Planning for Possible Health Problems

January 1, 2010

How much disability and long-term care insurance should you have? With retirement looking farther away in this tough economy, it’s time to make sure you are sufficiently covered.


It’s 2010: Do you know where your retirement is?

With many physicians still licking their wounds from the 37 percent plunge in the S&P 500 index in 2008 and the declining practice revenues as the recession dragged through 2009, it’s little wonder the concept of retirement looks to some like a quaint reference to another era.

Even if retirement has been pushed back - in fact because it has - two types of often-misunderstood insurance become all the more important: disability and long-term care.

Financial advisers still wallowing in gallows humor about the paltry stock market gains over the last two decades often quip that, in fact, there is no more retirement planning, only disability planning, because everyone who can work will need to work long into the future.

Health problems are typically one of the biggest reasons people retire before they intended. And costly nursing home or other medical care is often the chief catalyst for derailing retirement spending strategies.

Unfortunately, insuring against these catastrophes is not a simple matter. Both disability and long-term care insurance are plagued by nagging consumer complaints about the delivery of promised benefits. And in a bad economy, finding dollars to spend on premiums is difficult, particularly for doctors whose incomes rise and fall dramatically with their patients’ bad debt levels.

Sales of individual disability policies and group and individual long-term care policies all declined by double-digit percentages in the second quarter of 2009, according to LIMRA International Inc., the insurance industry trade group.

David Krier, a 62-year-old St. Paul, Ore., family practitioner, hasn’t purchased either since early in his career when a bank loan for his practice required him to purchase some disability insurance.

“The coverage just dwindled and I didn’t keep it up,” because of the cost and doubts about the coverage, says Krier, who now does occasional locum tenens work and runs a company called Volunteer Voyages, which provides medical personnel for international humanitarian missions mixed with educational travel packages.

If he couldn’t work at all or eventually needed long-term care, Krier says he would rely on his close-knit family to survive. He and his wife have four grown daughters, three of whom live close by.

Realistically, of course, this isn’t a strategy for everyone. Most doctors today can’t rely solely on their accumulated wealth (or family members’) to weather a crisis in their own health. But there are ways to make better purchases of both disability and long-term care insurance.

Disability

When it comes to disability, be sure to scrutinize the written policies you are considering and don’t just rely on what a brief brochure or agent tells you. More than a decade of rising claims and contentious lawsuits between claimants and the industry has resulted in stricter policy language and higher premiums for coverage that isn’t always as complete as physicians think it is at purchase.

Physicians typically purchase “own occupation” disability insurance, which generally pays benefits if the insured can’t perform the specific procedures required by the specialty. But even within this type of insurance, misperceptions about coverage are widespread.

Northwestern Mutual, in fact, commissioned a Harris Interactive poll at the end of 2008 to determine physicians’ perceptions about their own disability coverage. The results led to a new rider on the company’s disability policies (already available in most states and expected to be available in all states shortly) and a new Web site tool that aims to educate policyholders on coverage limits (www.di-checkup.com). “Specialty physicians want two things: the ability to protect [income from] their most important duties…and the ability to go work somewhere else and earn income without offsetting benefits. The reality is there is not a contract out there that does that,” says Stephen Frankl, director of Northwestern’s disability business.


Most contracts define a disability as partial if the physician can still do some of her former duties, which means the physician qualifies for only partial benefits; this then requires her to work in another capacity, in turn reducing the disability benefit further. With the new rider, a physician could opt for a total disability benefit, but would be unable to do any outside work.

The hitch is that even the most generous policies (or combination of group and individual policies) limit coverage to at most, two-thirds of income and often impose caps limiting any monthly benefits to less than $20,000, says Kathleen Longo, a financial planner whose firm, Accredited Investors in Edina, Minn., has several physician clients.

She currently has five clients collecting on disability policies, and says she has had multiple clients over the years who had to hire attorneys to fight for benefits.

Despite the limitations and frustrations, she recommends getting coverage to replace as much current income as possible, including riders that take coverage to age 70 if you plan to work that long. Make sure you are paying the premiums on an after-tax basis to avoid having benefits taxed. Even with that coverage, expect to self-insure as well to cover the inevitable income shortfall even with full benefits. And remember you’ll need extra savings to continue accumulating money for old age, she says.

Edward Comitz, an attorney who leads the health and disability insurance practice for Phoenix law firm Bonnett Fairbourn Friedman & Balint, recommends buying individual policies instead of the typically cheaper group ones, because employer-sponsored plans are subject to employment-law restrictions that include limits on jury awards if a claimant ends up in court fighting for benefits.

And don’t pay the premiums from the practice, he says, because an individual policy could be characterized as a group one if the practice is paying the bills.

Long-term care

Make it through your career without a disabling event, and you’re still not home free.

Spiraling long-term care costs are a great argument for long-term care insurance, but you again need to make sure you deal with a highly-rated insurer who can pay claims - and don’t overdo your coverage, Longo says.

“The average nursing home stay is three years at $250 a day in Minnesota,” she says. “We cushion that out to five years to be safe.”

That means clients need a pool of assets of about $456,000 to set aside and invest for long-term care costs, she says. If they have enough assets to live on in retirement and don’t feel strongly about leaving money to heirs, they may be able to self insure, she says. Otherwise, she helps clients look for policies that will pay the costs for five years.

She typically advises clients to wait until their 50s to buy the insurance, but recently had a physician in his 40s who came across a great deal on a group policy that allowed him to pay up the policy within 10 years at a relatively low cost.

“This is such an individual decision,” Longo says of both disability and long-term care coverage levels. “It’s heavily dependent on your current lifestyle, expenses, and income.”

Just make sure your level of coverage matches all three.

Janet Kidd Stewart is a freelance writer based in Marshfield, Wis. As a contributing columnist for the Chicago Tribune, she writes a weekly, syndicated retirement column called “The Journey” that appears in Tribune newspapers across the United States. She holds a bachelor’s degree and master’s degree from the Medill School of Journalism at Northwestern University. She can be reached via physicianspractice@cmpmedica.com.

This article originally appeared in the January 2010 issue of Physicians Practice.