Association Disability Plans: All That Glitters is Not Gold

Larry Keller

Larry Keller

[Editor's Note:  This is a guest post from Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF, who is no stranger to long-time readers of the blog, having submitted a number of guest posts in the past, especially on disability insurance.  This topic is a frequent one for him, and one I get questions on all the time.  We have no financial relationship.]

Throughout the year, I am asked for my opinion regarding insurance policies sponsored by various medical associations.  After all, they are touted as having “affordable rates”, being “exclusively available”, contain an “Own-Occupation” definition of disability and are “versatile”.  As has been stated on this blog before, you must use extreme caution when dealing with your professional society and your finances. This is especially true when dealing with disability insurance.

While this post will focus on the plan offered by the American Academy of Family Physicians (AAFP), (also see the rate calculator) underwritten by New York Life Insurance Company, the majority of association plans have similar limitations associated with them.

It Is Not Non-Cancelable and Guaranteed Renewable

While New York Life cannot cancel the master policy as long as the Academy continues to endorse the plan and doesn’t offer another similar disability product, the premium rates for the plan are not guaranteed.   Once approved, you can continue your coverage to age 70, as long as you pay all premium contributions when due, you remain at Full-Time Work, the group policy remains in force, and you do not enter active duty in the Armed Forces.  Additionally, benefit amounts are not guaranteed and are subject to change by agreement between New York Life Insurance Company and the AAFP.

The Premium Rates Are Not Guaranteed

The cost is based upon your gender and your initial age when insurance becomes effective.  The cost increases as you grow older and enter a higher age bracket (every 5 years when your age ends in a “0″ or a “5″).  Premium contributions may be changed by New York Life Insurance Company on any premium due date and any date on which benefits are changed.  However, your rates may change only if changed for all others in the same class of insureds under this association-group insurance policy.  For example, a class of insureds is a group of people with all the same issue age, gender, waiting period, tobacco/nicotine use and/or state of residence.

Ideally, you want to purchase a policy that is Non-Cancelable and Guaranteed Renewable to avoid the potential problems described above – especially if you are a young physician with a long career ahead of you.

It Does Not Include an “Own-Occupation” Definition of Disability


“Totally Disabled” means you are completely and continuously unable to perform the material and substantial duties of your profession or occupation for pay or profit due to accidental bodily injury or sickness, provided you are not otherwise working for pay or profit.

Ideally, your policy should state that totally disabled means that, solely due to injury or sickness, you are not able to perform the “material and substantial duties” of Your Occupation (note, it does not include any language related to not working in another occupation).  This means, if you become totally disabled from your regular occupation and choose to work in another occupation, you’ll receive full benefits, regardless of the income you earn from the other occupation.

Remember, at the time of this writing, only six companies offer this definition of total disability to physicians: Berkshire (Guardian), MetLife, MassMutual, Standard Insurance Company, Ameritas (formerly known as Union Central) and Principal.

You Must Be Totally Disabled First Before You Can Collect Residual Disability Benefits

This policy has been designed to encourage you to return to work as soon as you are able. Therefore, if you return to work after having been Totally Disabled for at least 30 consecutive days, and your income-earning capacity has been diminished by as little as 25%, you can receive what are known as residual benefits.  Residual benefits end when your earnings rise to the point that they exceed 75% of your pre-disability income.  Full benefits are payable if your earnings loss is 75% or greater.

In his article “What to Look for in Disability Income policies, Peter C. Katt, CFP®, a fee-only insurance adviser located in West Bloomfield, Michigan, states “Do not buy a disability income policy that has a qualification period.  There are too many diseases that are progressive and have no total disability at the beginning.  Under such circumstances, a qualification period of, say, 30 days would prevent the insured from receiving any residual benefits”.  Ideally, your disability insurance policy should not require that you be totally disabled prior to collecting Residual Disability benefits.

There Is No Recovery Benefit

To be considered disabled, the disability must occur while you are insured under the policy and you must be under the regular care of a licensed physician (other than yourself or immediate family/household member) during the period of disability.

Consider the example of a private practice Family Physician whose income is based solely on the number of patients that he sees.  What if he had been totally disabled and returned to his practice on a full-time basis after one year, performing all of his job duties as before but his patients went elsewhere?  After all, they depended on him for medical advice and disease management but he was not there.  Additionally, referral sources with whom he had built relationships had no choice but to refer patients elsewhere.  Obviously, it would be very difficult to take the business away from the practitioner that had been providing these services during his absence.

