plan. After all, your ability to work and earn an income is what allows you to pay down debt, build wealth and create a lifestyle for you and/or your family.

Disability insurance is something that anyone who is working but has not yet achieved financial independence needs. While you might love what you do, if you are working because you need to generate an income, you need to protect that income, and the only effective way to do that is to purchase disability insurance. This article will help you understand which features should be included in your disability insurance policy and why.


What to Look for in a Disability Insurance Policy

At its very core, disability insurance is akin to an Automated Teller Machine (ATM) Card. The more hours you have access to a cash machine, the easier it is to withdraw funds from your account. You can think of it this way, the more restrictive your policy is in terms of its features – the definition of total disability, the trigger for Residual/Partial Disability, and how claims related to mental/nervous and/or substance abuse disorders and foreign residence will be handled, all of which will ultimately determine your ability to receive benefits from your policy. As such, each additional restriction or limitation that is part of it, means that you will have less access to the cash machine in order to withdraw funds. In short, the fewer limitations associated with your policy, the easier it will be to receive benefits, from a contractual standpoint, in the event of a claim.


What Provisions Should Be Included in Your Disability Insurance Policy?


#1 Non-Cancellable and Guaranteed Renewable

A policy that is Non-Cancelable and Guaranteed Renewable provides you with the greatest degree of protection as a consumer. As long as required premiums are paid, the policy cannot be canceled, the premium rates cannot be changed, and the policy provisions will remain the same until the policy’s expiration date (typically age 65).

Certain insurance companies may also offer a Guaranteed Renewable (not Non-Cancellable AND Guaranteed Renewable) policy. However, this allows the insurance company to change the premium rates by class of policyholder with state insurance department approval. While this can provide you with premium savings, in my opinion, in most cases, it is not worth the risk. After all, we don’t know where financial markets are headed, where medicine is headed and what claims experience might represent over your career. Insurance is about transferring risk away from you to a third party (the insurance company) until you have either gained the ability to self insure or have reached financial independence.


#2 “Own-Occupation” Definition of Total Disability

Ideally, you want to purchase a policy with a true “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.

Some companies will even go so far as to state that if you have limited your practice to a single medical specialty, that specialty will be deemed to be your occupation. This definition of total disability makes it possible for you to work in another occupation or medical specialty and still receive your full disability benefits – even if you are earning the same or more income than you were prior to your disability. There is no black letter law that states exactly when one will be considered totally disabled, residually (partially) disabled or not disabled at all.

Generally, for surgeons, as long as the occupational analysis showed that just prior to disability his/her main duties were performing surgery and the majority of his/her office based practice was pre-operative consultations and post-operative follow-up, they would be considered totally disabled. Their new income is not taken into consideration and their full disability insurance benefits continue to be paid as he/she remains unable to perform the material and substantial duties of their occupation.

In their most recent offering, Berkshire’s policy starts with a true “Own-Occupation” definition of total disability and then adds a second way to qualify for benefits with a threshold that can be used in order to receive full disability insurance benefits if you are a surgeon or invasive practitioner by stating that “If your occupation is limited to a Medical Doctor or Doctor of Osteopathic Medicine and more than 50% of income is earned from performing surgical procedures, we will consider you to be totally disabled even if you are gainfully employed in your practice or another occupation so long as, solely due to injury or sickness, you are not able to perform surgical procedures. This language changes the focus from solely your duties to your source of earnings and provides more ways to qualify for total disability benefits.

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Surgical procedures means the medical interventions involving an incision with instruments performed by you in a clinical or hospital setting normally involving anesthesia and/or respiratory assistance, that you regularly perform, during the 12 months prior to your disability. These procedures can be performed on either an inpatient or outpatient basis. Providing hypodermic injections, in itself, is not a surgical procedure.”

If you have a mixed practice or your income comes from several sources, this can be an advantage as it stipulates that percentage of income that must be met in order to qualify for total disability benefits. Otherwise, as long as a policy contains an “Own-Occupation” definition of total disability, the carriers will all evaluate a claim in a similar fashion. Keep in mind, an individual’s eligibility for benefits is determined on a case-by-case basis, taking into consideration the factual circumstances presented as well as the terms and conditions of his/her policy(ies).

One carrier introduced a “Medical” Own-Occupation definition (MOOD) definition of total disability not long ago. However, despite how this might seem to read on the surface, the bottom line is that if you go back to work in another occupation, any earnings are taken into consideration in a calculation to determine the benefit that may be payable, which could result in a reduction or elimination of your policy’s monthly benefit.

If you have the desire and ability to work in another occupation or medical specialty, if your policy includes a (true) “Own-Occupation” definition of total disability, any earnings do not impact the total disability benefit payable.

