Anyone who knows my origin story knows that I have very strong feelings about disability insurance because I was led astray by a young disability insurance salesman who didn’t know what he was doing. To this day, I can not get personal disability insurance, because of his mistake, which led to me getting denied.
The great irony is that the insurance salesman who forever impacted my family’s financial security was from Northwestern Mutual, and – as you’ll find out below – their definition of disability is not a true own-occupation, own-specialty definition for disability. So, even if I had been approved, I would have had the wrong policy!
Readers and residents often ask me how they will know if they are getting a good disability insurance product. From now on, I’ll be able to point to this post as it is chock-full of good information about the difference between good and bad disability policies!
Given my personal history, I am extremely cautious in who I recommend for disability insurance to my students, residents, and colleagues. This guest post was written by one of the insurance agents that I consistently recommend, Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF. Larry is both a sponsor of this site, and a go-to resource for disability insurance questions.
6 Signs You May Have The Wrong Disability Insurance Policy
Purchasing disability insurance can be complicated. There are many “moving parts” associated with it and the number of riders (optional benefits) available and permutations of them can seem endless – especially if you are unfamiliar with the terminology and are not well-researched. So how do you know if you have the “right” policy? This article focuses on six areas that may help identify that you don’t.
1) It Is Not Non-Cancellable and Guaranteed Renewable
A policy that is Non-Cancelable and Guaranteed Renewable provides you with the greatest degree of protection as a consumer. As long as required premiums are paid, the policy cannot be cancelled, the premium rates cannot be changed, and the policy provisions will remain the same until the policy’s expiration date (typically age 65).
Certain insurance companies offer a Guaranteed Renewable (GR) version of their policy. This allows them to change the premium rates by class of policyholder with state insurance department approval. While this can provide you with premium savings, in my opinion, in most cases, it is not worth the risk.
After all, we don’t know where financial markets are headed, where medicine is headed and what the frequency of claims might be over your career. Although, other than the premiums and the premium guarantees, contractual provisions for Non-Cancellable and Guaranteed Renewable and Guaranteed Renewable disability insurance policies are identical.
You may see language in your policy that indicates your policy is not Non-Cancellable and Guaranteed Renewable.
A good example is “The premium can be changed only after the policy is three years old and then, only if the change applies to all policies with similar benefits insuring the same risk class” or “This disability income policy is guaranteed renewable upon timely payment of premiums to the first policy anniversary after the Insured’s 65th birthday and, during that period, can neither be cancelled nor have its terms, other than premiums, changed by the Company. Premiums may be changed by class”.
2) You Think You have an “Own-Occupation” Definition of Total Disability (But Don’t)
Ideally, you want to purchase a policy with a true “Own-Occupation” definition of total disability. Typically, “total disability” or “totally disabled” means that due to an accident or illness, you are not able to perform the “material and substantial” duties of your occupation.
Generally, for surgeons, as long as the occupational analysis showed that just prior to disability your main duties were performing surgery and the majority of your office based practice was pre-operative consultations and post-operative follow-up, you would be considered totally disabled and any income earned in another occupation would not be taken into consideration and full disability insurance benefits would be payable as long as you are unable to perform the material and substantial duties of your occupation.
Several years ago, one well-known carrier introduced a “Medical Occupation” Definition (MOD) of Total Disability and, that same carrier, has since introduced a Medical “Own-Occupation” Definition of Total Disability (MOOD). The bottom line is that despite how they might read on the surface, if you work in another occupation, any earnings will be taken into consideration. A calculation is then made by the insurance company in order to determine the benefit that may be payable, if any.
Unfortunately, this could result in a reduction or elimination of your policy’s monthly benefit. Let’s review the two definitions and how they might work at the time of claim:
The “Medical Occupation” Definition of Total Disability
Under the “Medical Occupation” Definition of Total Disability, if you earn less than 20% of your pre-disability income, you would receive your full benefit. If you earn 20%–80% of your pre-disability income, you would receive a benefit proportionate to your loss of income.
For example, if prior to your disability, your income was $25,000 month ($300,000 annually) and you choose to work, you would have to earn under $5,000 month ($60,000 annually) in order to receive full benefits under your policy (as this would result in a loss of income of more than 80% compared to your pre-disability income).
Otherwise, your policy’s monthly benefit would be proportionately reduced.
