Doctors' worst insurance mistakes

These cautionary tales may spare you headaches and extra expense.

By Dennis Murray
Senior Editor

No one likes to think about death, accidents, or disability. But, once you're insured against these life events, you're protected and can rest easy, right?

If only it were that simple. Problem is, many people stash away their insurance policies and never look at them again. Only after it's too late do they, or their heirs, wish they'd kept closer tabs on their coverage.

But you can learn from the lessons of others. We asked attorneys, financial planners, and insurance experts to share some of the more egregious insurance mistakes that they've seen doctors make; here they are.

Inattention can leave your heirs out in the cold

A 54-year-old Michigan general surgeon died suddenly. He had a $1 million life insurance policy, which his son and daughter found among his bank and brokerage statements. To their shock, the surgeon's ex-wife was listed as the policy's sole beneficiary, five years after the couple's bitter divorce.

To make matters worse, his ex-wife was also still listed as the beneficiary on his retirement plan. That was puzzling because the plan's assets had been the object of a huge fight during the divorce proceedings. The doctor was fortunate to retain ownership of them. But due to his oversight, when he died the court awarded his ex-spouse this money on top of the insurance proceeds—a windfall that totaled $2.2 million.

The lesson: If you have reason to change the beneficiary on any of your insurance or investment documents, do it immediately. Often this takes little more time than a phone call to your broker or adviser, who will forward to you any documents that require your signature.

Gaps in coverage can cost you dearly

It's always smart to own an umbrella policy, which covers claims in excess of the limits stated in your other personal-liability policies. Nevertheless, if you don't set it up properly, umbrella coverage may not keep you from getting soaked financially, as an Arizona internist found out a few years ago.

She had a $2 million policy in effect when she was sued for her involvement in a car accident. The driver of the other car suffered a back injury that required emergency surgery and fairly extensive physical therapy. The doctor's insurer settled the case for $350,000. She had only $300,000 of liability coverage per incident, but figured the umbrella policy would take care of the difference.

Wrong. The terms of the umbrella policy required her and her husband to have $500,000 of underlying liability coverage, in both their homeowners and auto policies, before the supplemental insurance would kick in. Result: The internist had to cover the $50,000 shortfall herself.

The lesson: Make sure your umbrella policy dovetails with your other insurance, leaving no gaps in coverage. "If the internist and her husband had coordinated things correctly, they would have been fully covered for up to $2.5 million," says Albert J. Zdenek Jr., president of Zdenek Financial Planning in Flemington, NJ. "Don't assume that everything will be fine when you renew your policies, either," he adds. "Closely review the documents, and make sure the limits are adequate and that nothing material has changed. Don't assume that your insurance agent will do this for you."

Beware of insurance that promises tax benefits

In its most basic form, life insurance is invaluable. You pay the premiums and when you die, your beneficiary receives the policy's face value. However, many insurance brokers and financial advisers have been known to push life insurance as a great retirement vehicle. When tax perks are promised, too, things can get dicey.

Some New Jersey doctors found this out the hard way several years ago. The perpetrators of a scam promised them large pre-retirement death benefits, specified tax-free retirement income, and paid-up life insurance. Tax-deductible contributions in the form of premiums on term insurance were made to a VEBA plan, which provided most of the physicians with $1 million in death benefits. Two were insured for higher amounts. (The perps set up this VEBA, which stands for voluntary employee beneficiary association, as a multiemployer trust comprised of physicians' practices.) The premiums on the term insurance were some 12 times higher than normal.

These excess premiums created a huge hidden cash value that, the doctors were told, could be tapped into after they "converted" the heavily funded term insurance to a permanent universal life policy. Part of the trick was that upon conversion the doctor, and not the VEBA, became the policy's owner. This resulted in a tax-free distribution of the cash values from the plan.

The IRS viewed the excessive deductions for premiums as a red flag, and considered the term/universal life coverages a single policy with two components. It denied the physicians' deductions and treated them as dividends, subject to double taxation, at both the corporate and individual level. To add insult to injury, the doctors were also hit with penalties and interest.

"The Medical Society of New Jersey endorsed this method of funding a retirement plan, which the promoters pointed out at every opportunity," says Peter Katt, a fee-only insurance adviser in Mattawan, MI. "What the doctors didn't know was that the promoters had paid the medical society a fee for its endorsement."

