Physicians’ Guide to Disability Insurance
By: David A. Bryant
Highly compensated professionals, physicians in particular, purchased private individual disability insurance en masse in the 1970’s, 80’s and 90’s. Agents selling Individual Disability Insurance (IDI) policies flooded the market as insurance carriers competed for market share of disability premium, fueled by attractive commission rates. This previously untapped disability market, represented hundreds of millions in potential annualized premium. High stakes competition for these premium dollars resulted in underpriced, benefit-rich disability insurance policies purchased by physicians and other professionals. The insurance companies were, and still are, ill-equipped to manage the downstream claims volume or incident rates as these policies mature. The primary focus of this article is to educate policyholders on the benefits contained in their disability policies and what to look for in purchasing a new disability policy. In addition, this article puts into context the historical economic landscape driving the disability carriers and the consequences of significant competition.
Initially, a fundamental distinction in disability insurance types and the economic drivers of the disability insurance marketplace to provide a foundation.
Long-term disability (LTD), a group benefit provided by an employer, typically covers 60% to 80% of an employee’s base income, excludes variable income, is limited to two years of own occupational disability, contains multiple limitations with respect to musculoskeletal and mental nervous claims, and is received as pre-tax dollars. LTD is unquestionably inadequate insurance for true replacement income due to disability.
On the other hand, Individual Disability Insurance (IDI), an insurance contract between an individual policyholder (such as a physician) and an insurance company or “list bill” through a professional association like the AMA, can provide up to 80% of total annual compensation until retirement age. In addition, IDI is received as after-tax income. IDI insurance is vastly superior to LTD in providing the benefits needed by disabled professionals.
When lecturing at the National Association of Personal Financial Advisors (NAPFA) annual convention, I aptly titled my presentation, “The Difference Between Fools Gold (LTD) and Gold (IDI).” As one would suspect, all the major disability carriers’ LTD products generate margins that dwarf the margins generated by IDI issued paper. It’s a simple rule of consumer insurance economics: if the insurers/carriers maintain higher margins/profitability then the odds product has purchased a “less valuable” and or the probability of a covered occurrence is uber remote. . As a result, my advice to my clients and colleagues is to forgo all long-term disability (LTD) offered by an employer and seek private individual disability insurance coverage (IDI) directly from a reputable insurance carrier (names of recommended carriers mentioned below).
THE IDI BOOM
In the 1960’s and 70’s, insurers including Paul Revere Life, Massachusetts Casualty, Massachusetts Indemnity, Monarch Life, Union Mutual, and Provident Life and Accident, created a reputation as specialists in the IDI marketplace. Significant changes, later leading to troubles for the insurance companies, began in the latter part of the 1970’s when most of these companies issued a number of new disability insurance product features designed specifically to appeal to higher income professionals, without properly anticipating the costs associated with later claims. These IDI policies, due to their rich benefits, became known as “Cadillac” policies.
The first new feature added to the IDI policies during this time period was the “pure” own occupation definition of disability. Own occupation coverage referrers to the ability to perform the occupation you are engaged in at the time of your injury or illness. The addition of the “pure” own occupation definition of disability increased the previous two-year or five-year duration limitation of the occupational definition to coverage to age 65, or for the insured’s lifetime. It was wholly irresponsible for the carriers to have failed to adjust premium pricing commensurate with the risk. Without the historical data to properly underwrite the additional risk has and will prove problematic for the disability carriers and their policyholders. The additional risk is embedded in the language of your policy.
What is and is not contained in the definition section of the policy controls coverage. The initial subtle change was the removal of “not gainfully employed” in another occupation as a precondition to Total Disability coverage., Removing language that the insured not be gainfully employed in another occupation allows a disabled surgeon, now the CEO of the hospital, entitled to monthly indemnity until age 65 or lifetime. IDI products began insuring the loss of income for a particular occupation, not just the loss of income from employment. The “not gainfully employed” requirement was removed from both the Total Disability and Residual Disability definitions of IDI policies.
Residual Disability (RD) was also introduced in IDI policies the 1970’s, allowing a physician to work part-time, or not work at all (eventually the “at work” requirement under the RD definition was removed), and be entitled to monthly indemnity so long as a few conditions were met: a) the physician was Totally Disabled for a period of 30, 60 or 90 days – also known as the “Elimination Period”; b) loss of income is due to the original disability; and c) the insured is under the appropriate care of a physician.
Every private disability policy holder should review their policy for an “at work” requirement as a precondition for RD benefits. Absent this requirement, a policyholder can collect residual disability benefits without being employed in their previous occupation or any other occupation. It is my experience that carriers have failed to educate their claims management personnel on these liberalized changes.
