Disability coverage: A buyer's primer

August 20, 2004

Good coverage is getting more expensive, more restrictive, and harder to find.

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Good coverage is getting more expensive, more restrictive, and harder to find.

After three unsuccessful surgeries, Dr. H's carpal tunnel syndrome became so crippling that the 44-year-old pediatrician had to give up his practice. Fortunately, his individual disability insurance policy provided $10,000 a month in coverage. That wasn't enough to replace the $200,000 a year he'd been making before his problems began, but combined with a part-time teaching job, it enables him to support his family, including four teenagers.

The good news is that Dr. H's policy will continue to pay those benefits—with cost-of-living increases—until he reaches 65. He'd often grumbled over the years about the $6,000 annual premium he'd paid for his top-of-the-line policy, but now he's convinced it was worth the money. "Doctors tend to have a macho attitude about the chances of disability," he says. "We think nothing will ever happen to us. But it can."

 Power Points 
 • Take a group policy if it's offered, but it's better to have an individual disability policy, too.
 • Always look for "own-occupation" coverage.
 • The most you can reasonably hope for is coverage that pays benefits until age 65.
 • Take a close look at the fine print on exclusions and restrictions, particularly if the policy premium seems too good to be true.

Insurance experts agree. They say that while doctors typically pay more attention to life insurance than disability insurance, there's actually a much higher probability of being disabled than of dying during one's working years.

Why good coverage is harder to find

Until the 1990s, disability insurers considered doctors an attractive, low-risk market because they rarely filed claims, and, even when they were disabled, they usually continued to practice—or tried to. So carriers typically offered them generous coverage at modest premiums.

But as managed care spread during the '90s, and doctors' incomes declined, their disability claims began to soar. (Insurers believe that wasn't a coincidence.) Many companies took a beating: some simply stopped writing disability insurance; others folded or merged with bigger companies. Paul Revere, for example, took over claims for General American, John Hancock, New York Life, and others; it was later taken over itself by Provident, which then merged with Unum. Today, UnumProvident is the giant of the industry, with more than 40 percent of the individual disability market.

The companies that still offer disability policies are limiting their exposure by raising premiums, reducing benefits, tightening restrictions, and adding exclusions. That means doctors who shop for disability insurance today may have to look harder and pay more for less coverage.

What to look for in a policy

Most doctors would be wise to buy their own individual coverage, even if their practice offers a group policy (see "The pros and cons of group coverage"). To get the protection you need, you have to understand how individual disability policies are structured and what options are available. Since the options and provisions are numerous and complex, it might be worthwhile going over them with your agent or broker, or with an experienced disability attorney before signing up. Here's a primer to help you get started:

General occupation coverage. This most common type of policy provides coverage in case of an injury or medical condition that prevents you from practicing any type of medicine—not just your own specialty. That's an important distinction. It means that a cardiac surgeon who could no longer do invasive procedures as a result of a disability wouldn't qualify for benefits if he could still practice as a diagnostic cardiologist or general internist, or teach at a medical school.

Income replacement coverage. Many carriers these days offer straight "income replacement" policies that consider lost income only, not its source. The typical benefit is 60 percent of the earnings you've lost because of your disability. Thus, if you're unable to work at all, you'd receive 60 percent of your former practice income. But if you can still earn half your former income (with part-time practice, for instance), the insurer would pay only 60 percent of the other half. If your income grew, the benefit would decrease proportionately.

Such policies may contain a provision that allows the carrier to cancel your coverage or raise your premiums based on their claims experience for your specialty. But Frank Darras, a Claremont, CA, attorney who specializes in disability litigation, advises against buying such policies if there's another option. "Doctors deserve first class coverage for themselves and their families," he says. "Why buy a policy that won't keep you afloat if something goes wrong?"

"Own occupation" coverage. This type of occupation-specific policy covers you if your disability prevents you from performing the essential tasks required to practice your own specialty. Under this policy, the cardiac surgeon would receive total benefits even if he took a position as a general internist or a medical school professor. Own-occupation policies can also prove valuable for primary care doctors. In fact, the pediatrician described above was fortunate that he had bought such "Cadillac" coverage, since his carpal tunnel condition left him unable to do even simple procedures like drawing blood or suturing wounds.

Unfortunately, many companies have stopped offering own-occupation policies to physicians. Those that still do have raised prices, reduced monthly benefits, and may no longer provide coverage for doctors over 40. Many carriers now offer occupation specific coverage for only five years, and limit monthly benefits to a $10,000 combined maximum for doctors with both individual and group policies.

Guaranteed renewable coverage. These policies guarantee your right to renew, but the carrier reserves the right to raise premiums if it experiences an increase in claims for your specialty. It can only raise rates, however, if it does so for all other policyholders in the same specialty.

