by Lawrence B. Keller, CLU, ChFC, CFP®
Not long ago, if you did not purchase your disability insurance as a Resident or Fellow, you could potentially be “penalized” by having your benefits limited when purchasing an individual policy. Now, due to enhanced special limits, within certain insurance companies, for “New In Practice Physicians” this is no longer the case.
Enhanced Special Limits for “New In Practice” Physicians
You were probably told that you should purchase your disability policy prior to the completion of your residency or fellowship training for a variety of different reasons. While some insurance agents may tell potential clients that if they wait, their policies will cost more after graduation, this is simply not true (the exception being if there is a discount program available at your teaching hospital that will not be available to you after graduation).
Rates increasing based on your age or potential adverse changes in your health not being taken into consideration, the most compelling reason to purchase a policy prior to graduation is related to what is known in the insurance industry as “Issue & Participation” (I&P) limits. These limits simply relate to the total amount of disability insurance coverage that the insurance company will allow you to have in relation to your earned income. After all, if they allowed you to purchase an amount of coverage in excess of your earnings, they may in fact be providing you with an incentive to claim benefits on your policy.
While insurance companies, generally, do not take the amount of disability insurance provided to you while you are in residency or fellowship, if you graduate and your new employer provides you with coverage, it will be taken into consideration in determining the amount of individual coverage available to you. This essentially meant that by deferring the purchase of a policy until after graduation, you might find that you are eligible to purchase less coverage as an Attending (earning 4-5 times the income) than you could have purchased under the special limits available to Residents and Fellows.
A Case Study
Dr. Smith will be completing his General Surgery Residency and entering private practice. His starting salary will be $200,000 and his employer will be providing him with disability insurance that covers 60% of his salary with a maximum monthly benefit of $10,000. Therefore, Dr. Smith would collect $10,000 per month in the event of his disability.
Unfortunately, the group Long-Term Disability (LTD) insurance is mandatory and Dr. Smith cannot “waive” or “opt out” of the coverage being provided – even if he desired. Dr. Smith then decides to look into purchasing an individual policy to supplement his employer’s plan. Using the Issue & Participation Chart from a well-know insurance company, Dr. Smith’s agent tells him that he can purchase a policy with a monthly benefit of only $2,670, just more than half the amount he could have purchased as a Resident or Fellow (in most cases, $5,000 per month is available regardless of actual income).
Additionally, as the Future Increase Option (FIO) Rider is typically a multiple of the base policy’s benefit, he can no longer reach this specific insurance company’s issue limit of $16,000 month, regardless of his health, as his income rises. Instead, he is limited to a maximum of $8,010 month ($2,670 base plus a $5,340 FIO Rider); again about half the amount he could have had the ability to reach had he purchased his policy as a Resident or Fellow. Obviously, this can cause a major problem if he leaves his current employer or if his employer’s Long-Term Disability policy is canceled and he is no longer healthy.
Too Good to be True?
As of this writing, two companies will allow “New in Practice” physicians (up to 12 or 24 months after graduation, depending upon the specific carrier) to purchase coverage based on the limits made available to their medical specialty (up to $7,500 month), regardless of their earned incomes or other employer provided coverage.
What this means, is that although Dr. Smith, under normal circumstances, would be limited to purchasing a policy with a monthly benefit of $2,670, he could now purchase as much as $6,500 month, as a General Surgeon, with a Future Increase Option Rider of $9,500. Thus, the availability of these enhanced special limits have essentially negated the “penalty” that would have normally been imposed for deferring the purchase of his disability insurance policy until he completed his medical training.
Summary
While I am not suggesting that any physician defer the purchase of disability insurance until the completion of their medical training, in the event that they did, the enhanced special limits provide “New In Practice Physicians” with an exceptional window of opportunity to purchase a proper amount of individual disability insurance coverage. It is best to consult with an insurance agent or financial planner that specializes in working with physicians as they will be familiar with which companies are best suited to your individual situation and those that make enhanced special limits available to beginning professionals.
Lawrence B. Keller, CLU, ChFC, CFP® is the founder of Physician Financial Services, a New York- based firm specializing in income protection and wealth accumulation strategies for physicians. He can be reached for questions or comments at (516) 677-6211 or by email to Lkeller@physicianfinancialservices.com.