[Editor's Note: This is a guest post by Thomas J. Segedin CFP®, a physician-focused financial advisor in New York City. He and I have been emailing back and forth over the last few months and this post grew out of that conversation. I found it very interesting and hope you will too. We have no financial relationship, but obviously part of his income comes from selling disability insurance.]
Physicians shopping for disability insurance need to understand the difference between owning a Guaranteed Renewable (GR) Individual Disability Insurance (IDI) Contract and a Noncancelable/Guaranteed Renewable (NC) Individual Disability Insurance(IDI) Contract. I'll define each of these provisions, determine the additional cost of a noncancelable provision, and analyze the process an IDI carrier must go through to increase premium rates on in-force GR Contracts and the effect it would have on the block of business within that risk class.
Guaranteed Renewable to the Termination Date:
- As long as the premium is paid by the end of each grace period, the insurance cannot change any part of the policy, except its premium, until the Termination Date. The insurance company can ONLY change the premium if it applies to ALL POLICIES INSURING THE SAME RISK CLASS.
Noncancelable & Guaranteed Renewable to the Termination Date:
- As long as the premium is paid by the end of each grace period, the insurance company cannot change any part of the policy until the Termination Date.
Ultimately, the NC provision is PREMIUM RATE GUARANTEE INSURANCE on an Individual Disability Insurance Contract. It guarantees that as long as the premium is paid on time or by the end of each grace period, the insurance company can never change the premium until the Termination Date.
Currently, four out of the six IDI carriers that offer Own Occupation disability insurance will ONLY issue NC contracts. With these four companies (Berkshire/Guardian, Metlife, Principal, and Mass Mutual), the policy owner is required to pay for this premium rate guarantee. The NC provision is optional with Ameritas and The Standard. With Ameritas, there are two separate products (one GR and one NC), whereas Standard offers the NC Provision as a rider to their Protector Platinum DI Contract.
Cost of Non-cancelable Provisions
How much does the Premium Rate Guarantee(NC Provision) add to the cost of the disability insurance contract? It's impossible to analyze with four of the companies, but easily done with Ameritas and The Standard. Let's do a comparison.
- Age Range: 27-45
- Gender: Male
- State: New Jersey
- Occupation Class: Physicians that perform invasive surgical procedures (Including but not limited to General Surgeons, Orthopedic Surgeons, Plastic Surgeons, Neurosurgeons, Oral Surgeons)
The additional cost for the NC contract with Ameritas is just under 18% (17.90% at age 27 and 17.52% at age 45). As you can see, age does not play a substantial role in how Ameritas Life Insurance prices the NC contract.
Below is an example to illustrate the additional dollar cost of the NC Contractissued by Ameritas Life Insurance:
A 38 year old, Male, Orthopaedic Surgeon purchases a Noncancelable Contract from Ameritas Life Insurance, therefore, he will pay an additional 17.71% annually than if he purchased their Guaranteed Renewable Contract.
What is the additional percentage cost equal to in dollars? We need to make a few assumptions to answer the question.
- Age 38
- $15,000 Monthly Benefit (Max benefit issued to an individual in this occupation class)
- $10,000 Catastrophic Benefit
- COLA 3% Simple
- Enhanced Residual Disability Insurance (Required for Medical Occupations)
- Elimination Period 90 Days, Benefit Period to age 67
- Annual Guaranteed Renewable Contract Premium: $ 8,425.03
- Annual Noncancelable Contract Premium: $ 9,917.25
Annual Difference: $1,492.22, or $41,782.16 over 28 years (age 37 to age 65)
The Standard Data
Age is much important when pricing the NC Provision with Standard. The cost is 15.3% at age 27, and 26.8% at age 38. [Ed. Interesting that it gets more expensive with age, instead of less expensive like with Ameritas.] What is the difference in dollars?
