Jannette Collins MD, MEd, FACR

Ensure You’re Most Assuredly Insured: Home, Auto, and Extended Warranties

September 21, 2020 14 minute readFinance,Insurance

It is generally agreed that insurance is not exactly the most palatable way to spend your money. After all, you’re regularly paying for a product you don’t want to ever actually have to use. From one perspective, one might view it as sort of a rigged system. 

Insurance companies usually pay out less in claims than they receive in premiums, so insurance buyers collectively lose money.  No one likes to lose money, but no one likes to face financial catastrophe, either.  That’s what insurance is meant to protect against.  Major financial risks.  For most people, that would include loss of a home, for example.  Ultimately, this is the big picture perspective—and why being knowledgeable about insurance is so important.   Insurance is not a luxury; it’s a necessity. 

If you’ve been on the edge of your seat in anticipation for the finale in this series on insurance (see the first three parts here, here, and here), sit back, relax, and enjoy the read. The insurance featured in this post? Home, auto, and extended warranties. A topic trifecta. 

I’ll cover some critical things to know about these insurance products, and (bonus!!) offer suggestions and personal tips (from my own experience) on investing in the types of protection you need at the right price.

Homeowners insurance

(This contemporary stunner is what would be classified as a “Frank Lloyd Wright meets Malibu Barbie Dream House” style home.)

If you're getting a mortgage for your new home, your lender will require homeowners insurance. And even if you're among the lucky 22% of home buyers purchasing without a mortgage, you still should get homeowners insurance to protect against costly perils like fire and wind damage.  

You may be wondering: at what point during the homebuying process should you begin shopping for homeowners insurance? How much coverage should you get, and which features should you choose? Where the heck do you even start? 

Not to worry! I shall address these and other common questions below.  

Where and when to start?

Although you don't actually own the home before your closing, mortgage companies typically want evidence of insurance—also called a binder—a few days before the closing.  

I suggest starting with an independent agent who can compare premiums and isn’t beholden to just one company.  If you shop early, you also give the insurer more time to “underwrite” your home—that is, to determine the appropriate level of coverage. That’s particularly important if your home has lots of unusual or costly details, like woodwork made of a rare species or a fancy built-in sound system. 

How much coverage do you need?  

Don't assume you have to cover your home at its market value or its tax appraisal value or even the value of your mortgage loan. The number that a homeowners insurance company is interested in is how much it would cost to rebuild your home tomorrow. That amount doesn't include the price of your land, so in many cases the insurable amount will be lower than the home price.  Typically, a home that's completely destroyed by, say, a tornado may still have its foundation intact.  The insurance company will look at online real estate listings and other available data to come up with the amount of coverage, and/or it will send an appraiser directly to the house. 

The purpose of homeowners insurance is to cover large catastrophic losses.  It shouldn’t be thought of as a maintenance policy.

When should you file a claim?

The purpose of homeowners insurance is to cover large catastrophic losses.  It shouldn’t be thought of  as a maintenance policy.  Claim frequency and severity of the claim play a considerable role in determining rates, especially if there's more than one claim relating to the same issue like water damage, wind storms, etc.

The amount of the deductible you choose is also a factor in the claims that you may potentially file. The higher the deductible, the more out of pocket you have to pay. Also, the higher the deductible, the lower your annual premiums.

I suggest going as high as you can handle with your savings—say $2,500—and file only when something happens in your home that’s more expensive than that.  

What’s covered?

Not everything. For instance, water damage from a pipe or other system that breaks inside the house is covered, but water coming from the outside will not be (e.g., if your home is flooded because a lawn sprinkler broke or was left on).  In general, events that are preventable by reasonable home maintenance—mold, pest infestations, leaks from roofs worn by wear and tear—aren’t covered.  

You may need to buy separate coverage for perils that a standard homeowners policy doesn't cover.  Keep in mind that some perils, such as liability coverage for dog bites from breeds such as pit bulls and Rottweilers, may not be insurable at all.  For jewelry, furs, and fine art, you can buy a separate policy that covers accidental loss.  Consider business insurance if you run a business out of your home, even as a renter. Work with your agent to buy separate flood and earthquake protection. You may need a separate hurricane or windstorm policy, with a separate deductible, if you live in a high-risk zone.

