[Editor's Note: This is the second of our five sponsored posts this summer as part of the WCI scholarship program, which receives 100% of the proceeds raised by these posts. Thank you to Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF of Physician Financial Services for sponsoring the scholarship and submitting this post. Thank you for supporting those who support our mission.
Given how many guest posts Larry has done here over the years, his expertise should be very familiar to long-time WCI readers and conference attendees. In this post, he explores some of the nuances of disability insurance he has assisted WCIers with in the past.]
As WCI has said many times before, purchasing disability insurance can be complicated as there are many “moving parts” associated with how policies are structured. Rather than focusing on which policy provisions should be included in an individual disability insurance policy or policies, this article will focus on three specific strategies that can potentially provide you with the ability to purchase disability insurance on a very limited budget, potentially provide a substantial premium savings for female physicians and/or allow you to protect more of your future earnings if you are a high-income specialist.
Think You Can’t Afford a Disability Insurance Policy? – Guess Again
Under the “special limits” available to Residents/Fellows, monthly benefits of $4,000-$6,000 are available, depending upon the specific insurance company, regardless of their actual earned incomes or employer-provided group Long-Term Disability (LTD) coverage, if any. However, just because it is available, does not necessarily mean that it is affordable.
For example, let’s assume that you are a 27-year-old male Plastic Surgery Resident in Colorado and have been presented with an illustration of coverage from Principal for $5,000 month, payable after 90 days, to age 65. Also included is a Residual Disability and Recovery Benefit Rider, a 3% Cost Of Living Adjustment (COLA) Rider, a Future Benefit Increase (FBI) Rider and a Benefit Update (BU) Rider. The monthly premium would be $134.16, including a 20% Multi-Life Resident Discount but, unfortunately, this does not fit into your budget. Do you forego individual disability insurance as a result and simply rely on the group LTD plan provided to you by the hospital?
I think not. Don’t forget that your health is what actually allows you to qualify to purchase the insurance and your money is what allows you to keep the policy in force. In many cases, the amount of additional individual disability insurance coverage available for purchase in the future, using a future increase option rider, is directly tied to the initial monthly benefit that you purchased. In other cases, it is not.
Principal’s policy is one in which it is not and as long as you purchase at least 75% of the amount of coverage for which you qualify to purchase, the Benefit Update (BU) Rider is included in the policy at no cost. This rider will allow you to increase your policy’s monthly benefit up to the maximum Principal offers (this was recently increased from $17,000 month to $20,000 month for physicians and dentists, up to $30,000 month with other individual disability insurance and up to $35,000 month in total with employer-provided/sponsored group Long-Term Disability coverage) with no additional medical underwriting. Fortunately, there are many ways to meet this test:
First, you can purchase the full $5,000 month as illustrated above. However, we determined that this did not fit your budget. As a result, the next option would be to purchase 75% of that amount or $3,750 month. Since the premium rates are linear, this would result in a monthly premium of approximately $100.
Assuming that this still may not be affordable, the insurance agent might recommend that you remove the COLA Rider and/or increase the waiting period. While either or both of these things might make sense, this can potentially leave you inadequately protected in the future as you might not be able to subsequently add the COLA Rider, you may not be able to reduce the waiting period should you desire and/or you may not be able to ultimately purchase the amount of individual coverage that you desire as this would be subject to medical underwriting at that time.
In these situations, I recommend what I call the “Lease with the Option to Buy” plan. This strategy focuses on having a potential client purchase a minimal amount of coverage today in order to minimize their premium outlay but allow them to keep all of the riders they desire, as well as, ultimately reach the maximum monthly benefit available in the future as their income rises.
Rather than focusing on the “special limits” available to Residents/Fellows, in most cases, we simply use the Resident or Fellow’s actual earned income and employer-provided group LTD coverage to dramatically reduce the amount of individual coverage that needs to be purchased.
For example, using an earned income of $66,000 and employer-provided (taxable) group Long-Term Disability (LTD) of 60% salary to a maximum monthly benefit of $8,000 month, this would normally allow for a maximum monthly benefit of $1,710 with a corresponding monthly premium of $45.88.
While we could stop there, remember, only 75% of this amount needs to be purchased, resulting in a required monthly benefit of approximately $1,300 with a corresponding monthly premium of $34.88, a very small price to pay to have additional disability income and the ability to potentially reach up to $20,000 month, regardless of your health, as your income rises. Additionally, don’t forget that the premium rates for those in a non-invasive, non-surgical medical specialty will, generally, be lower.