Would you rather choose not to work in any capacity and receive the full total disability benefit under the “Medical” Own-Occupation definition of total disability or receive the full total disability benefit and still have the ability to earn income regardless?

At the time of this writing, depending upon your state of residence and medical specialty, there are only six companies that potentially offer true “Own-Occupation” coverage to physicians – Berkshire Life (a Guardian Company), Standard, MassMutual, Principal, and Ameritas.

The coverage provided under your policy, including the “Own-Occupation” definition of total disability, is portable from one job or occupation to the next. It is important to remember that your occupation at the time of claim is based on the main activities of your work immediately prior to the start of your disability. In the event you have an occupational change, it is always a good idea to review your insurance coverage with your agent to make certain that your policy continues to meet your needs, even though you do not need to notify the insurance company of this change.


#3 Residual or Partial Disability Benefit

While a policy with an “Own-Occupation” definition of total disability is the “best”, it does not adequately protect your income as it pays benefits solely based upon your ability (or inability) to perform the duties of your occupation or medical specialty. For example, if you are an Emergency Medicine Physician and develop a medical condition that still allows you to practice emergency medicine but you must reduce the number of shifts you work per month and/or the number of hours you work per shift, causing a loss of income, without a “loss of earning” component in your policy, no benefits would be payable – even if your loss of income was substantial.

Therefore, your policy should contain a Residual/Partial Disability Rider. This takes away the “all or nothing” associated with “Own-Occupation” and generally, pays benefits proportionate to your loss of income. Typically, a loss of 15-20% or more compared to your pre-disability income is required. Additionally, some companies state that they will not pay less than 50% of your policy’s monthly benefit for the first 6-12 months of a Residual/Partial Disability claim and, finally, if your loss of income exceeds 75-80% compared to your pre-disability income, full benefits would be payable for that particular month.


#4 Recovery Benefit

A Recovery Benefit is designed to do more to assist with your financial recovery following a total disability. This provision can be invaluable – especially if your practice has been built on referrals from existing patients and/or other healthcare professionals or you are compensated in whole or in part on an “incentive” or “eat what you kill” basis – and is typically built into the Residual/Partial Disability Benefit Rider (this is not the case for Principal in California). 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, benefits would continue to be payable. This provides significant benefits if you are no longer sick but your current income loss was caused or contributed to by your prior disability.


#5 Cost of Living Adjustment (COLA) Rider

A Cost Of Living Adjustment 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. 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 especially if you are not purchasing the largest monthly benefit for which you qualify.

For example, I recently worked with a 35 year old female Internal Medicine Physician that qualified for a monthly benefit of $12,475, payable after 90 days with a Residual Disability and Recovery Benefit Rider, a 3% COLA Rider, a Future Benefit Increase (FBI) Rider and a Benefit Update (BU) Rider. Her monthly premium with a unisex rate and 20% discount was $325.85. Removing the COLA Rider reduced her monthly premium to $281.34. For approximately the same monthly premium ($287.32), she would have only been able to purchase $11,000/month with the COLA Rider.

Using a 3% assumed inflation rate, we calculated that she would need to be disabled for approximately 5.5 years (1 year of disability plus 4.5 years of indexing), before the smaller benefit with the 3% COLA Rider would exceed the larger initial monthly benefit without it.

Finally, keep in mind, that even if your policy includes a COLA Rider, this benefit is not necessarily guaranteed protection against increases in the cost of living.


#6 Future Increase Option (FIO) Rider or Benefit Update/Benefit Purchase/Benefit Increase Rider

When it comes to increase options, there is the “traditional” increase option where you pay a premium in order to have the ability to increase your monthly benefit, up to a predetermined maximum, regardless of your health, as your income rises.

Berkshire, MassMutual, and Ameritas all offer this type of increase option. You pay a premium for this and, as such, you have the ability to increase your coverage annually, subject to your income and other disability insurance in force. If you want to exercise it, you can. If not, there is no requirement that you do so and this option will continue to be available annually until the rider expires and is removed from the policy.

In many cases, another type of increase option is included in the policy, at no cost, if certain criteria are met. While this is Principal and Standard’s only increase option (except for Standard in the State of California), MassMutual (with the exception of California and Connecticut) and Berkshire makes this available as an alternative increase option on their ProVider Choice Select policy.

Under these riders, every three years you would have the ability to increase your coverage. However, you must “check-in” in order to keep the Benefit Update Rider (Principal), Benefit Increase Rider (MassMutual or Standard) or Benefit Purchase Rider (Berkshire) on the policy.