In July 2002, a US Court of Appeals upheld the IRS ruling. "Both courts put heavy blame on the doctors," Katt says, "despite their claims that the medical society and the promoters had misled them."

The lesson: If you're promised tax benefits from an insurance product, don't sign anything until you've consulted with a CPA, a tax specialist, or a fee-only insurance expert. "Dishonest people use life insurance for all sorts of scams, because it's complicated and the commissions for selling it are huge," says Katt, whose web site, www.peterkatt.com , contains dozens of articles on buying, selling, and investing in insurance policies and insurance-like products such as annuities.

Get "D&O" coverage if you're on a board

It sounds innocent enough: A local business asks you to sit on its Board of Directors in return for an honorarium. The monthly check won't make you rich, but, hey, it'll cover your car payment or some other bills.

That's what an Illinois family physician figured when he agreed to serve as a director of his local bank. He realized that one of its clients could try to hold him liable for any wrongful actions, but he assumed that the bank's insurance or his own umbrella policy would cover him.

A year later, bank examiners charged the directors with "dereliction of duty" in connection with a large building loan that exceeded a federally imposed cap. The loan had been approved after a series of executive-committee meetings, two of which the doctor missed. According to the bank examiners, none of the directors ever questioned the size of the loan.

Upon reviewing his umbrella policy, the FP was surprised to see that it specifically excluded professional liability, including activities such as directorships and advisory roles. "That's true for almost all umbrella policies," says attorney Jack E. Horsley, of Mattoon, IL.

The FP was hit with a $40,000 civil penalty. Fortunately for him, Horsley was able to negotiate it down to $10,000. But the doctor had to pay that amount out of pocket.

The lesson: Don't assume that an umbrella policy will save you from any type of liability; always check the fine print. Similarly, don't count on the corporate entity's insurance to cover you. Before you agree to serve on any board, ask if you'll be covered under the organization's D&O (directors and officers) policy. If the answer is Yes, have your attorney review a copy of the policy. If the answer is No, walk away.

"It might sound appealing to earn say, $500, to spend a few hours a month sitting in on meetings," Horsley says. "But a lot of things can be discussed and transacted without your knowledge or full understanding, and you could be held liable."

The cheapest policy could wind up being the costliest

Will your disability insurance come through when you need it most? It depends on the depth and breadth of your coverage.

Several years ago, a cardiovascular surgeon earning $500,000 a year was blinded in one eye and forced to give up surgery. He was able to fill in for his partners on hospital rounds and office visits, plus teach at a medical school, but his income dropped 75 percent.

The surgeon's disability insurance provided no help: Too late, he learned that it wouldn't cover him if he could perform "any occupation for which he is reasonably suited by education, training, or experience." Since he was teaching and doing noninvasive cardiology, he wasn't entitled to benefits.

A bare-bones disability policy like this one is essentially worthless, says Mary McGrath, a financial planner in Champaign, IL. But it's cheap, which makes it appealing to physicians already up to their eyeballs in debt and expenses.

The lesson: Purchase an "own occupation" disability policy that will pay benefits if you can't perform all of the functions of your specialty, even if you're able to handle related tasks. "This coverage will likely cost more than what you're paying now," McGrath says, "but you'll get your disability benefits and still be able to do administrative work or teach. Premiums are a factor, but what good is the best price if you get the worst coverage?"

Jack Horsley agrees, adding: "If you have questions about your coverage, call the agent who sold you the policy, or have it analyzed by an independent insurance salesperson or an insurance expert."

As a physician, you've worked hard to build your practice, provide for your family, and save for retirement. So take a few minutes now to review your insurance policies, to make sure your assets are protected. If the doctors in the previous scenarios had spent a little more time doing so, they could have saved themselves a lot of trouble down the road.

Power Points

Change the beneficiaries on your policies as the need arises.

Make sure your policies dovetail with, but don't duplicate, one another.

Be suspicious of life insurance that promises hefty tax benefits.

Umbrella insurance isn't as comprehensive as you might think.

Inexpensive coverage is often inadequate coverage.

Dennis Murray. Doctors' worst insurance mistakes.

Medical Economics

Aug. 22, 2003;80:50.