As a result, rebuilding his practice and income level might take years.  Without a recovery benefit, he would no longer qualify to collect any benefits at all as he is no longer under the regular care of a physician.  The Recovery Benefit is designed to assist with financial recovery following a disability – even if an insured has recovered and returned to work on a full-time basis.  For a self-employed physician, a Recovery Benefit is extremely important and the AAFP plan does not include one.

Limitations Exist for Claims Related to Mental or Nervous Disorders and “Self-Reported Symptoms”

Under the AAFP plan, benefits will be paid for up to three years for disabilities related to mental or nervous disorders, alcoholism or drug addiction, or Self-Reported Symptoms.  “Self-Reported Symptoms” are defined as the manifestations of a condition which are reported to a physician, but which are not verifiable using tests, procedures, or clinical examinations. Self-Reported Symptoms include but are not limited to: headaches, pain, fatigue, stiffness, soreness, ringing in ears, dizziness, numbness and loss of energy.

In his book, Robbery Without a Gun: Why Your Employer’s Long Term Disability Policy May Be a Sham, attorney Benjamin W. Glass, submits that after a claim with this policy provision included is denied, the carrier will state that “there is no objective evidence that you are in pain” or there is no objective evidence that you are really fatigued.  Therefore, the diagnosis is being made upon your own report of pain or fatigue and, thus, we are going to either not cover this benefit or limit it severely.

Mr. Glass goes on to declare that “there are many well-recognized and documented diagnosable conditions related to pain and/or fatigue.  There are physicians that are experts in their field(s) who make these diagnoses after exhaustive testing.  The fact that there is sometimes not any one test or lab study that can be done to “make the diagnosis” should not be a reason for an insurance company to limit or eliminate benefits”.


Ideally, your policy should not have a limitation for Self-Reported Symptoms.  In fact, no individual disability insurance policy that I have ever seen has this limitation.  As for mental and nervous conditions, some individual policies will cover these types of claims in the same fashion as other disabilities.  Others, however, will limit these claims to a lifetime maximum of 24 months if the primary cause of disability was solely a psychiatric or substance abuse disorder or diagnosis, including, but not limited to, post-traumatic stress syndrome, anxiety, depression, and/or alcohol abuse/addiction. Although many physicians will opt to purchase a policy with the fewest number of restrictions, some may willingly accept this limitation with its attendant cost savings.

There is a “Cap” on the Inflation Protection Option (COLA Rider)

The Inflation Protection Option is designed to increase your benefits while you are disabled to help prevent your dollar’s “buying power” from being eroded by inflation.  If you become disabled prior to age 63, your benefits can increase annually starting on the first anniversary of your Total Disability. Increases are based on the Consumer Price Index for Urban Consumers (CPI-U). The maximum increase is 7.5% a year, with an overall maximum increase of 100% of your original monthly benefit.

In addition, a “catch-up” feature allows disabled members to receive benefit increases in excess of the 7.5% annual maximum if a prior year’s inflation adjustment was less than 7.5%.  Ideally, there should be no “Cap” on the increases to the monthly benefit as a result of the Cost of Living Adjustment (COLA) Rider.

[Editor's Note:  This inflation protection is actually far better than the one in the policy offered by ACEP.]

The Guaranteed Future Purchase Option is Extremely Limited

Under the policy’s Guaranteed Future Purchase Option, you will be offered $100 or $200 (depending on your current monthly benefit amount) of additional monthly benefits at six separate intervals.  You can accept this additional coverage regardless of your health, provided you are at Full-Time Work, your total monthly benefits do not exceed the plan maximum of $10,000 a month, and you make timely premium contributions.  Guaranteed purchase dates are ages 31, 34, 37, 40, 43 and 46.  Most individual policies make increase options available more frequently, in larger amounts (typically a multiple of the initial monthly benefit, not to exceed the specific company’s issue limit), for a longer period of time.

Recurrent Disabilities

If you suffer a recurrence of the same or related disability within three months of returning to Full-Time Work (within 12 months if the disability is due to a mental disorder, drug addiction or alcoholism), your benefits will resume without the need to satisfy a new waiting period.  Depending upon the individual disability insurance carrier, most consider a recurrent disability to be within 6 or 12 months of returning to full-time work, regardless of the cause of disability.

