October 1999 Bulletin

Sidestep disability insurance mistakes

Desired features: non-cancelable, own-occupation definition of disability, COLA adjustment

By Lawrence B. Keller

With physicians' income levels and job satisfaction decreasing as a result of managed care, insurance companies are convinced that physicians are more likely to claim on their disability insurance policies than ever before. This understanding, along with a significant increase in claims, has forced many insurance companies to drastically change the way they will insure physicians, especially those that perform invasive procedures.

If you have not thought about purchasing or supplementing your current disability insurance coverage recently, you might not be aware of the negative changes that have taken place. Here's how to avoid many common mistakes made when purchasing a new policy or supplementing your coverage in today's marketplace.

How policies are offered. Disability insurance can be purchased on either an individual or group basis. Group insurance is usually provided by your employer or purchased individually from a sponsoring medical association. Although initially low in cost, group policies have several limitations. They can be canceled (by either the association or insurance company), rates increase as you get older and premiums are subject to adjustments based on the claims experience of the entire group. Group and association contracts often contain restrictive definitions of disability as well as less generous contract provisions.

Purchase coverage early in your career. Disability insurance coverage should be purchased as early in your career as possible. Rates are based on several factors, including age. The younger you are when the purchase is made, the lower the cost of the insurance. Additionally, I know of one company that currently places orthopaedic residents in a higher occupational class than practicing orthopaedic surgeons. This allows residents to qualify for a policy with more liberal definitions at a lower premium cost.

Purchase a non-cancelable, guaranteed renewable policy. With a policy that is "non-cancellable" and "guaranteed renewable" you are in control of your financial security. The insurance company cannot cancel, increase the premiums, change any provisions or add restrictions to the policy. Therefore, once you own a policy with liberal definitions and contract provisions, you are guaranteed that it will remain that way, even if the issuing company no longer offers similar policies in the future. An individual policy would also not be affected by any additional disability coverage provided by a future employer.

Purchase a policy with an "own-occupation" definition of disability. Under this definition, benefits are contingent upon your ability to perform orthopaedic surgery. With an "own-occupation" policy an orthopaedic surgeon would collect full benefits if he or she could no longer perform orthopaedic surgery, even if he or she returned to medicine in some other capacity such as teaching or doing research. Although difficult to find, particularly for orthopaedic surgeons, a policy with this clause is advantageous. Check to see how long the "own-occupation" coverage lasts. Many policies have shortened the time such benefits will be paid. To my knowledge, there is only one company remaining that still offers an orthopaedic surgeon a policy with an "own-occupation" definition to age 65. However, to qualify for that definition, the policy must be purchased as an intern, resident or fellow. Ideally, you want to purchase a policy with the longest "own-occupation" period available.

Purchase a policy with a residual disability rider. This rider pays benefits based on your loss of income due to a disability, rather than the loss of your ability to perform orthopaedic surgery. There are many afflictions that could reduce your effectiveness and therefore, your income, but still allow you to work in your occupation. With combination coverage (own occupation with a residual rider), you would collect full benefits if you could not perform orthopaedic surgery and continue to receive benefits, proportionate to your loss of income, if you return to orthopaedics on a limited basis.

Without a residual rider the policy can be viewed as a bare bones policy that pays benefits only in the event of total disability. If you can no longer perform orthopaedic surgery, you would receive full benefits. Therefore, if you can perform orthopaedic surgery (even one day per week) you would not be entitled to any benefits. There are a few points to watch for with combination coverage: the residual rider should pay benefits even if you never suffer a total disability, and benefits should be payable to age 65.

Purchase a policy with a cost of living adjustment (COLA) rider. A cost of living adjustment rider is designed to help your benefits keep pace with inflation after your disability has lasted for 12 months. This adjustment can be a flat percentage or tied to the Consumer Price Index. Ideally, you want a COLA that is adjusted annually, on a compound interest basis with no "cap" on the monthly benefit. Although important, if cutting the cost of coverage is an issue, this might be the first optional rider to consider excluding from the policy.

Purchase a policy with a future purchase option rider. This rider is a must for young physicians. It offers the ability to increase your disability coverage, regardless of your medical condition, as your income rises. When this rider is exercised, some companies amend your original policy to reflect your new benefit level. This is preferable as the definitions, contract terms and premium rates are guaranteed to be the same as the original policy that you purchased. Other companies offer the right to purchase a new policy which would then subject you to definitions, terms and premium rates that may differ from your original policy. This could mean limits on the own-occupation period, as well as higher premiums for the additional policies that you will be purchasing.

Know the maximum benefit level on the policy. Most insurance companies will issue disability insurance coverage equal to approximately 60 percent of income. However, insurance companies have decreased the amount of coverage they will sell to physicians, regardless of earnings. The most common maximum benefit limit is now $10,000 per month. This is often a total maximum, combining both group and individual policies that you own. Therefore, if you have an old policy with a future purchase option rider included you might be subject to the rules that applied at the time you bought the policy. In that case, you might be able to purchase coverage in excess of $10,000 per month. Another possibility would be to supplement your individual policy with association coverage, provided it allows for a higher cap on monthly benefits.

(Portions of this article were adapted with permission from Young Physicians magazine, Vol. 3, No. 1, January 1999.)

Lawrence B. Keller, is founder of Physician Financial Services, a New York City-based firm, specializing in insurance, investments and financial services for physicians.

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