Always Read the Fine Print Disability Insurance: What You Don’t Know Could Cost You Dearly

Disability insurance coverage is written in many different ways and is often misunderstood by most doctors. They often don’t understand what they have paid premiums for until they have a serious health problem and are no longer able to perform their usual and customary duties. That’s when the painful reality of what coverage they thought they had sets in. The following example illustrates how one can be misinformed of what they are covered for.

Dr. Wayne’s medical group purchased disability income coverage of $9,000 per month for each of the doctors in the practice. Wayne’s coverage cost $6,000 per year. At age 62, Wayne had a stroke rendering him unable to return to his usual full-time duties, which included surgery. What Wayne expected was that his disability coverage would pay him $108,000 per year for life and, although that is only about half his annual compensation, it would be a tax-free benefit that would equal about 75{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of his current after-tax income. When he submitted his claim for disability he was dismayed to learn the following:

• There were three policies with different provisions. Two of the policies, totaling $6,000, provided lifetime coverage while one ($3,000) provided coverage only to age 65.
• Since Wayne was 62 years of age, the “lifetime coverage” only goes to age 65 because of a provision in the policies that states if the disability occurs after attaining age 60, the policy will only pay the greater of 2 years or until the age of 65.
• Two of the policies had general occupation coverage which only paid $1,500 each per month instead of $3,000 because, although he couldn’t perform surgery, he could still see patients in the office.
• The benefits, which were reduced from $9,000 to $6,000 per month and only until age 65, were also taxable to the doctor because the medical practice paid for and deducted the premiums.
• The result was that the doctor only received an after-tax benefit of $54,000 per year over less than three years, instead of $108,000 over his lifetime, which he expected. For this benefit, the corporation paid $120,000 in premiums over a 20-year period.

Adding salt to the wound, the corporation had a $150,000 disability buy-out policy on Wayne to fund his disability buy-out. The corporation discovered the coverage decreases 20{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} per year once the doctor reaches age 61, so the coverage was now only $90,000 and the claim was denied because he didn’t meet the definition of disability in the policy.

Disability insurance is very important to doctors because their compensation ties directly to their own productivity. It is also critical to group practices that stand to lose a critical stream of revenue if one of their doctors becomes disabled. In fact, the chances of a doctor becoming disabled are much greater than dying before retirement and, while the death of a doctor is a significant blow to a group practice, the disability of group member is often much more devastating financially.

Should you get group or individual coverage? If the practice has group disability coverage you may be tempted to just sign on to this because it is less costly and the underwriting requirements are less. However, there are some drawbacks. They are usually subject to cancellation. If this happens at a time when you are having health issues, you may not be insurable. They have a maximum monthly benefit that may not be adequate for your needs so you may need to supplement coverage with an individual policy. They often have stricter definitions of disability and more restrictions or exclusions than individual policies. They usually have provisions that reduce benefits paid by any payments you may be eligible to receive from workers compensation, state disability programs, Social Security or other sources.

They generally lack some legal safeguards that are present in individual policies. Also, group coverage is not portable if you leave the current employer or group practice. Group coverage is an option, however, if you can’t otherwise qualify for individual coverage, even though there may be a waiting period for pre-existing conditions.

The following are some guidelines to follow when shopping for individual disability insurance. If you already have disability coverage it may be wise to take an inventory of coverage and ask your insurance agent to assist you with the following:

• Inquire of the highest-ranking disability insurance carriers, in terms of volume of coverage written, reputation for handling claims, and independent ratings. Get quotes from the three with the highest overall rating.
• Ask for a clear explanation of the coverage and definition of disability. Get the language as written in the policy and if this isn’t in “layman’s terms” and understandable to you, make the agent put this in clearer language, with examples, if necessary.
• ‘Own occupation’ coverage is generally the preferred for doctors. This type of occupation-specific policy covers you if your disability prevents you from performing the essential tasks required to practice in your own specialty. Under this policy, a surgeon would receive total benefits even if he took a position as a general internist or a medical school professor.
• 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 in a certain age group. Many carriers now offer occupation-specific coverage for only five years, and limit monthly benefits.

Another option is ‘income replacement’ coverage that considers lost income only, not its source. The typical benefit is 60{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the earnings you’ve lost because of your disability. Thus, if you’re unable to work at all, you’d receive 60{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} 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{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the other half. If your income grew, the benefit would decrease proportionately. Although this may be less expensive coverage, we don’t recommend it for doctors.

• ‘General occupation’ coverage is another less desirable option. 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 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 general internist, or teach at a medical school.
• Look for guaranteed level premiums over the life of the policy. Some carriers reserve the right to raise premiums if they experience an increase in claims for a particular specialty. They can only raise rates, however, if they do so for all policyholders of the same specialty.
• Be sure to get non-cancelable 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. This may be in a rider that costs extra, but get it.
• Most policy benefits are payable to age 65. Check into the availability of lifetime benefits. These are rarely written, maybe available only up to a certain age of applicant, and may come at an extra cost. Beware of the provision under lifetime coverage that limits the benefit period if disability occurs after age 60. It may not be worth the extra cost.
• Inquire of policy exclusions or limitations for certain types or causes of disability such as mental impairment, chronic pain or fatigue conditions, stress or fibromyalgia and pre-existing health conditions. These may be conditions you can accept but you should be aware of them.
• One way to reduce your premiums is to choose a longer waiting period before benefits begin. Most long-term disability policies have a 60- to 90-day waiting period. Many group practice employment arrangements provide for full or partial compensation to continue for a period of three months or more which can reduce premiums significantly.
• Disability policies usually offer various riders at an extra cost for options such as increase in future coverage without evidence of insurability, and automatic cost of living benefits adjustments. These are personal preferences but are good to know they are available.
• Be aware of the tax status of your benefits. If the disability policy premiums are paid by the group practice or your employer as a paid benefit to you, and the practice takes a tax deduction for them, you will be taxed on any benefits received, unless you opt to have those premiums included on your annual Form W-2 and included in taxable wages. It is, therefore, advisable to make an annual election before the beginning of the applicable year to have these treated as a taxable fringe benefit.

Disability income insurance is very important to doctors because their financial well-being is so dependent on their continued good health and ability to generate income froUnlike life insurance, disability coverage can be much more complicated and wrought with pitfalls not readily identified by the untrained eye. This is one area in which doctors should engage the help of a professional who is their advocate and will keep them from buying a pig in a poke.

James B. Calnan, CPA, is partner-in-charge of the Health Care Services Division of Meyers Brothers Kalicka, P.C., Holyoke, Certified Public Accountants and Business Consultants; (413) 536-8510.