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Disability Insurance

by Lawrence B. Keller, CLU

What you don't know can hurt you

I began to specialize in disability insurance planning for physicians almost 20 years ago. Since that time, the disability insurance policies made available to physicians have continually changed. However, one thing has remained constant: Plastic surgeons often make poor choices when it comes to protecting their most valuable asset—their ability to earn an income.

This article will help you understand how policies are offered, why certain provisions must be included in your policy, and how to find the best coverage in today's marketplace.

How Policies Are Offered

Types. Disability insurance can be purchased on an individual or group basis. Group insurance is usually provided by an employer or purchased individually from a sponsoring medical association such as the American Medical Association or the American College of Surgeons.

Although initially low in cost, group policies have several limitations. They can be canceled (by the association or insurance company); rates increase as you grow older; and premiums are subject to adjustments based on the group's claims experience. In addition, group and association contracts often contain restrictive definitions of disability as well as less-than-generous contract provisions.

Coverage limits. Most insurance companies issue disability insurance coverage equal to approximately 60% of earned income. However, because of adverse claims experience, insurance companies had previously limited the amount of individual coverage available to plastic surgeons and other "invasive" practitioners, regardless of their earnings. Fortunately, this recently changed and one major carrier now issues policies with monthly benefits up to $12,500.

The same carrier will also participate up to $15,000 per month with individual disability coverage purchased from another company. For example, if you already purchased $10,000 per month from this company, an additional $2,500 per month would be available; or if you had $10,000 per month from another company, an additional $5,000 per month would be available as long as your income warranted these amounts.

The Cost of Disability Insurance

Premium rates are based on several factors, including age, gender, monthly benefit, and optional riders selected (described later in the article). The younger you are when the purchase is made, the lower is the cost of the insurance. Therefore, you should purchase a policy as early in your career as possible to lock in lower premium rates.

Although women are considered better risks for life insurance, this is not the case with disability insurance. Rates for females are substantially higher, and their policies generally cost 50% to 60% more than those for men.

However, unisex rates may be available by taking advantage of a "multilife" discount. This arrangement typically requires three or more policies to be purchased by individuals employed at the same medical practice or hospital.

Whereas this strategy allows female physicians to save as much as 50% on the cost of their policies, there is often little or no savings for males. In fact, with some companies, the male rates will actually increase. For this reason, one must consider any potential savings based on the overall makeup of the practice and the individuals to be insured.

What to Look for in a Policy

Renewability provision. The renewability provision is one of the key features of an individual disability income insurance policy. This provision defines your rights when it comes to keeping your disability policy in force. In general, a disability policy can be "guaranteed renewable" only or both "noncancelable" and "guaranteed renewable."

Guaranteed renewable. If a policy is guaranteed renewable only, the insurance company cannot cancel or change any provisions of the policy as long as you continue to pay your premiums. However, the insurance company does reserve the right to increase premiums with state insurance department approval for an entire class of policies in the event of poor claims experience.

Noncancelable and guaranteed renewable. If a policy is both noncancelable and guaranteed renewable, the insurance company cannot cancel, increase your premiums, change any provisions, or add restrictions to the policy—even if the issuing company no longer offers similar policies in the future. Therefore, if you purchase a policy that is both noncancelable and guaranteed renewable, you can remain in control of your financial security.

Definition of total disability. Arguably, the definition of disability is the most important aspect of a disability policy. As a surgeon, you must pay careful attention to the definition of disability found in your policy—it will ultimately determine how any claim you make for benefits will be judged. For purposes of this article, I will limit my comparison to an "own-occupation" and a "modified own-occupation" definition of disability.

Own-occupation. Although difficult to find, own-occupation (also known as "true" or "pure" own-occupation) is usually the definition of choice for plastic surgeons because it is the most liberal definition of total disability available. This type of policy pays benefits if you are disabled and "not able to perform the material and substantial duties of your occupation."

You would collect full disability benefits if you could no longer perform aesthetic or reconstructive surgery, even if you decided to work in another occupation or medical specialty, earning the same or more income than you did as a plastic surgeon. Beware the agent who tells you that this definition of disability is "no longer available" or that you "don't need it." This person may be telling you this because his or her company no longer offers it or the agent does not have the ability to sell it to you!

Modified own-occupation. This type of disability policy is the most prevalent in the industry today and typically pays benefits if you are "unable to perform the substantial and material duties of your occupation and you are not working." Although benefits are still contingent upon your ability to perform plastic and reconstructive surgery, this definition will not allow you to continue receiving full disability benefits if you are working in another occupation or medical specialty.

A Case of Two Brothers

Many insurance agents and financial planners question the true value of own-occupation disability insurance. They often believe that their clients are not looking to "profit" from their disability and should not be able to receive full benefits if they decide to work in another occupation and become financially successful. However, I am of the opinion that as a highly skilled professional, you have invested a great deal of time and money in your education and training and should not be penalized if you are skilled, motivated, and resourceful enough to transition into a new occupation.

Let's look at the following example of twin brothers who became plastic surgeons. They went to the same schools, lived in the same neighborhood, and earned essentially the same income. The only difference was the type of disability insurance that each procured. Brother A purchased a policy with an own-occupation definition of disability to age 65, while brother B purchased a policy with a modified own-occupation definition of disability to age 65.