Sewer backup coverage, to address a blockage in your sewer line, costs around $40 to $100 a year. Flood insurance costs, on average, around $700 a year but can be purchased for far less in a low-to moderate-risk area and may be much higher in high-risk areas.

What if you rent a home?

Your landlord’s policy insures only the rental unit itself, not your belongings in it.  If the value of your possessions is substantial, consider rental insurance, which on average costs $15 to $20 per month. It also covers you for liability (do you own a dog with a dangerous reputation?).

How much does your credit score matter?

Your credit score matters quite significantly. Insurance companies will use any means necessary to determine the probability of risk.  Around 95% of auto insurers and 85% of home insurers use “credit-based insurance scores” in states they are legally allowed to when determining your underwriting risk (the practice isn't allowed in California, Maryland, or Massachusetts).  Why do they do this?  Because actuarial studies show that a person's financial affairs are a good indicator of whether that person will file an insurance claim. A 2017 study found a substantial increase in premiums for people with lower credit scores.  

What about ‘Personal Liability for Damage or Injuries’?

Liability coverage protects you from lawsuits filed by others. This clause even includes your pets! So, if your dog bites your neighbor, no matter if the bite occurs at your place or hers, your insurer will pay her medical expenses. While policies can offer as little as $100,000 of coverage, experts recommend having at least $300,000 worth of coverage, according to the Insurance Information Institute. For extra protection, a few hundred dollars more in premiums can buy you an extra $1 million or more through an umbrella policy (see below).

Is it worth comparison shopping?  

Compare insurance costs by shopping around every couple of years to see whether you can get a better premium from a different insurer. Over half of people who change companies do so because switching saved money.  

Are there any tricks to help cut premium costs?

Yes. There are several ways to cut the cost of premiums:

Maintain a security system

A burglar alarm monitored by a central station or tied directly to a local police station can lower your annual premiums by as much as 5% or more.  Smoke alarms are another biggie. While standard in most modern houses, installing them in older homes can save the homeowner 10% or more in annual premiums. CO2 detectors, dead-bolt locks, sprinkler systems and in some cases even weatherproofing can also help.

When you choose a deductible, you’re picking a number you’re willing to spend out of pocket if you suffer a loss. 

Raise your deductible

Like health insurance or car insurance, the higher the deductible you choose, the lower the annual premiums. You can shave hundreds of dollars off your annual homeowners insurance bill by increasing your deductible.  I don’t just mean going from $500 to $1,000. Think big. $2,500. Already have a $2,500 deductible? Then think bigger. $5,000. $10,000. Or really big. If you have a $5,000,000 home, you might even consider a deductible of $100,000.  

When you choose a deductible, you’re picking a number you’re willing to spend out of pocket if you suffer a loss. It should certainly cover what you think of as run-of-the-mill outlays (when calling the insurer would be more of a hassle than writing a check to the repairman). But if you’re comfortable with laying out even more at the time of a loss, over time you can really save money on premiums.

How much might you save with a bigger deductible? While a typical homeowners insurance policy deductible is $500 or $1,000, you might save $300 a year by going to a $2,500 deductible or $600 a year by going to a $5,000 deductible.  On a house insured for $1 million with a $2,500 deductible, you might save $1,000 a year by going to a $10,000 deductible.

Look for multiple policy discounts 

Many insurance companies give a discount of 10% or more to customers who maintain other insurance contracts with them (such as auto or health insurance). 

Do you really want that pool?

Items such as pools and/or other potentially injurious devices (like trampolines) can drive the annual insurance costs up by 10% or more.

Pay off your mortgage

Obviously this is easier said than done, but homeowners who own their residences outright will most likely see their premiums drop. Why? The insurance company figures if a place is 100% yours, you'll take better care of it.  Note: this must vary from company to company because when I paid off my mortgage I did not get a break on my premium.