Depending upon the specific policy selected, there may be certain requirements that must be met in order to have the increase option included but, generally, this strategy can work for Berkshire’s ProVider Plus Limited policy* (used for policies currently being issued in the state of California) or Berkshire’s ProVider Choice Select policy** (when the policy includes the Benefit Purchase Rider) and MassMutual’s Radius Choice policy (when the policy is being issued with a Benefit Increase Rider). While this will also work with Standard‘s Platinum Advantage Policy (not available in California) being issued with a Benefit Increase Rider (BIR), Residents/Fellows can purchase a policy with as little as $1,000 month and the above calculations do not need to be used at all since Standard allows Residents/Fellows to purchase policies with a monthly benefit as low as $1,000 and the Benefit Increase Rider (BIR) will be included.
Unisex Rates to the Rescue for Female Physicians
Due to a higher morbidity rate, premium rates for females are substantially higher compared to their male counterparts. As a result, when working with female physicians, the key is to try to find a policy that includes a unisex (gender neutral) rate structure along with a discount. Generally, this combination can provide them with a savings of 40-50% off of 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.
This time, let’s assume that we have a female Anesthesiology 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 premium is $318.53. However, the same policy with a unisex rate and 25% discount reduces the monthly premium to $170.42. This combination provides a monthly savings of $148.11 or approximately $46% off of the normal female rates.
While I have illustrated MassMutual’s policy above with the Future Insurability Option (FIO) Rider, they do make a Benefit Increase Rider (BIR) available, which can be used in a similar way to how I illustrated Principal’s policy in order to purchase a policy with a minimal benefit (and premium) that can subsequently be increased to their maximum, regardless of your health, as your income rises. However, be aware, it is more restrictive in certain areas compared to increase options available with other carriers.
Are Two Policies Better Than One?
With the exception of California, any one insurance company will issue individual disability insurance policies with a maximum monthly benefit of $15,000-$20,000. However, by purchasing policies from two different companies, with increase options on both, you can potentially reach a total of $25,000-$30,000 month of individual disability insurance (or potentially up to $35,000 month with employer-provided/sponsored group Long-Term Disability coverage, depending upon which companies are combined), subject to your income and other disability insurance in force.
Therefore, I often recommend that high income specialists, including, but not limited to, Plastic Surgeons, Neurosurgeons and Orthopedic Surgeons, purchase two different policies from two different companies affording them the ability to reach the larger amounts referenced above without the need for additional medical exams, blood tests, urine tests or having to answer any medical questions in the future.
As a result, they are adequately protected today and have the ability to increase the monthly benefit on their policies, regardless of their health, as their incomes rise. This strategy guarantees that any medical condition(s) that develop after the original policies are purchased would not need to be disclosed to the insurance company and would not be subject to medical underwriting (only financial underwriting is required when increase options are exercised).
While I routinely recommend this strategy for male physicians, I often don't recommend this to female physicians as it is difficult to find one policy with unisex rates and a discount, let alone two. However, if unisex rates are available with two carriers, the same strategy will work just as well and it makes sense to potentially utilize it the same way.
Have you received a flurry of emails telling you that if you don’t purchase your disability insurance prior to the completion or your residency or fellowship, you will not qualify for discounts? This is simply not the case as, generally, discounts that are tied to a residency/fellowship program are available for up to 90 days after graduation. Therefore, as a result, if you completed your training recently, you can likely still take advantage of any discounts that were available to you as a Resident/Fellow.
Other than pricing, physicians should make sure that their policy or policies contain a true “Own-Occupation” definition of total disability. A policy with a true “Own-Occupation” definition of Total Disability 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. Currently, there are only six companies that currently offer this definition of Total Disability to physicians including Berkshire Life (a Guardian Company), Standard Insurance Company, Principal, Ameritas, MassMutual and Ohio National. The availability of this definition may also vary based upon state of residence and/or medical specialty.
Most physicians do not understand the way group Long-Term Disability (LTD) plans and individual policies interact. Unlike medical insurance, there is no such thing as a “primary” or “secondary” company and, if you meet the definition of total disability under both policies, you can potentially collect full benefits under both of them.
However, with the exception of those eligible to purchase coverage under “New In Practice” limits, generally, if you are going to be eligible for group LTD coverage with a new employer, it must be taken into consideration when determining the amount of individual coverage available. Therefore, deferring enrollment into a mandatory group LTD plan to purchase a larger amount of individual coverage does not work as your eligibility must be disclosed on your application for coverage.
In conclusion, remember, the contractual language and premium rates must be approved by the insurance department of each state before a policy can be approved for sale by a particular insurance company. If policies are structured the same way and all agents are showing policies with the same discounts, the premium rate will be the same and the only way that one agent can provide a lower price to the consumer is by having access to or knowledge of a discount plan that another agent does not.