Thomas J. Segedin CFP®
[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.
Disability Insurance Definitions – NonCancelable & Guaranteed Renewable
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 Policy 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.
Assumptions
- 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)
Ameritas Data
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.
Assumptions:
- 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?
Assumptions:
- 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)
Raising Rates of NonCancellable Policies
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.
Should You Buy Noncancelable Disability Insurance?
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 201-615-8843.
Nice post!
In my experience, I have not had a physician or dentist, regardless of age, opt for the Guaranteed Renewable version from either Standard of Ameritas. That being said, part of the reason might be that (as stated in the post), Standard required the purchase of the Non-Cancelable Rider in order to have the “Own-Occupation” Rider as part of their policy. However, I have had other medical professionals opt for it in the past.
Where I see value is an older client that is looking to minimize their premium outlay and maximize their benefits. If they will not be working for a long period of time until their retirement, they can then self insure for the risk of rates being increased by class. Even if they are subject to a rate increase, it would need to be substantial for them to come out on the losing end of things.
Standard Insurance Company also states that they cannot change the premiums until after the policy issued is three years old (thus providing more of a hedge on the insured’s bet).
As an FYI, when the made the change from the Protector+ policy series to the Protector Platinum policy series, the discount associated with the Guaranteed Renewable policy was not nearly as large as it had been in the past.
Thanks that made me think about something in a different light and id have to say that looking at it from that angle, id prefer the cost savings.
One thing, however, in the policies you listed if you included the rider, how would the policy compare in cost to the typical recommended Guardian. If they are similar, then I would expect the rider to have a similar although not necessarily exact cost if it could be excluded/removed. Obviously it cant.
One other question this has brought to my mind. Is there actually any good evidence that the true own occ policies are more likely to pay if you are disabled? The wording of the contract would make one think they should be more likely to get paid but where is the real world proof of it?
I should also mention that Standard’s Protector Platinum policy series has the “Own-Occupation” definition of total disability built into it. As a result, one does not need to purchase the Non-Cancelable Rider in order to have the defintion of disability as part of their policy.
Lawrence,
The Standard’s Protector Platinum policy allows physicians to secure True Own Occupation with Specialty in Medicine Language without having to purchase the NC provision.
This article is specific to the current market.
Ameritas Life Insurance also allows True Own Occupation with Specialty Language without having to make the contract NC. It is very important to note that Ameritas Life only provides a 24 month benefit period for mental nervous/ substance abuse disabilities. Berkshire/Guardian and The Standard’s Protector Platinum offer Mental Nervous/Substance Abuse coverage for the entire length of the benefit period.
Rex,
In my experience, The Standard’s Protector Platinum GR contract is about 30% less expensive than Berkshire/Guardian.
Enjoyable post! I think that this was a valuable topic for this blog’s audience. Similar to Larry’s comment though, I also do not get much interest in the GR contracts when I bring it up to physician clients. Out of curiosity, Thomas, what percentage of your disability insurance business goes through either Standard or Ameritas in their GR contracts? Additionally, does disability insurance make up a significant portion of your overall business?
“In my experience, The Standard’s Protector Platinum GR contract is about 30% less expensive than Berkshire/Guardian.”
I think that this statement leaves too much unsaid.
– Standard’s policy offers a “to age 67” benefit period. In my experience, most physicians select to go with age 65 benefit periods – therefore, by comparing other carriers to Standard we are innately increasing premium ranges simply because of having to use age 67 for comparison purposes.
– This is only stating the difference between Standard and Guardian/Berkshire, but does not touch on the other Non-Can policies available such as MetLife and Principal.
Being analytical, I had to run the numbers in order to verify this for myself. Here is what I’ve found…
A 40-year old, male surgeon (not including Orthopedics) applying for $15,000 of monthly benefit with an Own-Occupation clause, residual benefit and COLA rider would find the following:
Standard (3P Occ class with age 67 benefit period)
GR $8,898
NC $11,316
Guardian ProVider Plus (3m Occ class – NonCan)
Age 67 benefit period $11,967
Age 65 benefit period $10,585
Principal (4a-m Occ class – NonCan)
Age 67 benefit period $8,992
Age 65 benefit period $8,417
MetLife (5s Occ class – NonCan)
Age 70 benefit period $10,225
Age 65 benefit period $8,633
*Pricing and specific policy provisions vary by state.
* Principal has a 24-month benefit limitation for mental/nervous disorders, when using the Own-Occ rider.
Given these options, I can’t help to think that most individuals would select Principal or MetLife with a benefit that pays to age 65.