Make regular policy reviews and comparisons

No matter what initial price you're quoted, you'll want to do a little comparison shopping.  Get at least a few quotes.  And even after purchasing a policy, I recommend that you comparison shop again at least once every year or two. This should include a review of your existing policy, noting any changes that have occurred that could lower your premiums.  Once they have your business, insurance companies don’t want to lose it (often offering to lower your premium or deductible for your loyalty).  Use comparison quotes as a negotiating tool.   

Personal tips

Since I’ve started looking closely at my home, auto, umbrella, and personal property insurance policies over the last several years, I’ve developed a better understanding of what is covered and the cost differentials for different levels of coverage.  It takes time to read the fine print and shop around, but every year it becomes easier and takes less time.  Knowledge takes the mystery out of it.  I use an independent insurance agent, who has been very responsive to my needs, but I know that no one will look out for my best interests as much as I will.  It’s impossible for an agent to know about all the changes that occur in my life.  

For example, my husband and I wanted to buy a house on the same street, 5 houses down from where we were living.  We had gotten tired of clearing a sloped driveway in the Wisconsin winter.  We liked the new house with a flat driveway that got a lot of sun.  There were other things we liked better about the new house too, but the driveway was the big one.  We managed to buy the new house for a good price and moved before the old house was sold.   

I was surprised when the homeowners insurance premium for the old house went UP by $200 even though we were no longer living there.  That’s when I learned about personal property coverage, which my agent defined as “If you were to pick up your house, turn it upside down and shake it, whatever falls out is personal property - clothing, furniture, kitchenware, household goods, etc. - whatever isn’t permanently attached to the studs."  She told me that the limit of that coverage is automatically 75% of the limit for which the home itself is insured.  I had no idea!  My husband and I don’t furnish our home expensively and didn’t think the value of our property came close to the number that was 75% of our home’s insured value.  Certainly not in the home we’d moved out of, where we no longer had any furniture.  We immediately dropped our personal property coverage to 10% on the old house and to 50% on our new house.

My agent also told me that the “standard” deductible for homes valued under $1,000,000 was $1,000.  I figured I could pay more than that out-of-pocket and asked how much I could save on premium costs by increasing the deductible.  I wound up increasing my deductible to $2,500 and saved $156/year on my premium.  I’m considering increasing my deductible to $5,000, although it may or not not be worth doing so if it doesn’t reduce the premium by a significant amount.

I also asked about flood insurance and learned that the maximum you can purchase from the federal government on a Primary Flood Policy is $250,000 on the dwelling and $100,000 on personal property.  This would have cost me $499.  If I wanted higher limits, I would have to purchase an Excess Flood Policy, both of which would cost around $1,300/year.  I live in an area where the risk of flood is about as low as it gets, so I decided not to get flood insurance.  I am covered for sprinkler flood or water backup.  

My homeowners premium is reduced because of the following: alarm credit, deductible credit, home new purchase discount, insurance score credit, mature homeowner discount, package credit, preferred risk (no losses in 6 years), and superior risk credit.  

Umbrella policy

An umbrella insurance policy is extra liability insurance coverage that goes beyond the limits of the insured's homeowners or auto insurance.  It provides an additional layer of security to those who are at risk of being sued for damages to other people's property or injuries caused to others in an accident. It also protects against libel, vandalism, slander, and invasion of privacy.

If a policyholder is sued for damages that exceed the liability limits of car insurance, homeowners insurance, or other coverage types, an umbrella policy helps pay what they owe. For example, if you run a red light and accidentally hit another car, there might be significant damage to the vehicle and several people might be injured.  If car repairs total $50,000 and the treatment of the injuries eclipses $500,000, you may be liable for expenses that go far beyond the coverage limits of your insurance. An umbrella insurance policy will pick up the additional liability costs beyond the limits of your car insurance coverage.

