Why Long Term Disability Insurance?

Disability insurance is not required by law. If you’re not sold on why you should own dentist or physician disability insurance, this is a great starting point.

Why is disability insurance so important?

Your future income is your biggest asset. It’s far more valuable than your home or car. Why not insure it?

Maybe you’re healthy, don’t have a high-risk life and don’t think it’s going to happen to you. Although chances are small, everyone is at risk of unexpectedly becoming disabled. A car accident, major illness or unexpected injury can limit your ability to work. The question is: what’s your plan if it does happen? Disability insurance provides income when you need it most.

As one person, you never know your chances of becoming disabled – they could be 100%. And you’d never know until it happens.

If you look at large numbers of people, the chances are very low, but the insurance companies already know this. That’s how they price it. The chances are very low but the potential cost is extremely high. This makes it one of the most efficient risks to insure first.

Good planning requires considering the good and bad scenarios and creating plans to address both. Having the worst case scenario (like permanent disability) taken care of allows you to put more focus on living a great life.

The only legitimate excuse for not owning long term disability insurance is that you’re already financially independent. Otherwise, everyone should consider owning at least some disability coverage.

How Does It Work?

For an individual policy, you must apply for coverage, be accepted and begin making payments to be covered for long term disability insurance. Group coverage works differently and will depend on the specific employer. In some cases coverage becomes effective without action from the employee. In other cases, employees must opt in.

Here are some of the basic definitions used in Long Term Disability insurance contracts:

Occupation Class – Insurance companies use their own discretion to sort occupations into a handful of classes based upon expected risk. Rates, and sometimes policy terms, are different for each class. The lowest class includes all occupations that are not eligible for coverage.

Conditional Coverage – If the applicant pays a premium when applying for coverage, he or she will receive interim coverage during the underwriting period subject to the terms and conditions of the conditional receipt.

Insured – The person or company covered by the insurance.

Definition of Disability – How an insurance policy defines when the insured is totally or partially disabled or not.

Exclusions – Specific conditions which will not be covered under the policy.

Non-Cancelable and Guaranteed Renewable – A type of disability policy where the insurer cannot change the policy terms or premiums as long as the insured pays the scheduled premiums.

Guaranteed Renewable – A policy type where insurer cannot change the policy terms (but can change premiums) as long as the insured pays the scheduled premiums.

When Should You Consider Purchasing?

Right before you get disabled, right? Maybe if you can predict the future. But for everyone else the best time to set up coverage is today.

This could be as soon as medical or dental school. Several companies and professional associations sell disability insurance to this group.

If you’re in residency or fellowship, most employers provide minimal group coverage. However, when you consider post-training earning potential, it’s a drop in the bucket. In an effort to help young doctors insure more future earnings, many individual disability insurers and professional associations offer special coverage amounts to medical and dental residents and fellows. Also, some institutions offer “guaranteed issue” coverage to employed residents and fellows.

Which Company Should You Consider?

Most people who buy disability insurance own it for many years. If you’re considering new coverage, look for established and financially strong companies that have solid claims paying experience. Thankfully, good information is much easier to find nowadays with the internet.

Ratings companies such as AM Best, S&P, Moody’s, Fitch and Weiss can help you get started assessing an insurance company’s current financial position. Also, the Comdex provides a score for each insurer based on their average ratings from AM Best, S&P, Moody’s and Fitch. Here is a report from Stan The Annuity Man the breaks down insurer ratings and Comdex scores.

Check out this disability attorney’s website to see how insurance companies handle “grey area” claims. They publish a massive collection of stories, complaints and articles providing information you’ll never hear directly from insurance companies. Below is a video explaining all the resources their website provides on the subject.

Also, another fantastic and underutilized resource for checking out insurers is the NAIC company search. You can enter any company name on the right side of the page (make sure it’s the formal company name for the product under consideration) and click find a company. Then click closed complaints, licensing or financial information for the respective company. If you select the closed complaint ratio report, select individual accident and health to pull complaint reports on individual disability. If you select financial information, you can pull up a report that shows the company’s key financials.