Unfortunately, they both became totally disabled at age 35 and will never be able to perform plastic surgery again. Each brother had a policy with a monthly benefit of $10,000 and could potentially collect benefits for 30 years. Excluding any cost-of-living increases, each brother's potential payout would be approximately $3,600,000.

The claims examiners from their respective companies now must evaluate the payments that are to be made. Remember, under his policy, brother A is guaranteed to receive full disability benefits even if he decides to work in another occupation and earns the same or more money.

As a result, the claims examiner might consider offering brother A a lump sum for the present value of the future monthly (annuity) payments. Using a 5% discount factor, this translates to about $833,000. If brother A believes that he can invest this sum wisely, use the funds to start a new business, or help him move on with his life, he might decide to take the "deal." By the same token, the claims examiner has just turned a $3,600,000 liability on his insurance company's balance sheet into a $2,767,000 asset (the difference between $3,600,000 and $833,000).

Although brother B will never be able to perform plastic surgery again, his benefits are not guaranteed. If he decides to work in another occupation, his benefits may be reduced or eliminated. The claims examiner surmises that because brother B was a plastic surgeon, he is competitive in nature and probably has a type A personality. Therefore, he will want to work and continue to contribute to society if he has the ability. Obviously, this will be taken into consideration when evaluating his claim for benefits.

As a result, if a lump sum offer is made, it most likely will be for an amount substantially less than the one made to his brother. Additionally, with a modified own-occupation policy, if brother B decides not to take the "deal," or if no settlement offer is made, he will have to document his postdisability income to the insurance company every month until age 65 or until he no longer qualifies for benefits under the terms of his policy.

My final thought here is that if the premium difference between these definitions is not significant, given the choice, why would a surgeon purchase anything other than a policy with a true own-occupation definition of disability?

Riders to Consider

Residual disability rider. Own-occupation is the most liberal definition of disability, but it is not the end-all. What happens if your physician states that you can still perform plastic surgery but requires that you work fewer days per week (or fewer hours per day), or limits the number of surgeries that you can perform? In this case, the own-occupation definition of disability protects your specialty, but it does not adequately protect your income.

Generally, to qualify for residual disability benefits, you must experience an income loss of 20% or more from your predisability earnings. In addition, if your loss of earnings is greater than 75% or 80%, then 100% of your monthly disability benefit would be paid.

Unfortunately, without this rider the policy will pay "all or nothing," depending upon your ability to perform your duties as a plastic surgeon. This rider is also extremely important if you are totally disabled at first and then return to your practice with a limited schedule or if you never meet the definition of "total" disability in your policy but experience a substantial loss of income due to an accident or sickness.

Cost-of-living adjustment (COLA) rider. A COLA rider is designed to help your benefits keep pace with inflation after your disability has lasted for 12 months. This adjustment can be a fixed percentage or be 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 expensive, this rider can provide significant increases to your monthly benefit if you are disabled young. However, if cutting the cost of coverage is an issue, this might be the first optional rider to consider excluding from your policy.

Future increase option rider. This rider is a must for young physicians. It provides you with the ability to increase your disability coverage, regardless of your future health, as your income rises. Essentially, you are paying for the right to increase your policy's monthly benefit without undergoing another physical exam, taking additional blood or urine tests, or answering medical questions. This guarantees that any medical conditions that develop after your original policy's purchase would be fully covered and not subject to new medical underwriting.

It is important to know when you can increase your coverage, as well as by what increments, on any given option date. Some companies may allow you to exercise your entire option in 1 year as long as your then-current income warrants the increase; others, however, may limit the amount that you can purchase.

Protecting Your Practice as Well

If you are a physician in private practice and are responsible for some or all of the monthly expenses to keep your office open, you should consider purchasing a business overhead expense (BOE) policy in addition to a personal disability policy. A BOE policy provides reimbursement for the expenses of operating your practice if you or one of your partners is sick or hurt and cannot work. These expenses may include staff salaries, office rent or mortgage payments, utilities, malpractice insurance premiums, and other fixed costs normal to the operation of your business.

In addition, some policies may even provide benefits for you to hire a member of your profession to replace you or a colleague during a disability. This way, the practice's expenses are covered until either you or the disabled partner returns to the practice or either partner's share in the practice can be sold.

Premium payments for BOE insurance are tax-deductible as a reasonable and necessary business expense. As such, benefits received during disability, while taxable upon receipt, are used to pay practice-related expenses, which are tax-deductible. The net tax result is zero.

See also "All About Insurance" by Cheryl Whitman in the June 2006 issue of PSP.

Whereas some disability insurance companies continue to view the "medical market" with skepticism, other carriers are aggressively pursuing this type of business. As a result, finding a disability policy that will meet your individual needs can be a challenge.

The best approach is to use the services of a professional insurance agent who specializes in working with physicians. He or she will be familiar not only with your occupation, but also with the companies that have policies that are best suited to your particular specialty. Then you and the agent can decide which insurance company's policy best meets your individual insurance needs.

Lawrence B. Keller, CLU, is the founder of Physician Financial Services, a New York-based firm that specializes in income-protection and wealth-accumulation strategies for physicians. He can be reached at (800) 481-6447 or .


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Use Trade Shows for Publicity - October 2006

The 21st-Century Medical Practice - September 2006

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