The added coverage provided by an umbrella insurance policy is most useful to high net worth individuals, such as radiologists, who own a lot of assets or very expensive assets and are at a significant risk of being sued. Or they may own dangerous things that can cause injury (swimming pools, trampolines, dogs, etc.). They might also engage in activities that increase their chances of lawsuits, such as being a landlord, coaching kids’ sports, or participating in sports where they could easily injure others (e.g., skiing, surfing, hunting).  Small businesses also use an umbrella insurance policy to guard against potential monetary damages arising due to claims made against them. 

The average annual cost of a $1,000,000 personal umbrella insurance policy is $150 to $300.  I pay $484 for a $5,000,000 policy.  I don’t know that there is a “standard” amount of coverage that radiologists should have, but have seen recommendations that are generally between $1M to $5M.  

Depending on the provider, the policyholder who wants to add an umbrella insurance policy is required to have a base insurance coverage of $150,000 to $250,000 for auto insurance and $250,000 to $300,000 for homeowners insurance.  

Auto insurance

Vrooom. Now we get to the part about cars! Or trucks. Or your motorcycle. Auto insurance is a policy purchased by vehicle owners to mitigate costs associated with getting into an auto accident. The premiums vary depending on age, gender, years of driving experience, accident and moving violation history, amount of coverage, and other factors. You can reduce your premiums by agreeing to take on more risk, which means increasing your deductible.  

Most U.S. states require basic personal auto insurance, and laws vary from state to state. If you are financing a car, your lender may stipulate requirements. Nearly every state requires car owners to carry:

• Bodily injury liability – covers costs associated with injuries or death that you or another driver causes while driving your car
• Property damage liability – reimburses others for damage that you or another driver operating your car causes to another vehicle or other property

Many states also require:

• Medical payments or personal injury protection (PIP) – provides reimbursement for medical expenses for injuries to you or your passengers; it will also cover lost wages and other related expenses
• Uninsured motorist coverage – reimburses you when an accident is caused by a driver who does not have auto insurance

An auto insurance policy will cover you and other family members on the policy, whether driving your car or someone else’s car (with their permission). Your policy also provides coverage to someone who is not on your policy and is driving your car with your consent.

Personal auto insurance only covers personal driving. It will not provide coverage if you use your car for commercial purposes—such as making deliveries. Neither will it provide coverage if you use your car to work for ride-sharing services such as Uber or Lyft. Some auto insurers now offer supplemental insurance products (at additional cost) that extend coverage for vehicle owners that provide ride-sharing services. 

Personal tips

When the premium was greater than 10% of the value of my husband’s car, we cancelled collision and comprehensive coverage, saving over $200/year.  His Ford Explorer had a retail value of $2,900 and the insurance would have only paid out $1,500-$2,500.  I also cancelled auto towing and medical coverage on my auto insurance (covering other people in my car, not lawsuits), two things that are automatically “recommended”, which I didn’t think I needed.

Extended warranties (like for your iPhone!)

What about minor financial risks, like your iPhone shattering on the pavement, or the washing machine going kaput?  Because insurance will usually be a money loser, I don’t want to pay premiums to protect against risks I can easily pay for out of pocket.  

Extended warranties are a type of insurance that covers what I would consider “minor risks.”  Every time I buy an appliance, automobile, or phone, the salesperson tries to sell me an extended warranty.  They usually don’t cost much but I know there’s very little chance I will ever need it so I don’t buy it.  And I’m in a position where I can buy a new phone with cash.  

While it may sound like a good idea in theory, extended car warranties often come with a high price tag (thousands of dollars) and don’t necessarily cover everything that could go wrong.  Plus, many people who buy extended warranties never use them. In that case, an extended warranty becomes a cost with no financial return. According to a Consumer Reports survey, 55% of respondents who bought an extended warranty didn’t use it and only a quarter of survey participants said they’d buy one again.  And the cost for repairs among respondents who used their warranty was typically less than the cost of the warranty. Here are other “cons” of buying an extended car warranty:

• Overlap: If the coverage period of the extended warranty overlaps with the manufacturer’s warranty, you may pay for a warranty you’re already getting at no cost. And with a new car, the extended warranty likely will not be in effect until the manufacturer’s warranty expires.
• Coverage: Extended warranties typically don’t cover everything that might go wrong with your car. 
• Service requirements: You may only be allowed to have your car fixed at certain repair facilities.
• Depreciation clauses: Some extended warranties may only pay for a portion of the cost to repair or replace parts that need to be fixed, based on the car’s mileage.
• Reliability: Under most extended warranties, either the dealer, manufacturer or an independent third party is responsible for paying for repairs. If the entity that’s supposed to pay the bills goes out of business, you may be stuck with a warranty you can’t use.

Personal tip

One type of “extra” insurance that I have bought is travel insurance.  Several years ago, my husband and I plunked down $10,000 for a cross-country bicycle tour.  It was the trip of a lifetime.  We were going to ride our bikes over 3,000 miles in 34 days.  We spent months preparing by riding 100 miles a day or more on our bikes.  

The trip was going great until my knee started to hurt from an overuse injury.  I kept riding (foolishly thinking that continuing to stress my knee would make it better) until the guides had to drag me off the pavement into the van (okay, that’s a bit of hyperbole, but just a bit).  My knee had swollen to the size of a grapefruit and after riding 800 miles along the Pacific Coast highway, through Nevada, Utah, and Colorado to the Grand Canyon, I had to fly back home for a knee MRI and physical therapy.  Fortunately, I had travel insurance, and it kicked in immediately.  A pediatrician on the tour was kind enough to examine my knee and fill out my insurance paperwork. I was refunded for all the trip days my husband and I couldn’t finish as well as first class plane fare back home.  I wasn’t the only person who suffered an injury during the trip and had to abandon.  If you pay a lot of money in advance for a trip and there is a risk of injury or illness (elderly people tend to need to cancel trips for medical reasons, for example), travel insurance may make sense.  

Final remarks

You did it! You just finished reading my 4th installment on insurance!  A note: if you missed any of them, you might want to go back to the last three posts to learn about other types of insurance (e.g., malpractice, life, disability, health, and long-term care). 

It takes some time and effort to learn about the ins and outs of each type, but you should consider it a life-long investment.  Once you’ve mastered the basics, you will be in a better position to make sure that going forward you get what you need, and only what you need, at a reasonable price.  

by Jannette Collins MD, MEd, FACR

Buying Disability Insurance: The Biggest Mistake You Never Made

September 8, 2020 12 minute readFinance,Insurance

A full post devoted to the topic of disability insurance might sound a little extreme to some; you may be dismissive about the idea of buying disability insurance coverage. At one point in time, I would’ve thought the same thing. 

I have to admit that I didn’t know much about disability insurance as a student, resident, or even for a long time as a practicing radiologist.  Luckily, my naivety wasn’t tested.  I never suffered a disability that prevented me from working.  I’m now at a point in my career when I don’t rely on earned income to pay my bills so I don’t need disability insurance.  But you may not be in my situation now and you may not be as lucky as I was.  

Sure, disability insurance is costly.  And the average radiologist will not benefit from paying for that insurance, except for the benefit of peace of mind.  Some will benefit greatly when tragedy befalls them and their insurance kicks in.  And some, unfortunately, will regret not having insurance when they become disabled and face financial catastrophe.  

That is why I’m devoting a full post to the subject of disability insurance. I’ll help you become more informed by providing an overview, including why you should consider it a necessary investment to protect your future, different types of plans and coverage options, as well as other essential questions and practicalities.    

Hopefully, such misfortune will never befall you, but if it does, investing in disability insurance may be the biggest mistake you never made

For most radiologists, their human capital (i.e., the economic value of their experience and skills) is their most valuable asset and greatest source of wealth.

Words on the “why”

A full-time radiologist earns, on average, just over $400,000.  Multiply that figure, along with adjustments for salary increases (one can only hope) over a career of 30 years and you’re looking at a big pot of gold.  For most radiologists, their human capital (i.e., the economic value of their experience and skills) is their most valuable asset and greatest source of wealth.  It’s worth insuring.  