- 38 year old male orthopedic surgeon
- $17,000 Monthly Benefit
- $10,000 Catastrophic Benefit
- Indexed COLA 3%
- Elimination Period 90 Days, Benefit Period to age 67
- Annual Guaranteed Renewable Annual: $ 8,553.78
- Annual Guaranteed Renewable with NC Rider Premium: $ 10,848.78
Annual Difference: $2,295.00 ($64,260 over the 28 years until he turns 65)
Now that we've seen just how expensive it is to get a NC policy, let's take a look at what that really gets you. Historically, it is very uncommon for IDI carriers to increase premium rates on inforce GR contracts. Now, that does not mean they cannot increase rates in the future but it does provide a precedence of stability as it pertains to the IDI carriers underwriting their policy holders. The underwriting process for IDI has become a science for the insurance companies. Let's examine why it is so rare for these rates to go up.
Rule 1: The insurance company can ONLY change the premium on in-force policies if it applies to ALL POLICIES INSURING THE SAME RISK CLASS. A Risk Class refers to the insured's occupation class and gender.
Rule 2: The insurance company is not allowed to raise premium rates simply to earn additional profit. There has to be a solvency issue with the company and actuarial proof to support a premium rate increase on in-force GR contracts. That means the insurance carrier's rate increase MUST be approved by each individual state in which that policy was sold.
Let's take a look at another example, using Standard.
Currently many of the medical specialty occupations fall into the Standard’s 3P occupation class. Consider a female orthopedic surgeon whose occupation class if Female 3P. So Standard's “block” of IDI business would be:
- Product Series: Protector Platinum
- Risk Class: Female 3P
If the insurance company is having trouble with this Risk Class or block of business in New Jersey and they want to raise rates on their inforce policies issued in New Jersey, they must apply for the rate increase in each state in which that policy was sold for ALL 3P Females. Chances are if only one state is having substantially higher claims than anticipated, they will not try to increase rates because they are profitable everywhere else.
For argument's sake, let's say the insurance company is having issues with 3P Females across the board in most states so they apply and get a rate increase approved, what would the healthy policy holders do? Start shopping of course.
With the healthy policy holders replacing their coverage, the insurance company is left with policy holders who are no longer insurable (higher risk). The 3P Female block of business becomes even more problematic because it will now consist of people who are on claim and/or more likely to go on claim. The insurance company needs the healthy individuals to keep their policies in-force to offset the risk of the insured policy owners that are already on claim and the policy owners who are most likely to go on claim in the future.
Finally, there are substantial costs associated with applying for rate increases on in-force GR policies. Since raising rates on in-force GR contracts will not necessarily fix the insurance company’s problem, the insurance company practices a different strategy. They would use their resources to create a new, more competitive product and simultaneously get higher premium rates approved for FUTURE POLICY OWNERS in the 3P Female Risk Class.
The Noncancelable provision is essentially insurance on insurance, as the provision will guarantee the policy owner that the premium for their individual disability insurance contract can never be changed.
Let's look at our example from earlier for the 38 year old Male Orthopedic Surgeon with the $17K Standard Protector Platinum Contract. He has two options
- Buy Premium Rate Guarantee insurance and pay an additional 26.83% ($2,295.00 per year and $64,240 over a 28 year career) for the NC Rider or
- Save 26.83% ($2,295.00) annually for the GR Contract and self-insure any potential rate increases, allowing for additional investment, or even spending. [Ed. Note: $2295 per year invested at 5% real over 28 years is equal to more than $140K.]
There are priceless benefits, both emotional and financial, that insurance and the act of transferring risk provides for individuals. It’s very important to protect ourselves, our families, and our assets against unforeseen circumstances. At the same time, there are risks for which self-insurance is the most logical strategy. Given the cost at this time, I consider a possible future premium rate increase on a GR IDI policy to be a risk not worth transferring. [Ed. note: I was wondering where was this article when I bought my Standard policy with the NC Rider 8 years ago. Mr. Segedin informs me that Standard required me to buy the NC rider if I wanted the specialty-specific language and the presumptive disability language in the contract.]
Mr. Segedin can be reached via email at [email protected] or by phone at 201-632-3583.