Disability Insurance Past and present

by Ron Cohen, RHU, RR Ron Cohen & Associates

For most physicians, trying to purchase disability insurance after 1993 was like searching for the Holy Grail. Because of claims losses on disability policies written in the 1980s, quality individual noncancelable policies became more difficult to find.

Re-insurers fled, limits were cut, and “Own Occupation” policies were more or less gone. The most favorable of prospects for disability insurance in the 1980s—the physicians—had fallen from grace. The liberal language used in these policies created the problem. It seemed as though every company wanted to say, “We are the Cadillac of the disability industry.” This gradually resulted in even more liberal language and cheaper rates. What makes this country great is competition. Suddenly, there was none. High claims losses were the cause of this exodus. Physicians almost were better off being disabled than they were practicing medicine. The major players who had offered quality coverage to the medical market since the 1960s decided it was time to concentrate their efforts elsewhere … on claims.

When a business loses money, change is sure to come. There were more than 1800 insurance companies back in 1993, and it seemed all of them were marketing disability insurance. In the late 1990s, you could count them on one hand.

Now, insurers marketing disability insurance have a history of claims. They believe they are more experienced and know how to underwrite the medical market. They believe the products offered today can be profitable. Still, physicians think, “That’s not my problem. I just want the best policy I can buy for the best price, with a good company. I want a company that will be around when I need it.” Competition is back, and that’s good for all physicians. When there is competition, there is choice.

Physicians now can purchase the same quality noncancelable and guaranteed renewable policies that Medical Economics has been touting since the early 1960s.

The claims experience of the 1990s has made the underwriting of individual policies much more difficult. With the introduction of HIV/AIDS, blood testing has become common. The possibility of over insurance (or being better off disabled, which was the case in the 1990s) has resulted in additional requirements. Tax returns may be required to be submitted with the disability application. A HIPAA form also is required.

Physicians should consider variables such as medical specialty, age, gender, state, income, and insurability because they will affect the rates and policies that will be offered. Because companies can classify the same medical specialty differently, rates could be more expensive than those of competitors, as a result of their claims experience with that specialty. Generally, the maximum monthly benefit being offered to physicians is $10,000. Some carriers will participate to $15,000 per month—allowing physicians to purchase an additional policy for $5000 per month.

The benefits periods available also have changed because physicians are working longer and continuing to maintain these policies for life, as opposed to retiring at age 65. Benefit periods may extend up to age 70.

The millennium also finds us with a new concern—retirement. Companies offer policies that guarantee a physician’s pension plan contributions in the event of disability. These benefits are over and above all other policies in force. Typically, they will provide benefits only for total disability, and generally, after 180 days. Still, this is something to consider.

This year also finds us with another option, the return of premium disability. Physicians may have asked themselves, “Why am I spending so much money on something that I probably will never use?” Somebody was listening. This is a noncancelable and guaranteed renewable policy that provides the following guarantee in writing: “At the end of each term period, we will pay the owner the benefit ratio times the difference between all premiums paid for the policy and any attached riders, and the dividend and claims received during the term period. If claims are less than 20% of premiums for a term period, then zero will be used in place of claims in this computation.”

What this means is that 80% of all premiums paid will be refunded at each of the following intervals: every 10 years, at age 65, and at death less claims. If the claims during that period total less than 20% of the refund, then 100% of the refund will be paid.

When the refund is due, the owner has more choices. He can choose to take the money in cash, use it to pay the next 10 years in full (guaranteed to pay it in full), or leave it with the company at interest.

After the choice is made, the policy continues. The premiums do not increase, and the ability to maintain the contract remains unchanged. With the second option, to pay future premiums using the refund, the policy remains in force without payment for the next 10 years. With the third option, the money remains with the company at the interest rate then in effect, and the premium remains the same, with another refund paid at the next term period.

The actual cost of the return-of-premium policy (without claims) could result in 20% to 25% of the premium payments that would be spent on the typical disability policy.

The return-of-premium provision is an optional rider that is added to the base policy. At age 65, the return-of-premium rider stops and the annual premium of the policy is reduced to the base premium. If the physician wishes to maintain the policy, there is no age limit.

As with all individual policies, premiums are guaranteed to age 65, after which, they can change. This is standard procedure. The rates normally are not increased dramatically because the benefit periods at that point generally are limited to 24 months.

Using the premium listed above:

The actual cost of the policy is $4075 per year. The additional cost for the return-of-premium rider is $1589.25, which works out to be 39% of the base premium.

If you chose to buy the 6% cost-of-living rider with the competition (as compared in the examples above), the annual premium would be $1578. An inflation rider (COLA 6%) does not take effect until you have been disabled for 1 year, and only inflates the monthly benefit accordingly.

The company being used for comparison is excellent. The trouble most physicians have with that mindset is that they’d rather get their money back. Competition has returned. For this reason, for the sake of true comparison, we should include the annual premiums with two other major carriers without return of premium ($4259 and $5106). Multiplying each by 25 (years of premiums), you can calculate and compare the total premiums paid to age 65.

Return-of-premium has been around since the late 1960s. Most companies that have offered it lost money in the process. The contracts, even though companies stopped selling them, are being honored, and refunds continue to be sent. Some very knowledgeable people believe that the additional premium for the return-of-premium rider is a gamble because of the “less claims” clause. They believe it is like prefunding your own future claims. They believe that if your claims exceed the 80%, you actually are over paying, and simply getting back this overpayment in the form of claims.

All things considered, the fact remains—choice is a wonderful thing.

Male AGE 40 Family Practice Specialty $10,000 Per Month, 90-day Elimination Period, Benefits Payable to Age 65
	Insured’s Age	Without ROP (Major Carrier) Traditional Plan	With ROP (ROP Carrier)
Annual Premium	40	$6,319	$5,664
Total Premiums 10 years	50	$63,190	$56,640
80% Return of Premium	50	0	$45,314
Net Cost		$ 63,190	$11,328
Total Premiums 20 Years	60	$126,380	$ 22,656
Total Premiums 25 Years	65	$157,975	$ 28,320
If you choose to pay each term period and keep each refund:
Your net cost to	Age 50	Years 1–10	$11,328
	Age 60	Years 11–20	$11,328
	Age 65	Years 21–25	$ 5,664
Total Premiums Paid To Age 65			$28,320
If you choose not to take the refund, you will pay only (This is using the refunds to pay future premiums)			$11,328
If you leave the initial 10-year refund to accumulate, the company currently assumes an interest rate of 4.5%, and after 10 years would accumulate		Total Accumulation	$ 45,413
If left to accumulate for 20 years		Total Accumulation	$115,685