If your policy contains this definition, you will see the following language:
If the Insured can perform one or more of the principal duties of the regular occupation, the Insured will be considered totally disabled if:
- more than 50% of the Insured’s time in the regular occupation at the time the disability began was devoted to providing direct patient care and services;
- the Insured is not gainfully employed in any occupation; and
- at the time disability began, the Insured was primarily engaged:
(i) in a procedure-based medical or dental specialty for which board certification is available and the Insured is unable to perform the principal procedures of the medical or dental specialty. The Insured will be considered to have been primarily engaged in a procedure-based medical or dental specialty if billing codes during the 12 months before the disability began demonstrate that more than 50% of the Insured’s charges for patient care and services resulted directly from principal procedures performed by the Insured; or
(ii) in a non-procedure-based medical or dental specialty for which board certification is available and the Insured is unable to perform the principal duties of non-procedure-based patient care and services. The Insured will be considered to have been primarily engaged in a non-procedure-based medical or dental specialty if billing codes during the 12 months before the disability began demonstrate that more than 50% of the Insured’s charges for patient care and services resulted directly from non-procedure-based patient care and services performed by the Insured. If the Insured can perform one or more of the principal duties of the regular occupation and the Insured is not considered totally disabled, the Insured may qualify as partially disabled.
The Medical ”Own-Occupation” Definition of Total Disability
While this definition is an improvement compared to the one above, it limits the amount of income that can be earned in another occupation.
If you can no longer do all of the substantial and material duties of your occupation, you would be considered totally disabled.
If, at that point, you choose to work in a new occupation, the Medical “Own Occupation” Definition would allow you reach your pre-disability income when combining your monthly disability benefit and any income earned in a new occupation.
Let’s use the same numbers illustrated previously.
If your monthly income was $25,000 ($300,000 annually) and you purchased a policy with a monthly benefit of $13,000 ($156,000 annually), you could earn up to $12,000 month ($144,000 year) with no offset to your policy’s monthly benefit – as this combination would bring you back to your pre-disability income of $25,000 month ($13,000 from the policy and $12,000 as a result of your income in a new occupation) or $300,000 annually.
However, if you make a “mistake” and earn in excess of $12,000 in any given month, your policy’s monthly benefit would be reduced on a dollar for dollar basis. Therefore, if you earned $13,000 month (you exceeded the limit by $1,000), your policy would pay $12,000 ($13,000 minus the $1,000 overage), for that specific month.
Of course, if you decide not to work, you would still be eligible to receive your full benefit.
To further complicate things, since this policy pays benefits based upon loss of income, this policy also states that “The Company has the right to conduct annual reconciliations to assess whether Earned Income reported by the Insured during a period of Disability is consistent with federal income tax (FIT) returns. Benefit underpayments discovered as a result of the reconciliation process will be paid to the Owner. The Company shall have the right to recover benefit overpayments”.
While one might argue that an insured should not “profit” by their disability and allowing them to reach their pre-disability income is “fair”, I would argue that paying the full premium to potentially collect a portion of the benefit from their policy does not make them “whole” either.
Does this argument really make sense?
One must have a great desire to become a physician – a driving passion to help people, to be challenged, and to learn throughout their lifetime.
They sacrifice their time and energy for the care of their patients, even to great detriment to themselves and their families. At the same time, they have also invested substantial amounts of money in their education and the practice of medicine in hope of career advancement, respect, monetary reward and job satisfaction.
In my opinion, a policy with a true “Own-Occupation” definition of disability does not allow a claimant to profit. It simply allows an insured to utilize their education, training and experience to transition into another occupation, do well at it and be rewarded financially as a result of their efforts.
If your policy contains this definition, you will see the following language:
The words “Total Disability” or “Totally Disabled” mean the Insured is unable to perform the substantial and material duties of the Regular Occupation.
If the Insured can perform one or more of the substantial and material duties of the Regular Occupation, the Insured will be considered Totally Disabled if:
- the Insured is not Gainfully Employed in an occupation;
- more than 50% of the Insured’s time in the Regular Occupation at the time Disability began was devoted to providing direct patient care and services; and
- the Insured is unable to perform the substantial and material duties which accounted for more than 50% of the Insured’s charges for direct patient care and services as evidenced by the Billing Codes for the 12 months before the Disability began.
If the Insured can perform one or more of the substantial and material duties of the Regular Occupation and is not considered Totally Disabled, the Insured may qualify as Partially Disabled.
In their most recent offering, Berkshire’s policy starts with a true “Own-Occupation” definition of total disability and then adds a second way to qualify for benefits with a threshold that can be used in order to receive full disability insurance benefits if you are a surgeon or invasive practitioner by stating that “If your occupation is limited to a Medical Doctor or Doctor of Osteopathy and more than 50% of income is earned from performing surgical procedures, we will consider you to be totally disabled even if you are gainfully employed in your practice or another occupation so long as, solely due to injury or sickness, you are not able to perform surgical procedures.”
This language changes the focus from solely your duties to your source of earnings and provides more ways to qualify for total disability benefits.