These IDI policy modifications, also known as enhancements, were due in large part to the competition for premium in the marketplace. Insurance carriers were “leap-frogging” each other in adding benefits and removing pre-conditions to coverage in an effort to maintain or increase market share. However, as previously stated, actuaries responsible for underwriting these risky benefits had little or no historical basis for properly pricing the enhanced policies. Then, add gasoline: the majority of these policies were non-cancelable/guaranteed premium prohibiting the insurers the opportunity to raise premiums through petition to the State insurance commissioners. The insurers were stuck with these policyholder-favorable IDI policies (referred to as the “closed-block” by Unum) at premium rates that could not sustain the looming claim volume.
The insurance companies that dominated the IDI market were Unum, Paul Revere, Provident, Union Mutual, Monarch, Prudential, Northwestern Mutual and New York Life. By the early 1980’s, monthly indemnity offered in these policies was approximately $3,000 per month. By the mid to late 1980’s, IDI policies offered over $15,000 per month in after-tax dollars. High interest rates and inflation in the early 1980’s created downward pressure on the sale of whole life insurance. The life carriers entering the IDI marketplace with force exacerbated the existing leap-frogging, and policy liberalization continued, including IDI policy enhancements such as:
- Pure own occupational disability insurance with residual benefits as standard issuances;
- Removing the elimination periods of 30, 60, or 90 days for qualification for Residual Disability;
- Definitional changes to Residual Disability, so that loss of income could be due to economic factors, and not just functional loss due to medical condition(s), creating “income replacement” coverage;
- Recovery benefits were added that allowed for return to full employment but continued benefits for 6 – 24 months so long as there was a reduction of pre-disability income;
- Cost-of-living adjustments (COLA) tied to the CPI, which at a minimum annual increase of 4% per year further distance and advising a return to work; and
- Lifetime benefits due to sickness continue to be offered.
Physicians continued to be the main target market for IDI carriers for good reason. Physicians are high earners, they purchase high indemnity policies, they pay their premiums on time or have low lapse rates, and they produce low incidence of claims due to the ability and fortitude to manage otherwise disabling medical conditions. Sounds like a recipe for high profitability. And it was, but only for the short term. The low loss ratios associated with the new issuances and high interest rates produced favorable economic conditions for the industry and the inertia to vie for additional premium further liberalized the disability issuance. Recovery benefits were introduced until age 65, and specialty riders were offered for subspecialties within an occupation.
The early 1990’s was catastrophic for IDI insurance carriers. Due to unsustainable actual and anticipated claim losses, the IDI “Cadillac” policies of the 1970’s, 80’s and 90’s are no long offered in the marketplace. One of the primary sources of non-profitability of IDI policies was the 30-day elimination period. Insurance companies started to feel the financial stress of their product and underwriting decisions in the late 1980’s, and many of the life carriers who originally entered into the marketplace exited due to the financial losses and lack of risk management resources to manage IDI claims. As these “Cadillac” policies were underwritten with the same termination ratios used to underwrite the two and five-year own occupational products, the new IDI products eroded the financial incentives for insureds to return to work and therefore termination ratios increased. Interest rates also dropped which reduced profitability of the IDI policies. Due to the complexity of deciphering all the varying enhancements to the individual disability policies, the claims management function at insurance companies became increasingly costly. Finally, claim reserves (the money an insurance company must set aside to pay a claim) were based upon previous Commissioners Individual Disability Tables which were incongruent with actual claim termination rates. Finally, the AIDS epidemic drove losses due to the increased cost of the blood tests during IDI underwriting and increased amounts of claims paid. Almost 20% of insurance companies decided to exit the business and no longer issue IDI products.
The percentage of new issuances dropped dramatically, and the profitability of IDI products began to erode. Many of the struggling carriers entered into reinsurance agreements with carriers such as Paul Revere, Provident and Unum, transferring claims administration and risk. The pendulum started to swing back in the late 1990’s, as carriers started to reintroduce the two-year and five-year own occupational benefit with a two-year limitation on mental nervous, alcoholism and related drug conditions.
Insurance companies experienced severe economic losses that resulted in “bad behavior” “claims containment management” or “bad faith” activities. One example is the “advanced paying close” claims technique whereby an insurance company would send multiple months of indemnity payments in one check to the insured, with an arbitrary date for return to work in exchange for closure of the claim. If agreed upon by the insured, they would unsuspectingly be required to satisfy the 30, 60 or 90 day elimination period if they never returned to work. This and other overly aggressive claims termination practices by a few of the insurance carriers led to litigation and large damages.