Summary

AAFP says, “Your Academy reviews, analyzes and selects coverage for members and their families based on each policy’s scope of protection and cost compared to other policies available.  We believe them to be the best available and we are pleased to endorse them to our members”.  Really?  As evidenced above, association contracts often contain restrictive definitions of disability, as well as, less-generous contract provisions.  Although initially low in cost, association plans, such as the AAFP disability insurance plan, do not provide the customized benefits that can be achieved by purchasing a high-qualify individual disability insurance policy.

What do you think?  Do you own this policy?  Do you own another “academy-sponsored” policy?  Are you happy with it?  Comment below!

 

 

 

 

 

 

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Comments

Association Disability Plans: All That Glitters is Not Gold — 9 Comments

  1. do you have any info on the policies offered for disability protection and for overhead expense protection offered by the american medical association? thanks.

  2. The AMA plan is very similar to the AAFP Plan. However, it is underwritten by The United States Life Insurance Company in the City of New York. I will follow the same format to explain the limitations associated with it as I did for the AAFP Plan:

    1. It is not Non-Cancelable and Guaranteed Renewable. “As long as you are a physician actively at work, under the age of 75 (not retired), pay your premiums when due, the group policy remains in force, and the AMA continues to sponsor this plan, your coverage can be renewed”.

    2. The premium rates are not guaranteed. “You also cannot be singled out for a rate increase, regardless of how many claims you have made or the changing status of your health. However, rates may be adjusted for the entire group”.

    3. It does not contain an “Own-Occupation” definition of total disability (but it states that it does). “Unlike some other disability plans, this plan contains a preferred definition of disability. If you are unable to perform the duties of “your own medical specialty,” benefits can be payable for up to age 65. It then states that “you can receive a residual benefit if you return to work on a part-time basis in your own specialty or any other specialty or occupation if your monthly income is reduced by at least 20 percent, and you first receive benefits for total disability”.

    4. You must be totally disabled before you can collect total disability benefits.

    5. There is no Recovery Benefit.

    6. Limitations exist for claims related to mental and nervous disorders. “If you are disabled due to mental, nervous or emotional disorders before age 69, benefits under this plan are limited to 24 months. At age 69 and 70, benefits are limited to 18 and 12 months, respectively. (If such disability begins before age 63, benefits are payable up to age 65 if you are confined to a hospital at the end of 2 years and such confinement has been continuous for the immediately preceding 12 months.”)

    7. There is NO COLA Rider available.

    8. There is a limited Future Benefit Increase Option. “If you are under age 40, this option may allow you a future increase in benefits with no health questions or medical exams required if your income increases and you remain actively at work. This one-time option must be exercised within the first three years of your original effective date or before your 40th birthday, whichever comes first.

    Finally, remember, that you do not own the policy. The AMA is the policyholder and you are simply given a certificate showing that you are part of the group.

  3. I understand the above limitations to the state medical associations’ policies through NY Life. I purchased one in addition to an individual policy, and I would have to say that in defense of the association’s plan, it is MUCH less costly than the individual policy (to the tune of < 1/2 of the price for a male 36-40.) Additionally, the best individual policy I could be issued, according to the supposedly impartial broker only pays benefits for 5 years (though it is own occupation, etc.) whereas the association policy pays to age 65.

    Mr. Keller- I'm having a hard time understanding why the definitions you give in your post and comment above differ from "own occupation".

  4. Dr. M-

    You are correct that the initial premium rate for an association plan can easily be 50% less compared to an individual policy. However, not taking any premium increases into consideration other than when your age ends in a “0″ or “5″, over you career, association plans will be more expensive and not as comprehensive (as evidenced by my post) in terms of contractual provisions. This will be covered in detail in one of my upcoming guest posts (part 2 of this one).

    In terms of the definition of total disability, an individual policy that is “Own-Occupation” will pay full benefits if you are unable to perform the materail and substantial duties of your medical specialty.

    For example, you are a Family Practice physician and are diagnosed with Tinnitus and can no longer effectively see patients (unable to listen to them during consultations without being distracted or use a stethoscope to help in terms of an accurate diagnosis), you would be considered to be totaly disabled and would collect full benefits under the terms of your policy – regardless of you ability to work in another occupation or the income that you earn in another occupation.