"Noncancellable" coverage. This provision means your carrier can't cancel your policy as long as you pay your premiums on time (or within the policy's grace period), even if the company stops selling disability insurance in your state. Such coverage is likely to be quite expensive, and may involve a rigorous underwriting process. Still, it may be worth the extra cost.

Long-term benefits. Unless you're under 40, you can probably forget about finding a policy that offers lifetime, occupation-specific benefits. The most you can reasonably hope for is coverage that pays benefits until age 65. That's likely to be quite expensive, but it may be worth the extra money, depending on your financial needs.

To cut their premiums, some doctors opt for a five-year benefits cap, but that's a risky gamble, since their disability might last much longer. Darras advises against skimping on long-term coverage. "I've seen too many specialists with occupation-specific coverage who've had to scramble to make ends meet when their five year benefits run out," he explains. "How are they going to find a job outside their medical specialty that will enable them to maintain the lifestyle they've worked so hard to achieve?"

Future benefits increase or future purchase option. This provision allows you to increase your coverage without evidence of insurability, although you'll have to prove that your rising income justifies the increase. The option can add 3 to 6 percent to your premium. Many physicians don't mind paying that small increase in annual premiums in exchange for coverage that keeps pace with higher earnings.

Some companies offer an "automatic benefit increase," but only in the first five years of your policy. That won't help, however, if your income rises sharply after 10 years of practice.

Supplemental coverage. For physicians in some specialties, the typical $10,000 monthly maximum on disability benefits may not be enough coverage. One solution is a "high limit" supplemental policy that provides an extra $10,000 or more a month. These policies are expensive, though, and must be renewed every three years—at higher rates. Renewal isn't guaranteed, and the benefits are generally limited to five years.

Cost-of-living adjustment. This provision guarantees that your monthly benefits will be adjusted annually to keep up with inflation, typically 3 to 6 percent, after you've been on disability for one year. Such coverage could prove valuable if you become disabled early in your career, but it can boost your premiums 10-15 percent.

Exclusions and restrictions. If your policy seems like a bargain, take a closer look at the fine print on exclusions and restrictions. For example, some policies have a two-year limit on mental illness, and might exclude such conditions as chronic pain, fibromyalgia, or chronic fatigue syndrome. Some policies exclude coverage for injuries that occur during foreign travel. Many policies contain a fraud provision that allows the carrier to rescind your policy at the time of a claim if they find a false statement on your application regarding your income, occupation, or medical history.

Waiting periods. One way to reduce your disability premiums is to opt for a longer waiting period before benefits kick in. Most policies carry a 60- to 90-day waiting period. The 60-day option might cost 30 percent more than the 90-day period. If you can hold out for six months by living off savings, you could cut your premiums by 10 to 20 percent. Keep in mind, though, that disability payments typically don't begin until 30 days after the waiting period ends. Whatever you do, don't miss a premium payment. If you forget, you'll get one reminder notice. After that, your policy will lapse, and all those premiums you've paid over the years will go down the drain.

As a medical professional, you should certainly make sure you have adequate disability insurance from either an individual or group policy, or both. While good coverage may be more difficult to find and more expensive than in the past, it's definitely still available.

"If you choose your policy wisely," says Benjamin Perez, of Disability Resource Group, an insurance brokerage in Chicago, "you'll have the comfort of knowing that even if an illness or injury forces you to stop practicing, you'll still have a source of income to provide for your family."

The pros and cons of group coverage

If your employer offers group disability coverage, take it gladly. But you may still need your own coverage, as well.

Group policies are usually subject to cancellation at any time, and their maximum monthly benefit might be only $10,000, which may not be adequate for your needs. (You may be limited, however, to a combined maximum monthly benefit of $10,000-$15,000 for both a group policy and an individual one.) Also, group policies often have stricter definitions of disability, and more restrictions or exclusions than your individual plan.

Group policies generally lack some of the legal safeguards of individual policies. They also lack the tax advantages: If you pay the premiums yourself, disability benefits will be tax-free, whereas group benefits are taxable because your employer is paying your premium.

Group benefits may be reduced or offset by any payments you're eligible to receive from state disability, workers' compensation, Social Security, retirement plans, or any lump-sum settlement you receive as the result of an accident that causes your disability.

Although your group coverage may not be as generous as you'd like, it may be the insurance of last resort if you've been turned down for an individual policy for health reasons. Most group policies, however, include a clause delaying coverage on pre-existing conditions for one or two years, after which you'd be eligible for benefits.

Not every doctor needs to supplement his group coverage. If you're 55, and no longer have big expenses, the group policy's 60 percent income replacement may be adequate. But if you're just starting out, and you've got medical school debt and a growing family, you'll definitely need more.

Finally, if you're planning to leave the group, try to convert your group insurance to an individual policy if that's allowed, or try to replace your group coverage with a "future benefits increase" option on your individual policy.



Berkeley Rice. Disability coverage: A buyer's primer.

Medical Economics

Aug. 20, 2004;81:38.