Most disability insurers are set up as either stock or mutual companies. Stock companies are owned by the shareholders. Mutual companies are owned by the policy owners. There are pros and cons to each structure. Stock companies deal with major challenges when stockholder demand for profit comes into direct conflict with taking care of policy owners. Mutual companies have a harder time raising capital because they’re unable to sell shares of the company. Either way, it’s good to know which type you’re dealing with.

For stock companies, pay close attention to claims paying history and consumer complaints. You’ll want to make sure they’re able to balance taking care of customers with profitability. For mutual companies. find out their dividend paying history for the particular product under consideration. Ask how they determine dividends in illustrations. Dividends are a return of premium to policyholders as a result of having more cash than what’s needed to operate (kinda like profits).

These are the companies we’re currently aware of that actively sell Individual long term disability insurance:

Guardian/Berkshire

Northwestern Mutual

Prudential

Mass Mutual

The Standard

Ameritas

Ohio National

Principal

Unum

MetLife (recently stopped selling individual LTD)

Which Contract Provisions Are Important?

Definition of Total Disability

There are many ways to define disability. The manner in which your policy defines disability directly affects your ultimate claim outcome. It’s better to do your homework now and make sure you’re clear on the policy definition.

The most common options for definition of total disability are true own occupation, modified own occupation and any occupation.

True Own Occupation

The true own occupation definition might look like this (excerpt from Guardian’s sample policy): “Totally disabled means that, solely due to Injury or Sickness, You are not able to perform the material and substantial duties of Your Occupation.”

It continues on to detail this more as follows… “You will be Totally Disabled even if You are Gainfully Employed in another occupation so long as, solely due to Injury or Sickness, You are not able to work in Your Occupation.”

Own occupation is considered the most flexible definition of disability. With own occupation, if you’re totally disabled from your job, you’re eligible for benefits even if you decide to go earn money from another job. However it’s not perfect.

Opponents say it’s more difficult than you think to qualify for “total disability”. The meaning of “Material and substantial” is up for debate. In this court case, the insurance company argued the insured was unable to perform all of the “material and substantial duties” except one and therefore wasn’t “totally disabled”.

Also, true own occupation can disincentivize totally disabled insureds from recovering. Maybe they are now working in another occupation and earning more disabled than they ever did before. Why put in the effort to get better?

Modified Own Occupation

Here’s an example modified own occupation definition: “The Insured is totally disabled when unable to perform the material and substantial duties of the regular occupation and not gainfully employed in any occupation.”

Modified own occupation is like own occupation with conditions. They’ll determine you’re totally disabled the same way as true own occupation, however, you must also not be gainfully employed (earn money) in any occupation. The intent it to limit people from double dipping and incentivize recovery. However, it’s certainly not as favorable for the insured that desires maximum flexibility.

Any Occupation

The any occupation definition might look like this: “The insured is totally disabled when unable to perform the material and substantial duties of any occupation.”

The any occupation definition is the most restrictive especially for more specialized professionals. Social security disability uses a variation of this definition of disability. The example I use is a pure any occupation definition. In my example, you must be disabled from all occupations (or unable to do any job) in order to be determined totally disabled.

When you start looking at actual policy definitions, you’ll quickly every company and policy puts it’s own little spin on their definition. Or they might have a hybrid of two. But at the end of the day, most are variations or combinations of these three.

Qualifying for Partial or Residual Disability

Partial disability is more common than people realize. Partial claims occur when you’re sick or hurt and unable to perform some (but not all) of your professional duties. These partial claims fall under a totally different set of guidelines and vary considerably from company to company. Some include partial disability language within all their contracts while others require that you purchase a separate residual disability rider. Make sure you understand how this works in the contracts you’re considering.

Contracts will also include a minimum required percentage income loss (solely due to sickness or injury) in order to begin to qualify for residual or partial benefits. Guardian’s residual disability benefit (offered as an option rider) requires that your loss of income be at least 15% of your prior income. Most other contracts require 20%.

Most companies also offer to pay at minimum 50% benefit for at least the first six months of a partial claim. Under this type provision, if you’re determined to be 25% disabled you might end up receiving 50% of your full benefit amount for the first six months of disability.

