By Ronald Perilstein
After more than a decade since the insurance industry began limiting the disability benefits they would sell to physicians, the pendulum is (finally) swinging back. Right now is a great time to re-examine your existing policy and consider whether the time is right to purchase additional insurance.
To understand how far we’ve come let’s take a quick trip down memory lane.
In the 70s and 80s, commonly referred to as the “good old days” of disability insurance for physicians, there were numerous insurance companies offering policies with strong, occupation-specific definitions of total disability, high limits on how much could be purchased and even higher limits on how much insurance you could have when combined with other policies or group insurance (called the participation limit).
Underwriting was liberal on both the financial and medical sides of the fence. Financial justification of income, such as copies of tax returns and pay stubs, were not required, and medical tests were only needed when applying for fairly substantial amounts of insurance. It wasn’t exactly “the sky’s the limit,” but it was close. In the early 90s, things began to change drastically.
As HIV and AIDS catapulted to the front pages, insurers reacted dramatically and began to reconsider the way they did business. After a physician was declared HIV positive from an apparent needle stick received at a major teaching hospital during residency, and was subsequently denied disability insurance, the insurance companies began requiring blood tests and urine specimens for all physicians and health care workers, regardless of the amount under consideration for purchase.
In a swift and impressive reaction, many of the major teaching hospitals demanded guaranteed disability insurance for their Residents and Fellows that required neither blood tests nor urine specimens to obtain. The insurers were caught trying to balance their desire to suddenly sell unprecedented amounts of insurance with their concern that HIV and/or AIDS claims would rapidly escalate and have horrific implications to their financial stability.
At this same time, managed health care was on the rise and physician income levels for many specialties began to drop. Not surprisingly, in the 90s, job satisfaction dropped to its lowest level ever and many physicians found themselves in the awkward and unpredicted position of having more disability insurance than income – a major cause for concern among insurers. Claims, particularly mental health claims such as stress, anxiety and depression, skyrocketed and insurers were forced to set aside hundreds of millions of dollars to pay the anticipated benefits.
The industry decided that physicians were no longer a good risk and the benefits that were offered were significantly reduced. The pullback of the mid 90s included lower replacement percentages, lower participation limits, shorter benefit periods, cessation of “own occ” coverage by most (but not all) of the major companies, and of course, higher prices. This was also the era of revamped underwriting guidelines and much stricter adhesion to what was implemented.
But enough about the past. Let’s look at what has changed over the past year or so that creates an outstanding opportunity today.
Own Occ Is Back
The number one policy provision that concerns physicians is the definition of total disability. From the first day of medical school almost every physician has heard that a disability policy must include “own occupation” coverage. Several years ago, depending on the medical specialty or sub-specialty, there may have been only one insurance company offering this benefit. Today, there are five companies and it’s offered to every medical specialty, including the historically higher-claim specialties of Orthopedic Surgery, Neurosurgery, Cardiothoracic Surgery, Anesthesia, Dentistry and Emergency Medicine! So, the good news is there are now, more than ever, plenty of choices among insurers and policies.
What is “own occ” and why is it so important? The impact of the “own occ” benefit (automatically included in some policies and purchased as an option in others) is felt after you are deemed to be totally disabled in your specialty. If your policy includes it, full payments will continue to be made to you even if you choose to work in another occupation and, regardless of how much money you earn in that new occupation. Without this provision, money earned in a second job could offset, or eliminate, benefit payments altogether, since only the level of income is protected as opposed to your ability to work in your occupation.
New Catastrophic Disability Benefit
A new option that has received too little attention and provides a huge safety net is called the Catastrophic Disability Benefit. This inexpensive rider provides additional benefit payments in the event a disabling injury or illness prevents you from performing 2 out 6 Activities of Daily Living (ADLs), or substantial supervision is required due to a severe cognitive impairment (such as Alzheimer’s).
ADLs include bathing, eating, dressing, transferring, toileting and continence. As an example, “eating” usually includes the ability to purchase, prepare/cook, and consume food, as well as the clean-up process. Payments made under this benefit are in addition to any other payments made in the policy. In addition to the base benefit, the maximum benefit available is typically $8,000 per month.
Higher Issue Limits
Another great reason to consider disability insurance at this time is the increased issue limits being offered to physicians. For much of the last decade the maximum policy any one insurance company would issue to a physician was $10,000 per month. Today, that maximum benefit is mostly $15,000 per month, though this limit does vary among medical specialties and insurers. Remember, these limits are only available to those with sufficient income. For physicians paying their premium with after-tax dollars (creating a tax-free benefit payment) the $10,000 limit is available to those earning about $250,000 per year. The $15,000 limit is available to those earning about $450,000 per year. Interestingly, one major company bucks the “norm” and will issue $10,000 per month and $15,000 per month to those earning $220,000 and $360,000 per year, respectively.
Higher Participation Limits
Most disability insurance companies will issue up to $15,000 per month of their own insurance, but they will now participate with another company’s insurance up to a total of $20,000 per month. This participation limit has increased from a low of $7,500 per month in the mid 90’s to $15,000 per month limit of the past few years.
Here’s how it works. Assume you’re earning $250,000 per year and entitled to a maximum benefit of $10,000 per month. If you already own an individual policy with a benefit of $6,000 per month, then you can purchase a new policy with a benefit of up to $4,000 per month.
Insurance companies use a slightly different formula when physicians are protected by an employer’s group long term disability policy. The amount of insurance that can be purchased will depend on whether or not the group insurance provides a taxable or non-taxable benefit. Frequently, though not always, the taxability of disability benefit payments will depend on whether or not the disabled physician is a partner in the practice.
Benefit Payments Forever
Once a commonly available option, “the lifetime benefit option” will provide ongoing disability payments for as long as the disability lasts. In the 80s, true lifetime benefits disappeared as companies decided it was too rich of a benefit and provided too much of an incentive to remain disabled.
Today there are two companies offering what is now known as “graded lifetime benefits.” How much you get paid after age 65 depends on the age of onset of the disability. If a disability occurs prior to age 45, and lasts through age 65, then full benefits will be paid for as long the physician remains disabled.
However, the amount paid after age 65 reduces by 5 percent for each year after age 45 that the disability began. For example, if the total disability benefit is $10,000 per month and disability begins at age 48, then the full amount ($10,000) is paid each month to age 65. After age 65 the benefit payment reduces by 15 percent (3 years times 5 percent for each year) to 85 percent of $10,000, or $8,500 per month so long as the disability continues.
In summary, the right time to consider purchasing disability insurance as “own occ” is back, new options are available, limits have increased and more insurance companies have entered the market.
Ronald Perilstein is President of The Arjay Group (Narberth, PA), a firm specializing in benefits for physicians, hospitals and medical groups.