    Under most association plans, using the same example, if you entered another profession (did chart reviews, became an expert witness, started a finacial blog for physicians, etc), depending upon your earnings, your monthly benefit would be reduced or eliminated entirely.

    In your situation, with the underwriting being more liberal in an association plan compared to an individual policy, having benefits to age 65 is a big benefit compared to only 5 years and a good reason to layer association coverage on top of an individual policy with limited benefits.

    That being said, depending upon when you purchased your coverage, you might want to have your agent review your medical history with the underwriters. Insurance companies are constantly updating the way that they view certain medical conditions and in some areas, things have been liberalized.

    For example, someone that was seeing a Psychiatrist that has been taking an SSRI for years, would typically qualify for a policy with a 5-Year benefit period, exclusion rider for mental and nervous conditions and not have the ability to increase their coverage in the future regardless of their health. Today, that same person may now qualify for a policy with benefits payable to age 65 (with the other limitations that I mentioned).

    Hope this helps clear things up.

  5. The AAD (American Academy of Dermatology) plans are very similar to the AMA Plan and is also underwritten by The United States Life Insurance Company in the City of New York. Two plans are available, however, I will focus on plan one which pays benefits to the age of 65 (Plan 2 only pays benefits for 24 months). Benefits up to $10,000 a month (in $100 increments) are available.

    I will follow the same format to explain the limitations associated with it as I did for the AMA and AAFP Plans:

    1. It is not Non-Cancelable and Guaranteed Renewable. “the group policy ends, the date insurance ends for your class, the end of the period for which the last premium has been paid for you, the date you attain age 70, the date you cease to be actively at work for reasons other than disability, the date you
    cease to be a member in good standing with AAD, or the date you are no longer a resident of the United States,or have been on foreign travel for longer than 3 months”.

    2. The premium rates are not guaranteed. “Premiums increase on the premium due date occurring on or following the date you enter a new age category”. This is when your age ends in a “0″ or “5″.

    3. It does not contain an “Own-Occupation” definition of total disability. “total disability means during the waiting period and next 60 months, your complete inability to perform the material duties of your regular job. “Your regular job” is that which you were performing on the day
    before total disability began. After such 60 months, total disability means your complete inability to perform the material duties of any gainful job for which you are reasonably fit by training, education or experience.”

    4. You must be totally disabled before you can collect residual disability benefits. “If you become residually disabled within 31 days after
    a period of total disability for which monthly benefits are payable, the insurance company will pay residual benefits.”

    Partial Disability Benefits are available with Plan 1. This states that “you do not have to be totally disabled before receiving a partial disability benefit. If you return to work and you are not able to perform the material duties of your regular job but you are able to perform at least one of these duties on a part-time basis, or at least one, but not all, of these duties on a full-time basis, you may receive a monthly partial disability benefit equal to 50% of the monthly benefit that would be payable to you if you were totally disabled”. Notice that the partial disability benefit is limited to 50% of the monthly benefit for total disability.

    Talk about being stuck between a rock and a hard place. Either option has some type of limitation associated with it.

    5. There is no traditional Recovery Benefit but there is a limited Rehabilitative Employment benefit which “prepares a disabled person to return to the workplace and may include items such as vocational testing and training, work-place modification, prosthesis and job placement. Any program of rehabilitative employment must be pre-approved in writing by the insurance company. If an insured person accepts Rehabilitative Employment, while totally or partially disabled, the insurance company will continue to
    pay a monthly benefit amount for a period not to exceed 60 months. The monthly benefit payable will be the total disability monthly benefit amount less 50% of any income received from Rehabilitative Employment, not to exceed 100% of the insured person’s basic monthly pay”.

    6. Limitations exist for claims related to mental and nervous disorders. “limited monthly benefits will be paid for disability due to alcoholism, drug addiction and mental, nervous or emotional disorders. If total disability is due to alcoholism, drug addiction or a mental, nervous or emotional disorder, the maximum payment period while such disability continues will be limited to the earlier of 24 months, or to age 65.”

    7. There is NO COLA Rider available.

    8. There is no Future Increase Option available.

    Finally, remember, that you do not own the policy. The AAD is the policyholder and you are simply given a certificate showing that you are part of the group. AAD disability plans not available in Alaska, Colorado, Louisiana, Maryland, New Hampshire, Oregon, South Dakota, and Utah.

  6. Is there a pre-existing illness clause for the AAFP policy? My current policy states than any illness within 12 months of the effective date of the policy would be considered pre-existing and not covered.