If you do not send in the application to increase your coverage, after multiple attempts, it will be removed from your policy permanently. If you do send the form back (as you should) and do not qualify for additional coverage, you will be declined from a financial underwriting perspective and you will go through the same process three years later.

If, however, you do qualify for additional coverage, you must purchase at least 50% of the eligible amount or, again, this increase option rider will be removed from your policy permanently.

I believe that, generally, this rider is extremely important for young physicians – especially those that expect a substantial increase in income. It allows you to apply for additional disability insurance coverage, regardless of your health, as your income rises, without undergoing another exam, blood test, urine test, or answering any medical questions. This guarantees that any medical conditions that develop after your original policy’s purchase would not be 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. 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. You will also want to know if the occupation class (a factor that helps determine the premium associated with your policy) is guaranteed and if any discounts applied to your policy are permanent.


Unisex (Gender Neutral) Premium Rates for Females – Going, Going…Gone?

Due to a higher morbidity rate, premium rates for females are substantially higher compared to their male counterparts. The solution is for female physicians to purchase a policy that includes a unisex (gender neutral) rate structure and a discount. This is a blended rate that greatly favors females and can, generally, provide them with a savings of 40-50% off the normal female premium rates.

To qualify, one would normally purchase their policy as part of a Multi-Life Discount program through one's employer or as part of a Guaranteed Standard Issue (GSI) program, except in Montana where all policies have unisex rates.

For example, let’s assume that we have a 30-year old female Emergency Medicine Resident in New York State purchasing a policy from MassMutual with a monthly benefit of $5,000, payable after 90 days, to age 65. Also included is an Extended Partial Disability Benefit Rider, a 3% Cost Of Living Adjustment (COLA) Rider and a $10,000 Future Insurability Option (FIO) Rider. The level (fixed) monthly, non-discounted, gender distinct (female) premium is $331.65. However, the same policy with a unisex rate and 25% discount is $182.15 month or approximately 45% less.

Assuming the monthly benefit was never increased, if she kept her policy until age 65, the cumulative savings would be $62,790! Of course, if she increased her monthly benefit, the savings would be that much larger.

Recently, MassMutual announced that, in most states and under most circumstances, unisex rates are no longer available. As of this writing, the exceptions are the states of California, Connecticut, and New York. There are also several “exclusive” discounts plans available through specific career MassMutual Agents.

If you are a female Resident/Fellow and have not yet purchased disability insurance, and live in one of these states, the time to do your research is now! In the event that you have medical issues that may be problematic in terms of disability insurance underwriting, you may also have the ability to purchase a policy, regardless of your health, with unisex rates as a result of a Guaranteed Standard Issue (GSI) plan. However, these are only available through certain agents and for those Residents/Fellows associated with specific residency/fellowship programs. Agents that specialize in working with physicians should know of and, in some cases, even have access to them.

So, if you are a Resident/Fellow and no longer have the ability to purchase a policy with unisex rates, what should you do? There are really only a few options:

  • Purchase nothing at all and hope, when you complete your training, you will have the ability to purchase a policy with unisex rates as an Attending Physician. Of course, this leaves you vulnerable in the event your health changes or you become disabled without coverage.
  • Use the “Lease with Option to Buy” strategy and purchase a very small amount of coverage today that can potentially be increased, regardless of your health, as your income rises. This strategy protects you against any adverse changes in health and, at the same time, limits your initial premium outlay. If a better option becomes available in the future, you can simply replace this policy if your health remains the same. If not, you can increase your coverage based upon financial underwriting only – without the need to answer medical questions or do an exam, blood or urine test.
  • Purchase the maximum monthly benefit available without unisex rates. Of course, this strategy best protects you today and, again, should a better option become available at a later date, you can always replace it based upon your then-current health, individual needs, goals, and budget.
Short of the above, for Attending Physicians, in many cases, Principal still makes unisex rates available. As a rule of thumb, the larger your employer, the more likely that a discount plan with unisex rates will be available.


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, others may limit these claims to a maximum of 24 months (either per period of disability or over your lifetime) or for five years 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.

In most cases, Principal, now makes the mental/nervous and/or substance abuse disorder limitation optional. Should you choose not to have the limitation (providing unlimited coverage for these types of claims), the monthly premium would increase (as the 5% or 10% mental/nervous and/or substance abuse disorder limitation discount would no longer apply).

Conceptually speaking, if the cost difference between unlimited or limited coverage is minimal, you might want to opt for unlimited coverage. After all, you are purchasing this type of coverage for the unknown and, cost aside, the policy that pays the most money, under the most circumstances, with the fewest number of limitations is best.

