Income Protection
By Katherine Vessenes, JD, CFP®
President, MD Financial
As a physician, your largest, most valuable asset is your ability to work and earn a good living. Out of all the risks you face as a physician that could derail your financial future, the one most likely to happen is being too sick or injured to practice medicine. That is why getting cost effective, income protection or disability insurance, while a doctor is young and healthy, is imperative.
Protecting against this risk with a quality income protection policy can be a confusing and daunting endeavor. Getting cost effective income protection insurance (DI), from a solid company, is harder than it looks. There are a lot of nuances and “gotchas” to DI policies. Sometimes the cheapest policy is not always the best one in the long run.
Here are few key things you need to know about any policies you may own now or considering purchasing in the future to avoid unpleasant surprises.
1. Levels of coverage. There are 3 “tiers” of income protection policies.
First tier: these policies will only pay a claim if you are too sick or injured to do any work at all, even as a cashier at Walmart or in telephone sales. This definition is totally useless for physicians, since you would practically have to be comatose to receive a benefit. These policies are rare with physicians.
Second tier: These policies will insure you in your own specialty, but only so long as you are not earning any income from another source, or getting a benefit elsewhere. Some of these policies will deduct the outside income, and pay you the difference. Some will not pay any benefits at all if you are making a dollar a week teaching Sunday School. These policies are better than no coverage, but can leave a physician without the income they need to support themselves or their families if the worst happens—they are too ill to return to work. This is the kind of policy we most often see employers provide their physicians.
Third tier: This is considered the gold standard for physicians. Here is how it works. If you are too sick or injured to work in your specialty, but you could still do other work, say as a pharmaceutical sales rep or teaching med school, or even working in another specialty, you could receive your full benefit AND the income from your new job. In fact, when you add the two together, it is possible to actually make more money than you were making before you became too sick or injured to work.
Whenever possible, we recommend our clients get the third tier policy. Why is this so important? Take this case—which happened to a colleague of mine. (Thank goodness it didn’t happen to one of our clients!):
Dr. Z is an urologist in Durham. She had a great life with a lovely house and two adorable kids in private school, until she was diagnosed with cancer and had her left arm amputated. Her captive insurance agent told her she had a level three, double dip, own occ policy. That’s what Dr. Z thought she was buying.
A few years later, when Dr. Z starts taking a claim under the policy, she also gets a job teaching at the local medical school. She is barely able to make ends meet with the reduced income and the disability payment. For two years, she is able to squeak by, until the insurance company finds out about her outside employment and threatened to sue her for all their back DI payments! Apparently her agent didn’t present the policy correctly—it was only a tier 2 policy, not a tier 3.
Moral of the story: make sure you have your policy professionally reviewed—it may not be what you think it is.
One more case. This one did happen to one of our clients, before she started to work with us, but I have changed the facts to protect her identity.
Dr. T is a Critical Care Pediatrician working for a Minnesota Hospital. The stress of the job became too much for her and took a toll on her health. Eventually, she quits working as a physician and takes a full disability leave. In fact, she doesn’t practice medicine for over 6 years. At which times she takes a job in family medicine at another clinic. Fortunately, Dr. T did have a tier 3 policy. When we met with her for the first time, I noticed something unusual about her income. She was taking home about $8,000 per month from the clinic, but was also making another $13,000 per month, tax free, in a benefit paid by her DI company. This was a case where she made more money after being disabled, than before.
2. Have your existing policies reviewed to make sure you know what you have.
If you purchased your own DI policy more than two years ago, it is a good idea to have it reviewed by an independent financial expert. Many of the rates and terms have been adjusted in the last few years and it is possible you could get better coverage or better rates in today’s insurance environment.
The reason an Independent Agent is important to work with is because they are more likely to be unbiased and work for your best interests. The Captive Agent, can only recommend or sell you the limited products created or approved by their own insurance company. These may be ok for some doctors, but not good for you! Plus, a well-know industry practice is to pay insurance agents and financial advisors more money to sell propriety products. This comes into play with some agents who could, legally, recommend a better product, but are unlikely to do so because they will get paid less showing you a policy that is actually better for you.
At MD Financial, we pride ourselves on being completely unbiased and independent. We don’t manufacture products. Instead, we do a thorough search for the best products and then analyze them for you. We narrow it down to the top two or three companies and then show you the pros and cons of each policy. All of our clients are smart. When our doctors have all the facts, they can make great decisions for themselves about which policy is better for them. We think of our job as doing the detailed due diligence and then presenting you with some options.
Takeaway: now is the time to find out what kind of coverage you really have and make to make the changes you need.
3. Avoid “Association” Policy offerings you get in the mail.
Unfortunately, many doctors are under the mistaken belief that the Associations are your guardian angels and they are looking out for you. Nothing could be further from the truth. The associations, to make more money, frequently create their own insurance firm, to sell products to their doctors. I have never seen one of these policies that actually was good for doctors. In many cases the insurer had the right to cancel at any time—which could be disastrous for you if you have a chronic illness, because you could not go to another carrier and get coverage.
Sometimes the insurer reserves the right to increase premiums! This also could be a disaster if you are not able to pay the new rates, or are unable to get insurance elsewhere.
Takeaway: always have your independent advisor do a side by side comparison of different policies before you make a decision.
As part of our complimentary review we examine your disability policies. Contact us today about setting up a meeting at a time convenient for you!
Katherine Vessenes, is the founder and CEO of MD Financial Advisors who serve 500 doctors from Hawaii to Cape Cod. An award-winning Financial Advisor, Attorney, Certified Financial Planner®, author and speaker, she is devoted to bringing ethical, fiduciary advice to physicians and dentists. She can be reached at Katherine@mdfinancialadvisors.com.