Major takeaway: Don’t be penny wise and pound foolish

Radiologists often pay attention to life insurance needs but fail to consider the possibility of a debilitating incident. The chance of missing months or years of work because of an injury or illness may seem remote, especially to a young healthy radiologist who doesn’t see much risk from sitting in front of a monitor interpreting images. But the statistics tell a different story. 

Fact: a professional has a greater statistical probability of suffering a severe disability that impedes their ability to work than of dying prematurely.  

Fact: more than one in four 20-year-olds will experience a disability for 90 days or more before they reach age 67.

Fiction: you can rely on the government’s disability program to offer sufficient assistance to see you through a difficult time.

Don’t think Social Security’s disability program will protect you.  Social Security requires you not only to have a disability that’s expected to last more than a year, but also the disability must prevent you from all work.  If you’re able to work just a few hours a week or you’re expected to recover within 12 months, you won’t qualify.  More than half of applicants get denied. And even if you do qualify, it could take a year or more to get approved.   Furthermore, the estimated average Social Security disability benefit amount for a disabled worker receiving Social Security Disability Insurance (SSDI) as of Nov. 2019 was just $1,237 per month.  Finally, SSDI pays benefits to you and certain members of your family only if you are "insured," meaning that you worked long enough and paid Social Security taxes.

Think disability doesn’t happen to radiologists?  Here is a sampling of conditions that I’m personally aware of as affecting a student, resident, fellow, or practicing radiologist’s ability to work:

Traumatic brain injury, ruptured brain aneurysm and stroke, near-drowning, autoimmune disorder with associated cognitive fatigue and “brain fog”, leukemia/other cancers, heart attack, depression, burn out, Parkinson disease, pregnancy-related complications, diabetes, drug addiction, debilitating back pain, and interstitial lung disease.

Note that several of those conditions are common in young individuals.  And that’s just a list of what I’ve personally come across.

Major takeaway: yes, it really can happen to you; you just never know in life

When should you get disability insurance?

James Turner, MD, who blogs for The Physician Philosopher, tells his story of regret regarding the purchasing of disability insurance.  When he was a third-year medical student and his first child was born, he met with an insurance agent (the brother of a friend) to ask about life insurance.  The agent said that was a good idea and also recommended he get disability insurance.  James trusted the agent and applied for a DI policy.  His application was denied because he had an essential tremor.  He didn’t think it was a big deal until he was a resident and found out about the great “guaranteed” policy offered by the hospital, with no medical exam and no medical history taking.  But there was one stipulation: the insurance was not offered to anyone who had previously been denied DI.  To this day, he does not have personal DI because “an insurance agent was trying to earn a commission off of him when that agent should have known that a guaranteed policy would be available to him just 14 months later that didn’t require an exam or medical history.”  

If you have a pre-existing medical condition that would preclude you from getting DI, you might want to wait until you are a resident to apply for DI.  Fortunately for James, who is now a practicing radiologist, his employer’s group disability insurance covers 60% of his base salary.  After tax, that’s about $10,000 per month.  But he has no individual DI policy on top of that.  He describes his real disability insurance plan (If you’re curious, yes he applied for individual DI again with a different company, and was denied again) is to live within his means and to make sure his monthly expenses never go north of $10,000 per month.  However,I’m assuming this means that if he leaves his current employer he would NOT take that group insurance policy with him (although in some cases you can take a group plan with you if you take on the full cost of the premium, including any portion that the group paid for you).  

The disparity between your residency paychecks and your post-residency ones puts your long-term financial health at a unique risk. If you become too ill or injured to work before you reach peak earning potential, you’ll still have to pay back the lender that bankrolled your medical school education.  The lender will not care that you are disabled.

Most residents are offered disability insurance through their employer.  A 2016 survey showed that residents were offered long-term disability insurance that was fully paid (70.9%), cost shared (17.6%), available but not paid by the institutions (9.3%), or not offered (2.2%).  