Surgical procedures means the medical interventions involving an incision with instruments performed by you in a clinical or hospital setting normally involving anesthesia and/or respiratory assistance, that you regularly perform, during the 12 months prior to your disability. These procedures can be performed on either an inpatient or outpatient basis. Providing hypodermic injections, in itself, is not a surgical procedure”.
If you have a mixed practice or your income comes from several sources, this can be an advantage as it stipulates that percentage of income that must be met in order qualify for total disability benefits.
Otherwise, as long as a policy contains an “Own-Occupation” definition of total disability, the carriers will all evaluate a claim in a similar fashion. Keep in mind, an individual’s eligibility for benefits is determined on a case-by- case basis, taking into consideration the factual circumstances presented as well as the terms and conditions of his/her policy(ies).
At this time of this writing, depending upon your state of residence and medical specialty, there are only six companies that potentially offer true “Own-Occupation” coverage to physicians – Berkshire Life (a Guardian Company), Standard, MassMutual, Principal, Ameritas and Ohio National.
The coverage provided under your policy, including the “Own-Occupation” definition of total disability, is portable from one job or occupation to the next.
It is important to remember that your occupation at claim time is based on the main activities of your work immediately prior to the start of your disability.
In the event you have an occupational change, it is always a good idea to review your insurance coverage with your agent to make certain that your policy continues to meet your needs, even though you do not need to notify the insurance company of this change.
3) You Are a Female Physician (and Do Not Have Unisex Rates)
Due to a higher morbidity rate, premium rates for females are substantially higher compared to their male counterparts.
The solution is for female physicians to purchase a policy that includes a unisex (gender neutral) rate structure and a discount. This is a blended rate that greatly favors females and can, generally, provide them with a savings of 40-50% off the normal female premium rates.
To qualify, one would normally purchase their policy as part of a Multi-Life Discount program through one’s employer or as part of a Guaranteed Standard Issue (GSI) program, except in Montana where all policies have unisex rates and in the Commonwealth of Massachusetts, which will be implementing H482 “An Act Providing For Equitable Coverage in Disability Policies” in January, 2020.
For example, let’s assume that we have a 30-year old female Emergency Medicine Resident in New York State purchasing a policy from MassMutual with a monthly benefit of $5,000, payable after 90 days, to age 65. Also included is an Extended Partial Disability Benefit Rider, a 3% Cost Of Living Adjustment (COLA) Rider and a $10,000 Future Insurability Option (FIO) Rider.
The level (fixed) monthly, non-discounted, gender distinct (female) premium is $331.65. However, the same policy with a unisex rate and 25% discount is $182.15 month or approximately 45% less.
Assuming the monthly benefit was never increased, if she kept her policy until age 65, the cumulative savings would be $62,790! Of course, if she increased her monthly benefit, the savings would be that much larger.
Recently, MassMutual, announced that in most states and under most circumstances, unisex rates are no longer available. As of this writing, the exceptions are the states of California, Connecticut and New York. There are also several “exclusive” discounts plans available through specific career MassMutual Agents.
If you are a female Resident/Fellow and have not yet purchased disability insurance, and live in one of these states, the time to do you research is now!
In the event that you have medical issues that may be problematic in terms of disability insurance underwriting, you may also have the ability to purchase a policy, regardless of your health, with unisex rates as a result of a Guaranteed Standard Issue (GSI) plan.
However, these are only available through certain agents and for those Residents/Fellows associated with specific residency/fellowship programs. Agents that specialize in working with physicians should know of and, in some cases, even have access to them.
4) You Are a High Income Specialist with a Policy (And Not a Strategy)
Therefore, I often recommend that high-income specialists, including, but not limited to, Plastic Surgeons, Neurosurgeons and Orthopedic Surgeons, purchase two different policies from two different companies, allowing them to potentially reach a higher (total) level of coverage than any one carrier would allow on their own.
As a result, they are adequately protected today and also have the ability to increase the monthly benefit on their policies, regardless of their health, as their incomes rise.
This strategy guarantees that any medical condition(s) that develop after the original policies are purchased would not need to be disclosed to the insurance company and would not be subject to medical underwriting (only financial underwriting is required when increase options are exercised).
While I routinely recommend this strategy for male physicians, I often don’t recommend this to female physicians as it is difficult to find one policy with unisex rates and a discount, let alone two. However, if unisex rates are available with two carriers, the same strategy will work just as well and it makes sense to potentially utilize it the same way.
5) You Purchased It in California or Florida (and Have Since Relocated)
It is not unreasonable to think that most physicians would rather be on the beach than in the operating room or clinic. As a result, claims experience has been extremely poor in states such as Florida and California, where policies are typically 10%-20% more expensive with less liberal contract provisions.