When a partial claim reaches a certain percentage of income loss, most companies will go ahead and pay 100% of the benefit amount. This is a provision that’s part of the partial or residual disability contract language. Under the Guardian residual benefit rider, more than 75% income loss is considered 100%. Northwestern Mutual’s normal policy allows more than 80% income loss to be considered 100%.

However, under their Medical Occupation Definition, they provide a spin on this which in certain situations allows for more than 50% time loss to result in full benefits paid. However, it’s not as cut and dry as typical partial contracts. Here is an article covering how this might compare to other contracts.

Recovery and Transition Benefits

Many disability contracts include some form of recovery benefit designed to continue paying some portion of benefits for lost income after the insured has fully recovered. For example, a solo practitioner pediatrician that becomes fully disabled and eventually recovers after several years will likely have lost some or all of their patient base (and resulting income). They may be fully recovered from the disability, but not the income hit.

The recovery benefit can provide benefits to help manage circumstances where it takes time to recover to pre-disability income levels. Some companies limit recovery benefits for a set period of time (like 12 months) while others may pay for up to the entire benefit period.

Elimination Period

Think of the elimination period like a deductible. You have to take the hit for a certain period of time before the insurance company starts picking up the tab.

Weaker contracts require consecutive days of disability to qualify for the elimination period. In many cases, people try their best to work through an illness or injury. Days off here and there turn into weeks off here and there. But they keep trying to go back. Eventually their doctor urges them to stop working. In this common scenario, the consecutive days elimination period will reset the clock every time they return to work. They require a set # of consecutive days to satisfy the elimination period. This contract might say you must be disabled 90 consecutive days to qualify.

Other types of contracts consider the collective days over some preset period of time instead of consecutive days. For example, a contract might say you must be disabled 90 days (out of a 180 day period) to qualify. This is much more favorable for the insured.

Maximum Benefit Period

A policy’s maximum benefit period is the maximum time or age that the policy will pay disability benefits. Maximum benefit periods range from as short as 2 years max all the way up to insured’s lifetime. The most common benefit period is to age 65.

Cost Of Living Adjustment (COLA)

COLA is an optional benefit or rider designed to allow disability insurance benefits to increase with inflation. For a long duration disability scenario, this benefit can be very impactful. It’s typically a good idea to include especially the younger you are.

Automatic Increases Option

COLA only kicks in if you’re disabled. If you’re not, automatic increase options help your coverage amount to keep up with inflation. Most policies limit the amount of time automatic increases will occur.

Future Increase Option

When income is expected to increase much faster than inflation, you can purchase another rider to lock in the ability to buy a pre-set amount of additional coverage without qualifying medically. Future increase options give you the ability to lock in coverage increase options to exercise in the future when salary jumps.

Check to see if increase options qualify for the same discounts as your underlying policy (especially females). Also, make sure you understand the process for exercising these options as some policies are much more restrictive than others.

Mental And Nervous Limitation

Most policies limit mental, nervous or substance abuse related disability benefits to two years. There are a few companies still willing to not include this limitation. For instance, Guardian offers no mental/nervous limitation for most medical specialists in states other than California and Florida.

Who Can Help You Buy Disability Insurance?

In order to purchase a policy, you must go through an insurance agent. There are independent agents and captive agents.

Captive agents are contracted to and obligated to sell product for only one insurer unless a small list of exceptions occur. Naturally, they develop a bias toward their employing insurers products.

Some insurance companies, like Northwestern Mutual, only work with their field force of captive agents. Yet most NM agents are also licensed with many independent insurers (similarly to an independent agent). But as captive agents, they are restricted contractually from going outside NM unless the individual has sub-par health.

Independent agents aren’t contracted or employed by an insurance company. Instead, they are licensed with multiple companies and act as an independent agent for the customer.

True Agent vs. Financial Advisor/Agent

Most disability insurance agents call themselves financial advisors. They want the position of trusted advisor instead of insurance salesperson. To make a living they sell disability, life, health, long term care, annuities and other insurances. It’s likely they’re selling some investments for commissions as well as managing some for fees. On top of that, many charge fees for planning and advice.