A good example is a 26-year-old male, Plastic Surgery Resident that I worked with recently. He was really indecisive when it came to this area. We had reviewed things together for several weeks but he found it really difficult to make a decision. Then, it hit me and I decided to present it to him in a different way.

I told him that a new policy was recently introduced to the marketplace that paid a monthly benefit of $5,000, after a 2 year waiting period, with benefits to age 65. However, it was solely for claims related to mental/nervous and/or substance abuse disorders and the monthly premium was $20.03 (the difference between the monthly premium for unlimited coverage compared to the monthly premium for limited coverage). He then decided very quickly and opted for unlimited coverage. He then told me that burnout was extremely common among Aesthetic Plastic Surgeons and he could not pick up a trade journal that did not address the topic of burnout among surgeons.


Foreign Residence and Travel

While some carriers allow an insured to travel or reside in countries outside the United States, the District of Columbia or Canada, the majority of carriers will limit payments for claims outside those jurisdictions unless the insured returns to the United States for a proscribed period of time – typically six consecutive months per calendar year. Therefore, if you would choose to reside outside of the United States in the event you were disabled, you should carefully examine how the policy or policies you are considering would handle your claim for benefits.

Keep in mind that if you are not a Permanent Resident (Green Card Holder) or U.S. Citizen, any policy subject to underwriting will likely include an exclusion rider for foreign residency or travel and one would need to return to the United States or Canada in order to receive benefits under the policy.

The exception to this, even for visa holders, is MassMutual. Rather than a full exclusion rider, their policy would state that the “Monthly benefits will not be provided for no more than 12 months in total during a period of Disability while the insured is outside the United States and/or Canada”.


Active Duty Military Residents/Fellows

MassMutual is the only traditional disability insurance carrier that will insure Active Duty Physicians. They also allow Military Residents/Fellows to purchase up to $2,000 month regardless of their income or disability insurance benefits associated with their base pay.

MassMutual’s Future Insurability Option (FIO) Rider is typically 3X the base policy’s monthly benefit (2X the base policy’s monthly benefit in California and Connecticut). Therefore, starting with $2,000 month, an FIO Rider of $6,000 month would be available. This would allow for a total monthly benefit of $8,000, not including the Automatic Benefit Increase (ABI) Rider which, would allow for an additional $300 month over five years or a total of $8,300 monthly benefit. Assuming no other coverage this would require (protect) an earned income of approximately $185,000. However, those Residents/Fellows in higher income specialties will likely require a much larger amount of coverage. The same would be true for Active Duty Physicians that are ultimately planning to separate from service and enter private practice.

MassMutual makes two different increase options available. The Future Insurability Option (FIO) Rider and the Benefit Increase Rider (BIR). Purchasing two different policies from MassMutual for $1,000 month with each increase option rider allows for this (the BIR is not available in California or Connecticut). One policy, would have the FIO Rider and allow for a potential maximum monthly benefit of $4,150 ($1,000 base policy plus $150 ABI over five years plus the $3,000 FIO Rider) and the other would allow for up to $20,000 month (or when combined a total of $20,000 month, subject to income and other disability insurance, in force, if any). This combination also protects against any subsequent changes in health, noted on your military exit physical, would not be taken into consideration, after the initial policy or policies were medically underwritten.


Premium Rates and Contractual Provisions

Finally, remember, if policies are structured the same way and all agents are showing policies with the same discounts, the premium rate will be the same. This industry is heavily regulated and the premium rates and contractual language must be approved by each state. Therefore, if the plan parameters are the same, the only way that one agent can provide a lower price to the consumer is by having access to or knowing of a discount plan that another agent does not.


Parting Thoughts

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Purchasing disability insurance may seem like a daunting task as there are many “moving parts” associated with it. However, those agents and brokers that routinely work in this area can help you understand the options available so you can make a well-informed decision based upon your individual needs, goals, and budget. The nice thing is that you will not be paying anything more by purchasing your policy from an “experienced” insurance agent than you would be by purchasing your policy from a newly licensed or “inexperienced” insurance agent or broker.

Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF https://www.whitecoatinvestor.com/experienced-help-for-physician-specific-insurance-needs/ 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. Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Individual disability income products underwritten and issued by Berkshire Life Insurance Company of America (BLICOA), Pittsfield, MA. BLICOA is a wholly owned stock subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, NY. Product provisions and availability may vary by state. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 355 Lexington Avenue, 9th Floor, New York, NY 10017-6603, 212-541-8800. Securities products and advisory services are offered through PAS, member FINRA, SIPC. Financial Representative of 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. AR Insurance License #1057229 / CA Insurance License #0C37340 2019-86764 Exp. 09/24/2021