Group vs. individual plans

Disability insurance can be purchased on an individual or group basis.  Individual insurance plans are typically purchased through a local insurance agent and, in some cases, can now be purchased over the phone or through a company’s website. Most insurance companies will issue disability insurance coverage equal to approximately 60% of earned income. 

Group insurance is usually provided by an employer or purchased individually through a sponsoring professional association. The two main benefits of a group policy is that they cost less than individual policies (perhaps ¼ the cost) and they are easier to qualify for.  Most radiologists will qualify for a group policy because it usually doesn’t require underwriting (i.e., no medical exam).  Getting cheap group insurance through an employer is a no-brainer.  But relying on this alone can be risky.  Group insurance doesn’t automatically go with you when you change employers. 

When I worked in the Department of Radiology at the University of Wisconsin I had good group coverage (although I admit I didn’t know much about it until I looked into it several years after leaving).  At UW, radiologists get paid from two sources: the University and the UW Medical Foundation.  For most, the largest portion comes from the UWMF.  The  DI through the university (to cover university income) is called Income Continuation.  The UWMF portion of salary is covered through a group disability program, which is “own occupation” covering 66 ⅔ of salary.  I was lucky to have good coverage, but I don’t advocate luck as a strategy for financial and professional success.  I suggest you do what I should have done, and that is to learn about the DI offered through your employer before you accept the job and sign the contract.  

There are several advantages to having an individual plan.  They’re portable, meaning you get to keep the coverage if you change employers.  Conversely, employer-paid coverage ends when you leave the company (although you might be able to take the coverage with you if you pay the full premium, including the portion paid by the employer).  And with individual plans you get to choose among the available plan options you want to pay for.  Group policies, on the other hand, are “one-size fits all.”  

Buying your own policy also lets you:

• Control the disability insurance. The coverage stays intact as long as you pay for it. But employer-sponsored coverage will end if the employer decides to stop providing disability benefits.
• Collect benefits tax-free if you become disabled. If the employer pays for the coverage, you must pay taxes on the benefits.

The annual price for a long-term disability insurance policy generally ranges from 1% to 3% of your annual income. A variety of factors affect the cost:

• Your age and health. You’ll pay more the older you are and the more health problems you have.
• Your gender.  Disability insurance generally costs more for women than men because women tend to file more claims.  Therefore, men should generally buy a “gender-specific” policy and women should generally buy a “unisex” policy whenever possible.
• Whether you smoke. You pay less if you don’t smoke.
• Your occupation. You’ll pay more if you work in a job with a high risk of injuries (e.g., rock climbing).
• The definition of disability.  This is probably the most important part of any DI policy.  The strongest definition is one that states if you cannot work in your chosen occupation (i.e., as a radiologist, or an interventional radiologist) that the policy will pay out its full amount.  Specialty-specific, own occupation - that’s what you want.  The broader the definition of disability, the higher the premium. A policy that covers you if you can’t work in your own occupation but could earn income in a lower-paying job will cost more than a policy that covers you only if you can’t work at all. 
• Length of waiting period. This is known as the elimination period. You can reduce the premium by increasing the waiting period before benefits kick in.
• Your income. The more income you have to protect, the more you’ll pay for coverage.
• Length of benefits. The longer the period that the policy promises to pay out if you become disabled, the more you’ll pay in premiums.
• Extra features. Additional features, such as cost-of-living adjustments to protect against inflation, will increase the premium.

There are various “riders” that can be tacked on to an individual DI policy, each usually accompanied by an increase in the premium.  Therefore, you should choose only those riders that are important to you and relevant to your personal circumstances.  For example, many riders will not be relevant to radiologists who are close to retirement.

Here are various riders that companies offer:

Guaranteed renewable

Guarantees that the insurance company can never cancel your policy as long as you continue to pay the premiums.  This is a good one!

Automatic increase benefit

Increases your monthly benefit for the first four to five years you own the policy, with no additional underwriting, to cover normal pay increases without any underwriting needed to justify the increase. 