  7. A potential client asked me to review the American Academy of Ophthalmology plan for him. For the benefit of WCI readers, I figured that I would include it here as well.

    The AAO (American Academy of Ophthalmology) plans are very similar to any other association LTD plan. However, this one is is underwritten by New York Life Insurance Company. Two plans are available, however, I will focus on the “Career Plan”. The Two-Year Plan only pays benefits for 2 Years). Benefits up to $10,000 a month (in $100 increments) are available. The Two-Year Plan limits monthly benefits to a maximum of $4,000.

    I will follow the same format to explain the limitations associated with it as I did for the AMA and AAFP Plans:

    1. It is not Non-Cancelable and Guaranteed Renewable. “Your insurance can remain in force until you reach age 70. Coverage will end earlier if: you cease to be a member of the American Academy of Ophthalmology; you fail to make premium payments when due; you begin full-time active duty in the Armed Forces; you cease FULL-TIME WORK (other than for disability); or the group policy is terminated or modified by the Trustees or New York Life to end coverage for the group of insureds to which you belong”.

    2. The premium rates are not guaranteed. “Premiums increase on the premium due date occurring on or following the date you enter a new age category”. This is when your age ends in a “0″ or “5″.

    The premium contributions reflect the current rate and benefit structure. Benefit option amounts are not guaranteed and are subject to chance by agreement between New York Life and the Trustees of the Ophthalmologists Insurance Trust. Premium contributions may be changed by New York Life Insurance Company on any premium due date and any date on which benefits are changed. However, your rates may change only if they are changed for all others in the same class of insureds. For example, a class of insureds is a group of people with the same issue age.

    3. It does not contain an “Own-Occupation” definition of total disability. However, the plan states that its “Preferred Definition of Disability Protects You as a Specialist in Ophthalmology”. It then goes on to state that “Totally Disabled” is defined in the group policy as your being prevented by accident or sickness from performing the material and substantial duties of your regular occupation, as a specialist in ophthalmology, provided: (a) ophthalmology was your primary occupation at the time of disability, and (b) you are not otherwise working (at any occupation) for pay or profit.

    Residual Benefits are built into the plan. This states that “If you return to work after a Total Disability that began before age 64, and which lasted for at least 30 consecutive days, you may be eligible for a Residual Benefit, provided your current average earnings do not exceed 75 percent of AVERAGE MONTHLY INCOME for the period before your accident. The benefit payable is a percentage of your Monthly Benefit Option equal to the percentage reduction in your monthly earnings. (See the Certificate of Insurance for conditions and limitations.)

    5. There is no traditional Recovery Benefit. Therefore, if one returns to their practice working on a full-time basis with no loss of time or duties but still has a loss of income (their patients went elsewhere or referral sources dried up), no benefits would be paid. Most individual policies have provisions in their policies (if not built into the policy available as a rider).

    6. Limitations exist for claims related to mental and nervous disorders. “This Plan limits benefits for disability due to Mental Illness and Chemical Dependency to a maximum of 24 monthly benefit payments.”

    7. Limitations exist for claims outside of the United States, Canada or the Virgin Islands. “No more than six monthly benefits will be paid if you are outside the U.S. when these benefits are payable”.

    8. There is no Future Increase Option available.

    When might this plan work well?

    If a potential purchaser works less than 30 hours a week (and, as a result, traditional carriers will not allow them to purchase individual coverage), “FULL–TIME WORK” under this plan means “the active performance of regular duties of your normal occupation for pay or profit on the basis of at least 20 hours per week at the place where such duties are normally performed”.

    Finally, keep in mind that, Members of the Academy who are under age 64 and at FULL–TIME WORK can request this coverage, provided they reside in the United States (except TN, VT, WA, and territories), Puerto Rico or Canada (except Quebec) and have an ANNUAL NET EARNED INCOME of at least $20,000. Members on active duty in the Armed Forces and full–time students are not eligible.

  8. Larry, any feedback on AICPA (American Institute of Certified Public Accountants) life and disability plans? The website is http://www.cpai.com and contains rates and types of insurance. It’s administered by Prudential. My life insurance continues as long as I pay the premiums (is not one of their term policies) and maintain my membership in AICPA. Both life and disability provide annual cash refunds as the claims end up being less than premiums. I have consistently been receiving refunds annually. Thanks so much for looking into this!

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