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Disability insurance: Protection at a cost
■ A column offering help for your wallet
By Katherine Vogt — covered hospital and personal finance issues, physician/hospital relations, and ancillary health facilities for us during 2003-06. Posted March 14, 2005.
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For Ira Fenton, DO, the decision to buy an individual disability insurance policy was a no-brainer.
"If I couldn't function, couldn't go to the hospital any more, or could only do teaching, I would still be able to keep my earnings and get my disability," said Dr. Fenton, 51, a rheumatologist in Vernon Hills, Ill. "I know if I was disabled I would have income ... for the rest of my life."
But that kind of peace of mind doesn't come cheap, and isn't easily attained by some physicians. Dr. Fenton pays up to $8,000 in annual premiums for his policy, which includes some of the most protective provisions available with disability insurance. He bought the insurance 15 years ago and said he's not sure he would be able to find such a comprehensive plan now.
Financial experts say good disability insurance policies are out there but a lot of physicians aren't buying them. Part of the reason may be cost. Another reason is a lack of understanding of what the plans do, said Scott Simmonds, president of Insurance Consultants of Maine Inc.
For example, Simmonds said 35-year-olds are seven times more likely to become disabled in the next year than they are to die. "But everybody is talking about buying life insurance. Well, disability insurance is probably more important for most working people because that's the event that takes somebody out," he said.
Not everyone needs disability insurance. Those who are retired or who live off investment income or are otherwise independently wealthy would see little benefit. But Simmonds and others in the industry say that anyone who is dependent on his or her working income should have disability insurance because it protects one's earning capacity.
What kind of coverage is appropriate is a trickier question, and one that is largely dependent on personal circumstances, including income, occupation and ability to pay premiums.
Many professionals have some coverage under a group plan offered through their employers, or in the case of many physicians, offered to their employees and themselves. But Simmonds said these policies should be carefully scrutinized because they can contain different standards for coverage than individual policies.
"It's worth knowing what the issues are," he said. "Having somebody review your group disability policy as part of your overall [financial] planning process" is a good idea, he added.
The AMA sponsors a group disability insurance plan through its insurance agency, and in the past, the Association has adopted a policy urging all medical schools to provide access to disability insurance for students and residents.
Robert Pagliarini, executive vice president of Los Angeles-based consulting firm Allied Consulting Group, said it is dangerous to rely too much on a group disability plan. "It's like showing up at a wood-chopping contest with a Swiss army knife," he said.
Pagliarini said most group plans have strict limits on how much they will pay out. Though the plan may promise a typical payout of 50% or 60% of the policyholder's base salary, the fine print might put a cap of $5,000 a month on that benefit, he said. (The AMA's plan has a monthly cap of $10,000. However, its plan is not available in Arizona, Massachusetts and Oregon.)
Also, premiums on group plans are paid by the employer with pretax dollars, meaning that the benefit will be taxed when it is paid out. Individual policies typically offer tax-free payouts because premiums are paid with dollars that have already been taxed.
Still, a doctor who employs a handful of people may want to get a group plan for his or her staff, Pagliarini said. "Having a group disability plan is a nice benefit for the other employees. It's also nice because for most group disability plans there's no medical underwriting," he said. But he recommends also getting an individual policy.
Physicians may have to pay more than some other professionals to get individual policies, in part because the cost of the premiums may go up as the policy covers higher incomes.
As a general rule, annual premiums on an individual policy may be 2% to 3% of the individual's salary, said Byron Udell, chief executive of AccuQuote.com, a quoting and brokerage service based in Wheeling, Ill. But several factors will affect the price, including how long the benefit will last and when it will kick in.
Options of when the benefit payments begin typically range from 30 days to 90 days or even up to six months. Simmonds recommends a six-month waiting period, assuming a physician would have enough cash in reserve to survive that long. He said a six-month waiting period could mean premiums that were 40% less than policies with a 30-day waiting period.
Pagliarini said, if possible, physicians should opt for a benefit that will pay out all the way until retirement age, instead of one that dries up in a year or two. Though it will cost more, he said it makes the most sense because disabilities can be permanent.
Also affecting price is how the policy defines disability for the holder's specific occupation. Pagliarini said the most expensive choice is called "own occupation," which basically means that if the policyholder is unable to perform the exact same duties as he or she was performing before the disability, the benefit will kick in.
A slightly less expensive choice is known as a "modified definition," which means benefits will only be granted if the policyholder can't perform an occupation for which his or her education and experience is suited. That means a physician who could no longer perform surgery but could still teach wouldn't likely be eligible to collect benefit payments.
Pagliarini said the choice between the two options should be based on a cost analysis. It could also pay to shop around for the right insurance company.
"You can have one company that gives you a great rate for brain surgeons, but their rates for pediatricians are not as good," he said. "You can't just look at the company and say that's a good company."
Katherine Vogt covered hospital and personal finance issues, physician/hospital relations, and ancillary health facilities for us during 2003-06.