By Ronald P. Perilstein, CLU
Every week my clients ask, “Can I still get a decent disability insurance policy?” Every week I answer, “It depends on your current health, your health history, your medical specialty, your duties within your specialty, and your state of residence.” These factors are extremely important because the disability insurance industry continues to experience corporate mergers, higher-than-expected claim rates and, as a result, it continues to offer policies with scaled-back features and benefits.
In addition, the industry’s strict adherence to underwriting guidelines has led to more and more applications being declined or issued with modifications in coverage. This has caused a renewed interest in two other types of disability insurance: Business Overhead Expense (BOE) insurance and Disability Buy/Out (DBO) insurance.
UNUM, which purchased Provident Life & Accident (after it had purchased Paul Revere) is still the largest seller of individual disability insurance but the features of its policies are one of the furthest from the comprehensive policies that many physicians still seek. In other news, Guardian announced last year that it would purchase Berkshire Life. Both of these companies are among the leaders in today’s market. The effects of this consolidation have not yet been finalized and the market is waiting to see which company’s products will survive. Both carriers are reported to have privately said that they would not be the last company in the market to offer true “own occupation” protection.
Many carriers are further segmenting the physician market into those doctors whose duties involve invasive procedures and those who do not. For example, a non-invasive cardiologist will pay lower premiums than a cardiologist that performs invasive procedures.
MetLife is the latest company to drop “own occupation” coverage for physicians, leaving less than a handful who still offer it at all to physicians. The company had briefly allowed independent agents to sell its products in 2000 before pulling the feature at the end of the year. How important is “own occ” as it is referred to in the industry?
Almost all policies will initially determine eligibility for total disability benefits based on one’s ability to perform the duties of their pre-disability occupation. “Own occ” coverage comes into play only when a disabled person chooses to earn income from a new occupation/profession. If the policy contains an own occupation clause or rider, disability benefits are not reduced by income earned from another job. Without this coverage, most carriers will only pay a benefit that is equal to the proportional amount of “lost earnings.” These are called, generically, “loss of earnings” or “LE” policies.
For example, assume a surgeon has a pre-disability income of $15,000 per month, disability income insurance of $6,000 per month and, after a covered disability, is earning $5,000 per month in an unrelated job. If her policy contains “own occ” coverage, the full benefit of $6,000 per month will be paid since she cannot perform her own occupation.
If she does not have “own-occ” protection, her benefit will be proportional to the amount of lost income. In this case, she will receive 2/3 of her benefit (or $4,000 per month) since her income has dropped by 2/3 (from $15,000 per month to $5,000 per month). While it appears that an “own occ” policy is better, the premiums are usually higher and should be compared to the cost of an LE policy.
To find out if your policy offers own occupation protection, look in the “Definitions” section for the definition of total disability. It usually states, “You will be considered totally disabled if you are unable to perform the substantial and material duties of your occupation.” If it goes further and adds “…and not working elsewhere,” or, “…and not gainfully employed,” than your policy is not an “own occupation” policy. It is a “loss of earnings” policy.
Another form of policy erosion occurs when the insurance company retains the right to change premiums in the future. These policies are called “guaranteed renewal,” or “GR” policies, since the insurance company only guarantees to renew the policy each year—not necessarily charge the same premium. GR policies usually start out with a low premium because the insurance company knows it can increase premiums in later years if claims and/or expenses exceed the insurance company’s projections. While some feel that these “trust me” policies are dangerous, it should be noted that an insurance company cannot arbitrarily increase any person’s individual premium. Increases in rates can only be approved by a state’s insurance department and must be tied to a class of policies such as doctors, females over 50, etc. If a policy states it is “non-cancelable and guaranteed renewable” than its premium cannot be changed unless the policyowner changes the benefits.
Mental Health Issues
Disability claims arising from stress, anxiety, depression and other mental health issues have seen a dramatic rise over the past decade. Older policies fully cover mental health claims but many newer ones limit the benefit payments for these claims to a maximum of 24 months. Benefits typically will continue however, if, at the end of the 24 months, a person remains confined to a hospital or institution.
The last major change has been the reduction in the amount of insurance a company will sell to a physician. Today, most companies will only issue a policy with a maximum benefit of $10,000 per month and then, only if earned income is around $350,000 per year. A few companies will participate with policies from other carriers so that a physician might be able to purchase a total of $15,000 to $20,000 per month, but these companies will only issue $10,000 per month of their own coverage.
Business Overhead Expense Insurance
As individual disability insurance limits have dropped, there has been resurgence in two other types of disability coverage. Business Overhead Expense (BOE) insurance is a disability policy that reimburses the practice for specific overhead expenses if a shareholder is disabled. This policy helps the practice remain open by reimbursing it to cover such expenses as accounting, advertising, utilities, employee benefits (on eligible employees only), equipment loans, insurance premiums, and mortgage or rent payments. BOE may not directly benefit the disabled person, but it will help to prevent him/her from using personal funds to keep the practice open when revenues decline due to a disabling condition.
Disability Buy-Out Insurance
Another type of disability insurance, called Disability Buy-Out (DBO) coverage, is similar to the life insurance that is typically used in Buy Sell agreements. We have all heard of the dreadful situation when a shareholder or partner becomes disabled while owning a significant portion of the practice. A huge conflict arises when the interests of the working shareholders seriously conflict with the interests of the disabled shareholder.
DBO coverage alleviates this conflict by reimbursing the working shareholders for buy-out payments to the disabled shareholder. Only issued in conjunction with a written buy-out agreement, this policy does not begin to make payments until either 12, 18 or 24 months have elapsed to make sure the disabled shareholder will not be returning to work. Benefits can be paid as a lump sum or monthly over 36-60 months or a combination of both methods.
BOE and DBO insurance policies cover potentially large obligations and help ease the inevitable financial burden that occurs during the prolonged disability of a shareholder.
In summary, as the disability insurance market continues to deteriorate, every physician should perform a “policy check-up” to better understand his/her policy. If your policy is lacking important features, contact your agent and act quickly!
Ronald P. Perilstein, CLU, ChFC is the President of The Arjay Group, Inc. The firm, located in Narberth, PA, has a national practice that specializes in disability insurance products for physicians, hospitals, and medical practices.