As a result, if you purchased your policy in one of these states and have since relocated, you may be able to purchase similar (or more comprehensive) insurance coverage, potentially from the same insurance company, at a lower premium rate.
6) You Have (Sadly) Mistaken Association Coverage for an Individual Policy
Although initially low in cost, association plans, such as the AMA’s DisabilityPro Own-Specialty Disability Insurance®, do not provide the customized benefits that can be achieved by purchasing a high-quality individual disability insurance policy. In my opinion, this offering is best summed up by the old adage “you get what you pay for”.
A few potential issues associated with the AMA’s disability insurance policy include, but are not limited to, the following: As of July 1, 2018, AMA-sponsored life, disability, and accident plans transitioned from United States Life to New York Life.
The policy can be changed:
(a) at any time by written agreement between New York Life and the Policyholder (American Medical Association Group Insurance Trust); and
(b) without the consent of any other person. Changes will be valid only if evidenced by an amendment to the policy. Such Amendment must be signed by the policy and an officer of New York Life.
The policy may also be changed by New York Life by amendment to the policy and without the consent of the policyholder or any other person, if such amendment is signed by an officer of New York Life and:
(a) results from the exercise of a right reserved to New York Life in the policy; or
(c) results from the termination or change in an agreement between New York Life and a third party, if such agreement is separate and distinct from the policy and provided the policy holder is not a party to such agreement.
The policy can be terminated by the policyholder or New York Life – The policyholder may terminate the policy by giving written notice to New York Life at least 60 days in advance. New York Life can terminate the policy by giving written notice to the policyholder at least 180 days in advance.
New York Life may only exercise this right if the American Medical Association no longer sponsors the insurance under the policy. You are not the policyowner. You simply receive a certificate evidencing that you are part of the group. More information on the features, cost, eligibility, renewability, limitations and exclusions are in the Certificate of Insurance.
The policy does not contain an “Own-Occupation” definition of disability – Covered total disability is an incapacity from an injury, sickness or organ donation that completely and continuously prevents the insured person from doing the material and substantial duties of his or her regular occupation, provided he or she is not engaged in an alternate occupation for which he or she is qualified by education, training or experience for pay or profit.
You must be totally disabled before Residual (Partial) Disability Benefits are Payable – a covered Residual Disability is an incapacity from an injury, sickness or organ donation that occurs when an insured person returns to work following a period during which he or she suffered a covered total disability.
The premium rates increase – Rate increases occur as you move from one age bracket to the next, typically when your age ends in a “0” or a “5”. However, the insurance company can also change premium rates on a class-wide basis.
The AMA Insurance incurs costs in connection with providing oversight and administrative support for this plan, and is reimbursed for these costs. The American Medical Association also incurs certain expenses in connection with the plan and is reimbursed for such expenses.
Purchasing disability insurance may seen like a daunting task.
There are many “moving parts” associated with it and the product has a terminology all its own. In a way, I view purchasing disability insurance akin to the Rubik’s Cube. The first time you see it with the colors scrambled, you can’t imagine ever having the ability to solve puzzle. However, once you are educated and understand how it works, after you have done it once, it almost becomes “second nature”.
Agents and brokers that routinely work in this area can help you avoid some of the potential pitfalls identified above so you make a well-informed decision for you and your family based upon your individual needs, goals and budget.
Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF is the founder of Physician Financial Services, a New York- based firm specializing in income protection and wealth accumulation strategies for physicians. He can be reached at (516) 677-6211 or by email to Lkel[email protected]inancialservices.com with comments or questions.
These are the personal views of the author and may not represent the views and opinions of The Guardian Life Insurance Company of America or its subsidiaries or affiliates thereof.
Individual disability income products underwritten and issued by Berkshire Life Insurance Company of America (BLICOA), Pittsfield, MA. BLICOA is a wholly owned stock subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, NY. Product provisions and availability may vary by state.
Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
Massachusetts unisex rate information is based upon H482 “An Act Providing For Equitable Coverage in Disability Policies.” At the time of this writing, it is unclear what impact, if any, chapter 175K “Interstate Insurance Compact” will have regarding unisex rates in Massachusetts.
The AMA’s DisabilityPro Own-Specialty Disability Insurance® is underwritten by New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010 on Policy Form GMR-FACE/G-30639-0 Under Group Policy No. G-30639-0
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 355 Lexington Avenue, 9th Floor, New York, NY 10017-6603, 212-541-8800. Securities products and advisory services are offered through PAS, 1-516-677-6200. Financial Representative, The Guardian Life Insurance Company of America, New York, NY (Guardian). PAS is an indirect wholly owned subsidiary of Guardian. Physician Financial Services is not an affiliate or subsidiary of PAS or Guardian.