Options for boosting your disability coverage

For physicians, adding coverage is tougher than ever. But here are some ways to do it.

By Dennis Murray
Senior Editor

Will your disability insurance cover all your needs if you become sick or injured and can't work? A typical individual policy covers 60 percent of net income, but if you have to add a second mortgage or the kids decide to go to a private college, even a seemingly generous monthly benefit might be stretched thin. No problem, you say, just buy more coverage.

If only it were that easy!

Because of a spate of physician claims in the early 1990s, disability coverage has become more restrictive and benefits less generous. Noncancellable and supplemental policies, lifetime benefits, and own-occupation coverage (which pays if you can't perform your original job) are all pricier and harder to come by. Annual premiums for new policies have soared.¹

Yet despite the industry crackdown, you can still boost your disability coverage. Here's how.

See if you qualify for a supplemental policy

"For physicians in certain surgical specialties, even $10,000 a month doesn't come close to replacing 60 percent of their net income," says John Ryan, president of Ryan Insurance Strategy Consultants (www.insiderisc.com), an insurance broker in Greenwood Village, CO. That has led companies such as Combined Insurance Co. of America and Lloyd's of London to try to bridge the gap with "high limit" policies that provide up to an extra $15,000 a month.

High-limit policies generally pay benefits for five years, tops, and they must be renewed every three or five years, depending on your age.

The short terms don't bother financial planner Todd Bramson of North Star Resource Group in Madison, WI. "This insurance isn't meant to replace a primary disability policy." he says. "It buys you time and financial security until you can sort through your options."

High-limit supplemental coverage is offered in most states. But it doesn't come cheap: A nonsmoking, 45-year-old male physician can expect to pay around $500 a month—$6,000 a year—for the maximum coverage. Renewal isn't guaranteed, and even if you're approved, your renewal rate will likely be higher than your old rate.

A second type of supplemental disability coverage, called retirement-contribution protection insurance, will allow you to continue adding to your retirement plan if you become totally disabled. MassMutual's policy, for instance, currently pays up to $3,333 a month directly to a trust and allows you to direct the money into a wide range of investments, including annuities, stocks, and mutual funds. The coverage extends until age 65, can't be canceled by the insurer, and pays benefits after a 180- or 365-day waiting period. Annual premiums vary by age, specialty, length of waiting period, and whether you're self-employed or a member of a group.

The downside: Unless you select tax-deferred investments, the policy's monthly benefits are taxable in the year you receive them, as are the earnings within the trust. (Distributions from taxable investments, however, are tax-free at age 65.)

You also have the opportunity to supplement your disability insurance if you're moving into a salaried position: Take what your new employer's group plan offers, but maintain your individual coverage. You'll need it if your employer decides to drop the insurer or vice versa, either of which can happen with little notice. "Also, individual coverage, while more expensive than group coverage, usually offers more inclusive and generous benefits," says John F. Nichols, president of Disability Resource Group in Chicago, himself the survivor of a serious spinal cord injury.

Moreover, the proceeds of a group policy are taxable to you, because the premiums are deducted on the corporation's tax return. This effectively shrinks your monthly benefit. For this reason, ask your employer if it can add the cost of this coverage to your taxable income. For the same reason, don't deduct the premiums for an individual policy purchased through your practice. "It's a great temptation," says Peter Katt, a fee-only insurance adviser in Mattawan, MI. "However, you'll feel less pain foregoing a tax deduction than you would paying taxes on disability benefits after you can't work."

Complement disability coverage with other types of insurance

"Business protection" or "overhead expense" insurance can be used to pay ongoing expenses—rent, salaries, supplies, etc.—if you can't work. Ask your regular disability insurer about this coverage. For business loan payments, inquire about a "reducing term disability income" policy. That's more difficult to find, but it is available through Guardian Life.

Critical-illness insurance, too, could dovetail nicely with your primary disability coverage. Its main attraction: You can collect even if you return to work, because benefits are triggered strictly by the diagnosis of certain conditions, such as cancer, heart attack, renal failure, stroke—even Alzheimer's disease.²

"This is an excellent supplement for all physicians, but especially for high earners and those who live in California or Florida, where insurers are capping the monthly disability benefit at $10,000," says James P. Fleming of Fleming Associates, an insurance agency in Walnut Creek, CA. He recommends Mutual of Omaha's policy, because it doesn't impose a waiting period. With some other policies you must survive 30 days or longer after receiving a diagnosis before benefits kick in.

Unlike disability benefits, which are distributed monthly, the proceeds from a critical-illness policy are paid in a lump sum. A 40-year-old man can expect to pay around $900 a year for a $100,000 benefit.

Critical-illness coverage is available to nonworking spouses, too. "A lot of physicians' wives or husbands stay at home to care for the kids," Fleming states. "These spouses don't have an income, but if they ever become disabled, the family's finances could suffer."

It's also possible to tack disability coverage onto your life insurance, with a "waiver of premium" option. This benefit, which kicks in about six months after you purchase the life coverage, will pay your premiums for the duration of the policy if you can no longer work. Fleming recalls a case where it paid off big-time, on a whole life policy.

"The internist, who was in his mid-30s, had to give up medicine because of severe back problems," he says. "He's 61 now, and the insurer has paid more than $75,000 in premiums. The policy's cash value has built up tax-deferred to $260,000, and with proper planning, he can borrow against that tax-free."

You can buy term insurance with a waiver-of-premium option, too. Upon disability, the policy will convert to whole life or universal life coverage, usually at no additional cost.

Not sure whether to increase your disability coverage? Consult a financial adviser. Just don't assume misfortune won't strike you. According to government statistics, almost 10 percent of those 64 or younger suffer from a severe disability. From ages 55 to 64, the figure rises to at least one in five.

¹For more on primary disability coverage, see "'Disability lite': Your family's new income protector," Dec. 4, 2000, and "Keep that insurer from blocking your disability claim," Aug. 6, 2001.

²For more on critical-illness coverage, see "Do you need critical-illness insurance?" June 5, 2000.

For more information

The products we've referred to in this article are sold through insurance brokers.

To find a representative in your area, call the insurer or check its Web site.

Combined Insurance Company of America: 800-225-4500; www.combined.com.

The Guardian Life Insurance Company of America: 800-441-6455; www.glic.com.

Lloyd's of London: no contact information for consumers; see an insurance broker.

MassMutual Financial Group: 800-272-2216; www.massmutual.com .

Mutual of Omaha Insurance: 800-775-6000; www.mutualofomaha.com.

 

Dennis Murray. Options for boosting your disability coverage. Medical Economics 2002;5:50.