This is a great concept and I strongly believe that physicians should be carefully reviewing all of their options when purchasing disability insurance – however I do not feel that it will change the minds of most physicians I speak with.
m
in your post you didnt use the same rate class for each company. now im sure there can be differences between companies depending on job but overall im not sure that most give a 3 and metlife giving a 5 is indicative of most specialties
Rex-
The disability insurance companies have different occupational classes among medical specialties. Michael is correct in the occupational classes that the stated.
The MetLife 5S was due to a recent occupational class upgrade that I mentioned and the reason that he specifically stated that it did not apply to Orthopedic Surgeons
https://www.whitecoatinvestor.com/updates-in-the-disability-insurance-marketplace/
i dont doubt for the one he stated and i know they differ but they dont all differ by that much as far as i know. would someone create a chart listing each company and how they rate?
That’s a somewhat tall order. It really depends on each medical specialty and the individual client’s needs and goals.
Some carriers are better for some specialties compared to others. Then you have multi-life discounts and association discounts. Unisex rates and gender distinct rates. Not too mention underwriting different medical conditions.
In many cases, pricing is also not the driving factor but certainly comes into play. Full mental and nervous coverage vs. limited?, unlimited ability to collect outside the US vs. limited?, unlimited recovery benefit vs. limited? These factors all need to be considered.
That is where the experience of the agent comes into play and there ability to provide the client with what they want in terms of income protection.
oops. Meant to say their ability…
The problem is so few agents will do the right thing
Most of those issues aren’t in play
It’s mostly healthy folks without extra bells and whistles that would be helpful.
Once your outside those boundaries, you pretty much need the agent to shop you.
To all advisors,
**This article is meant to specifically educate readers about the NonCancelable provision.
This is not an article recommending specific carriers or contracts. If a reader wants my help and they reach out to me, that is when they will receive my advice on how to build an optimal income protection plan.
If there are specific questions about the information in the article, I will gladly address them.
Michael-
If you compare Guardian to the quotes I provided in the article, Guardian should be around or about 30% more expensive excluding any sort discounted rates.
(Benefit period to age 67, not 65)
I should add I’m just saying which class for each specialty
Not the final cost
I should say around 30% at age 35, it looks like its a little more than 25% at age 40. My guess why we see that decrease in additional cost is because the internal charge for NC in the Guardian policy decreases with age as well.
Is this the same kid that played baseball?
Rex –
You are 100% correct. This does not apply to every specialty and I probably could have mentioned that for clarification.
Like Larry indicated, creating a chart would be a reallly tall order with too many variables. Additionally, putting up a chart of Occ classes or pricing would be extremely generalized and does not touch on some very important contractual/pricing differences that exist. I think it would be more of a disservice.
Assuming that you were interested for your own specialty – the Standard GR contract is a bit more enticing for Dermatologists. Still not sure many would select it, or that I would advise it especially for very young physicians – but much more enticing.
Ive been discussing this issue at another site, and was given the impression that there are other potential differences between NC and GR that really could matter.
Two in particular would be if you took another job and it had group insurance that the GR company could then reduce your policy limits. Since group stinks, this wouldnt be so great.
The second would be if the occupational class changed for the company that this could greatly affect the policy.
I imagine both are still unlikely.
That is incorrect.
The only difference between NC and GR contracts is the risk associated with a price increase by class.
Rex-
As stated in the article,
“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.”
I will add though, that I have had the conversation before with a disability insurance attorney and when I asked specifically about the Non-Can clause, he told me that it “enhances the value of a disputed claim”. Take that for whatever it is worth, but those guys are litigating this every day, so I value their opinion to some extent – they obviously have motivation to recommend whatever will get their cases paid.
Michael,
Please think about this question Logically.
How can the NC provision “enhance the value of a disputed claim?”
Ask the attorney to pull the cases he is referencing. I am sure whether the contract was NC or GR is NOT the ONLY difference between the policies he is referencing. I’m sure in these cases he is referencing, the contract with the NC provision has a stronger definition of total disability.
Here are the definitions again:
“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.”
The NC provision has nothing to do with how policies get paid out in disputed cases.
T
im going to guess you write a lot of standard policies. If your interpretation is correct, hard to say the others are worth the 30%.
Very well done comparison. I am the DI product manager at Assurity Life. We only offer a GR contract. We do have a non-can rider, but in my opinion, as you stated it is a waste of the client’s money.
If you write a lot of Standard, take a look at the Assurity policy, as a great option to the Standard premium. I know we can be very competitive in certain medical specialties, as well as any client making under $150,000.
Nice to “meet” you Todd. I’ve never heard much about Assurity’s disability offering before. Why do you think that independent agents who specialize in docs don’t seem to sell it much?