This one-stop-shop model may be appealing for some. But it also comes with downsides. Most notably, the massive conflicts of interest that exist. Also, it’s much more difficult to be really good at one thing when you’re doing so many different things.

Agents that truly specialize in disability are few and far between. You’ll know when you find one. Their expertise, objectivity and experience will be unparalleled. This is the agent you want to hire to help you find disability insurance.

Either way, it’s good to have a second set of eyes review what you’re considering purchasing. It’s best to find someone that’s somewhat knowledgeable about the products but that’s not financially connected to the deal. As fee-only advisors, we often play this role for clients.

When you’re considering hiring an agent, here are some questions to ask…

    What other products and services do you offer, and what percentage of your business is each?
    How much experience do you have?
    Which companies are you licensed with?
    Are you a captive agent? If so, what are your contractual restrictions for writing outside business? How do you handle this conflict?
    If you’re an independent agent, are there companies that you aren’t licensed with (Like companies that only work with captive agents)? How do your products compare?
    Do different companies compensate you differently (including commissions and bonuses)?
    How many disability policies have you sold to physicians?
    Do you have access to the lowest possible discount this company offers for individuals in my circumstance?

How Much Does It Cost?

Disability insurance for physicians can be expensive. It pays to do some homework before selecting a policy. Discounts are a big deal for physicians. They are typically established on an individual insurance agent level and can range considerably depending on who you talk to. For example, Joe Random insurance agent sets up a discount plan for the academic hospital with his favored insurer because he has enough clients and initiative to get it done. However, to limit competition, he chooses not to share the discount. This particular insurance company only allows one discount per institution and gives the agent full discretion on how they handle it. Therefore, all other agents must offer full rate plans. Some companies have many different discount layers and reward higher producing more established agents with captive discount plans. This makes it financially beneficial for you to consider certain agents over others.

Traditional individual policies cost up to 40% more for females. Sex-neutral policies charge the same rate for females and males. Some discount plans provide sex-neutral discounted rates while others discount based on normal rates (and are therefore much higher for females). Sex-neutral and maximum discounted plans can save females a ton on premiums. Typically, residency and fellowship has the best discount plans available because competition between agents drives more options.

Companies also charge different rates for different states. Pricing can vary 30% or more between states. The pricing is set based on the insured’s address when the policy is written and locked in. In many cases, young physicians establish disability coverage and move states. If they’re moving to a much lower cost state, it might make sense to cancel existing coverage and setup a brand new policy. Or if the reverse is true, sometimes its best to load up on coverage before moving.

Graded vs. Level Premiums

Graded or annually renewable premiums increase as you age and level premiums do not. Level premium plans will be more expensive on the front end and less expensive on the back end simply because the company levels out the cost.

The premium structure you choose should be based upon your circumstances. If you’re planning to be financially independent by age 45, and expect to drop coverage then, odds are increasing premium will provide the better deal. Or if you’re shooting for age 65, and plan to keep the coverage intact for that long, typically level premiums are the better deal. Experienced agents should be able to run a net present value comparison to help you see the true cost comparison of the two for various time periods.

Premium Frequency

Like car insurance, most disability insurers penalize you for spreading out your payment. Monthly premiums are the most expensive and annual premiums are the least. The cost difference will range from company to company. If you’re paying by any frequency other than annual, figure out the percentage difference and use it to prioritize when to switch to annual.

The white coat investor forum includes a discussion where young physicians discuss their insurance premiums. This will give you an idea of the wide range of costs people typically pay.

Group vs. Individual vs. Association Coverage

Group coverage typically is easier to qualify for and much cheaper than individual. But it usually comes with a tradeoff. Weaknesses of group plans might include:

    Any occupation definition of total disability
    No coverage for partial claims
    No portability if you leave
    Not locked in
    Offsets with other benefits (like social security)
    Benefits taxable (when employer paid)
    Capped benefit amount

There’s a lot to disability insurance. Sometimes the best resource is someone who can point you in the right direction. If you’re an agent that truly specializes in disability insurance for physicians, let us know. We’d like to consider adding you to our list of recommended agents. Or if you’ve purchased disability and had a great experience with a true disability insurance pro, let us know.

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