Many insurance carriers failed to educate their claims personnel on all the enhancements to the IDI products. Therefore, during the claims process, lesser known benefits imbedded in the policy, such as residual disability, are ignored by claim handlers. In this regard, Unum commissioned Tillinghast to compare the claims ratios in the closed block of Cadillac policies, comparing policies with Total-Only Disability (TD) and Total Disability and Residual (TD&RD). The claims ratio was 1:1, meaning payments were equal as to both sets of policies. There was no valid rationalization offered why a segment (TD&RD) of the closed block had the same claims liability as a segment with lesser coverage (TD). The patent explanation is that the multiple iterations and benefits of the Residual Disability benefit have not been embedded in the claims management process, or are ignored by claims adjusters. For insurers, the cost of adjudicating and analyzing the complex financials and the increased liability associated with Residual Disability claims would only further drag down profitability.
Unum became the volume leader in the IDI marketplace as a result of consolidation. In 1997, Provident acquired Paul Revere. In 1999, Provident emerged forming UnumProvident. Being the volume leader in the IDI marketplace has placed significant pressure on Unum and its affiliates to find ways, at times found to be unlawful, to relieve the financial stress that the IDI closed-book of Cadillac policies is placing upon them.
In a 2008 court case of note, defendants Unum and Paul Revere were found to have engaged in numerous acts of bad faith in adjusting IDI claims. (See, Merrick v. Paul Revere Life Insurance Company, 594 F. Supp.2d 1168). The United States District Court in Nevada found that the insurance carriers unlawfully targeted subjective claims such as nervous disorders and fibromyalgia for denial, unlawfully imposed objective requirements set by the carrier on certain claims, destroyed information on meeting held by carriers to decide claims, shifted the burden of claim investigation to the disabled policyholder, and set unfair targets and goals for claim termination based on financial performance of the insurance company. The actions of the insurance companies in this case resulted in a multimillion-dollar bad faith verdict in favor of the insured policyholder.
THE GOOD NEWS
If you purchased an IDI in-force legacy block policy of the 1970’s, 80’s and 90’s, you are now better equipped to obtain all your benefits in the event a medical condition impacts your monthly income. Physicians are not inclined to apply for disability benefits, as they often work through their medical condition or reduce their work hours. This doesn’t have to be the case if you are not working, or working less hours, due to a medical condition. Don’t waste the tens of thousands of dollars in premium you’ve paid for your IDI policy when low hanging after-tax dollars are available.
If you missed out on taking advantage of the frenzied IDI premium battle royale of the 1970’s, 80’s and 90’s, you still have options.
All professionals (doctors/physicians, podiatrists, dentists, lawyers, business owners, C-Suite executives, and professional athletes/musicians) in the market for individual disability insurance, with an annualized income of $500,000 or greater, unquestionably should contact Pro Financial Services Underwriters. This cover holder underwrites on behalf of Lloyds of London for professionals including physicians in the Unites States. I have not seen more favorable policy holder terms/language/benefits in the market place. Their product is comparable to the IDI policies sold in the 1970’s, 80’s and 90’s, but is priced appropriately and consequentially policyholders do not experience the same downward pressure on claim payments.
For those with annualized income of less than $500,000, ask your insurance agent about Guardian, Northwestern Mutual, and Standard Insurance. Or, request specimen or sample policies (draft insurance policies that often explain the meaning of the benefits) directly from these insurers. Compare and contrast with your insurance agent the definitions of “Total Disability”, “Own Occupation”, “Residual Disability”, “Accident”, and “Sickness”, then have your agent recommend the policy you should purchase and state the reasons why, IN WRITING.
My insurance agent friends will not be pleased with these recommendations because you will have effectively brought their errors and omissions policy in play in the event their representations of the policy are incongruent with the definitions within the policy. Unfortunately, my firm has been in a number of disputes with insurance agents and their insurance carriers when misrepresentations of material terms of insurance policies were made to the policyholder. Please feel free to contact my office should you require additional consultation in the purchase of a disability insurance policy.
Remember, the “definition” section of the disability policy carries all the promises the insurance company makes to the insured and where insurance attorneys apply their trade. “Total Disability”, “Own Occupation”, “Regular Occupation”, “Residual Disability”, “Recovery Benefit”, “Partial Disability” “at work” “Monthly Income”, “Loss of Earnings”, “Income Only” and other terms can have multiple definitions across policies. Bryant Legal Group has reviewed and digested this varying claim language and has the insight to hold the disability insurance carriers accountable.
If you own a disability policy issued by one the insurance companies named below, are on claim, or are contemplating a claim, I suggest you contact Bryant Legal Group should you have any remaining questions regarding your policy: UNUM, Provident Companies, Paul Revere, Union Mutual, Northwestern Mutual, Equitable, MassMutual, Connecticut General, Monarch Life, Massachusetts Casualty, Connecticut Mutual, New York Life, Guardian Life, Prudential, Illinois Mutual, Lincoln National Life, Mutual Benefit Life, Minnesota Mutual, John Hancock, Ohio National, Mutual of Omaha, Standard, Principal Financial, MetLife, or Northwestern Mutual.