By Ronald P. Perilstein, CLU
It is widely accepted that our single greatest asset is our ability to produce income. And why not? A 32-year old earning $150,000 per year today, will earn over $8,500,000 by the time he or she reaches age 65 with only three percent annual increases. If the increases average five percent each year, the amount he or she will earn will soar to almost $13,000,000. Even a 40-year old, earning $200,000 today, will earn almost $9,000,000 in the next 25 years if he or she averages increases of four percent.
Given that we protect our other large assets, such as our homes, cars and businesses, from damage and loss, it is perfectly sensible that we safeguard our ability to earn our income. Moreover, it has long been recognized that doctors have been at the forefront of embracing the concept of using disability insurance to protect their income.
This article will help you to quickly understand the important components of traditional disability income insurance policies, the differences between group and individual coverage, the state of the market and the newest products available to protect your retirement contributions.
What does disability insurance have to do with your retirement contributions?
Let’s first review the basics. Disability insurance pays you if you are unable to work due to sickness or injury. Benefit payments typically start after the first three months of disability and continue to age 65 (or 67) so long as you remain disabled. Policies for younger physicians should include a rider (an option) called one of the following: a Future Increase Option, Future Purchase Option, Benefit Update, or Guarantee of Physical Insurability Rider. This option offers the pre-disability right to purchase additional insurance (usually each year) without medical tests or health questions.
Physicians under 45 years old should also make sure their policy includes a cost-of-living adjustment (COLA) rider. This feature will provide a post-disability increase to your claim payment every 12 months to prevent inflation from eroding its purchasing power.
Almost all policies are purchased, and for good reason, with a residual disability rider that provides partial payments for partial disabilities. Without it, you could only receive benefit payments if you were deemed to be totally disabled. When included, it provides a partial payment that is based on your percentage of income loss.
However, the most talked about and most misunderstood feature is the definition of total disability, mistakenly called the “own occupation” clause. While it does provide an additional layer of protection, it continues to be demanded by physicians who may not need it and pushed by insurance agents who don’t really understand it.
The definition of total disability is the one feature that each physician must understand, up front, to avoid confusion and disappointment in the future. The best definition, referred to as “a true own occupation” definition, states that you will be considered totally disabled if you are “unable to perform the material and substantial duties of your occupation.” The period at the end of that sentence is very important as it means that being deemed “totally disabled” is dependent only on your ability to perform your job. Benefits will not be reduced from income earned in another occupation.
The next best definition, referred to as “a modified own occupation” definition states that you will be considered totally disabled if you are “unable to perform the material and substantial duties of your occupation and you are not gainfully employed” or “85you are not working elsewhere.” This wording changes your policy so that claim payments will be based only on your income, regardless of whether you are earning it performing your occupation or another occupation. With this definition, benefits will be reduced if you have income from another occupation.
The most restrictive definition, commonly found in group or association policies, will pay benefits only if you are “unable to perform the material and substantial duties of your occupation and you are unable to work in any occupation for which you are reasonably suited by your education, training, or experience.” This definition will reduce benefits if you are able to work in another job, but choose not to.
So, who really needs “own occ?” Most experts agree that surgical specialists should have a policy with an own occupation definition. It is also widely accepted that most primary care physicians and non-surgical specialties do not need this level of protection, though many still want it.
Does your group disability policy offer true “own occ to age 65” coverage? Most group and association policies written or modified in the last 10 years provide it for only the first two or five years and then switch the definition after this initial period to a modified own occ definition. Group policies also differ from individual policies because they reduce payments if you receive benefits from Workers Compensation and/or Social Security. In addition, premiums on group policies are not guaranteed and change frequently. If you’re a partner in a practice, increases come right out of your pocket. Individual policies usually have premiums that are guaranteed not to increase.
Group policies rarely include the cost-of-living adjustment or recovery benefits. Recovery benefits allow the policy to continue to pay benefits when you return to full-time work in your occupation so long as you still have a 20 percent loss of income or more. This is especially important if your compensation is tied to production since you’ll need time to re-build your patient base.
Another major distinction between group and individual policies is the lack of portability in group insurance. When you leave an employer that provides group insurance, your coverage ends. Individual policies stay with you from job to job, providing seamless coverage at all times, even during periods between jobs when you may be temporarily unemployed. When you consider these differences, does it surprise you that group policies often cost less than individual policies?
Looking at today’s market for individual disability insurance, we are continuing to see strict adherence to underwriting guidelines for physicians. Most companies limit the amount of individual insurance they will sell to one physician to the lesser of $10,000 per month or the amount, when combined with any other long term disability coverage that does not exceed a total of $15,000 per month.
Good News! Own occupation (to age 65) coverage, is still available for practically every medical specialty including orthopedic, cardiovascular or cardiothoracic surgeons, as well as emergency medicine physicians and anesthesiologists. Because the list of carriers offering this coverage is very short, now is a good time to consider your purchase. There are more companies offering “true own occ” to the non-surgical and primary care specialties, though the list varies from company to company as to which specialties are actually non-surgical.
As for underwriting, medical histories (via medical records) are being scrutinized more closely than in years past and exclusion clauses are more prevalent than ever, especially if you have had any recent treatment of the neck, back or spine. These ailments are almost certain to cause your policy to be issued with an exclusion for disabilities caused by these areas.
So, what’s new? There is a new product on the market that is gaining great acceptance among physicians who are currently capped at lower-than-desired benefit levels. This new product, marketed as retirement disability insurance, is a regular disability insurance policy that guarantees your present retirement contributions will continue to be made to your retirement plan in the event you are disabled!
Most people don’t realize that if you become disabled, contributions to your retirement plan just stop. Living with a disabling condition and a reduced income is hard enough. Imagine what happens, financially, when the benefit payments stop, as they typically do, at age 65. There you are, with no income other than, perhaps, Social Security payments and the earnings from your pre-disability savings, if any. The retirement nest egg that you would have built up over all the years had you been working, is non-existent.
This new policy continues your present contributions (up to $40,000 per year including any employer matches) to a trust. The trust invests the money, with your input, and holds the money until your normal retirement age, when it becomes available to you.
So, whether you are looking for your first disability policy, deciding between group and individual policies, or looking for additional insurance to supplement what you already have, the need for disability insurance for physicians exists and continues to be strong.
Ronald P. Perilstein, CLU, ChFC, CLTC is President of The Arjay Group, Inc. Narberth, Pa.