Presumptive total disability

Pays out the full benefit immediately if you lose sight in both eyes, hearing, speech, or the use of at least two limbs, regardless of the elimination period (how long you must be disabled before you receive the benefit) or whether or not you’re working.

Family care benefit

Pays out the full benefit of your policy if you take time off of work to care for a loved one.

Survivor benefit or death benefit

Pays compensation to your beneficiary if you die while on a disability claim. An alternative to this is to make sure you have enough life insurance.

Good health benefit

Reduces the elimination period by two days each consecutive year you go without a claim.

Occupational rehabilitation

Helps pay for vocational training after a disability to help you return to work. This can be especially valuable if you have an own-occupation policy, since you can collect the benefit while still working another job.

Own occupation

Changes the qualification of a claim so it’s specific to your occupation (if you can do another job, you would still get the benefit). There are several different definitions of “disabled” when it comes to own-occupation policies but it’s one of the most important aspects to a policy. Specialty-specific, own occupation is what you want!

Non-cancelable

Guarantees the premium and prevents the insurance company from changing the price you pay. This is a good one!

Partial or residual disability benefit

Pays a benefit if you are still working in your own occupation, but experience a loss of income due to a decrease in hours or productivity. Radiologists whose earnings are predominantly based on productivity (e.g., work RVUs) might want to consider this benefit.

Most residents and fellows are limited (by insurance company policy and what they’re able to afford) to buying less benefit than they want to live on for the rest of their lives.  For them it makes sense to buy a future option rider.

Future purchase option

Lets you increase your coverage in the future with no evidence of medical insurability (i.e., you won’t have to go through the underwriting process again). Anyone who expects their income to increase should consider this rider, which essentially "locks in" your insurability. This means no matter what happens to you medically, you can buy more coverage if your income goes up. This is particularly relevant to residents.  Most residents and fellows are limited (by insurance company policy and what they’re able to afford) to buying less benefit than they want to live on for the rest of their lives.  For them it makes sense to buy a future option rider. For radiologists later in their career, this is probably an unnecessary rider.

Allows you to purchase additional coverage to pay student loan balances while on claim. Most residents with student loans will be enrolled in an income-driven repayment program and be paying a minimal amount on their loans.  Practicing radiologists, who have large monthly payments, might consider this rider.  The cost of the benefit should be weighed against the alternative of just renegotiating the terms of the loan. 

Retirement protection

Group and individually owned disability insurance plans traditionally are designed only to replace a portion of the insured’s current income, not to replace monthly contributions into company or individual defined contribution retirement plans. This rider covers payments you would have made to a retirement account, like a 401(k). Before considering this benefit you need to know what kind of restrictions there are on the investment options.  If the options are poor, you may want to skip this, particularly if the rider is expensive.

Social Security offset

If you sign up for this rider, you agree to apply for Social Security disability insurance (SSDI) in the event of a disability and, if you qualify, your insurer will subtract your SSDI benefit from the amount they pay you. 

Cost-of-living adjustment (COLA)

Increases the monthly benefit paid to you while you’re claiming disability insurance benefits, pegged to the Consumer Price Index or other cost measurement. This can be an expensive rider, and the benefit only begins to increase while you’re on a claim. Most people will be better off keeping pace with their earnings with future purchase and automatic increase of benefit riders.

Catastrophic disability benefit

Pays an additional benefit amount if you are so disabled that you cannot perform at least two activities of daily living (eating, bathing, getting dressed, toileting, transferring, and maintaining continence) without assistance.

 Unemployment premium suspension

Suspends premiums while you’re unemployed, allowing you to stop paying premiums but continue owning the policy. However, coverage is also suspended while you’re unemployed, so if you become disabled during that time, you won’t receive a benefit. This makes it risky, so it’s recommended that policyholders continue to pay premiums while going through temporary unemployment, so they have protection if they have an injury or illness during that time.

Return of premium

Returns a certain percentage of your paid premiums when you cancel a policy. That means you’ll receive something back if you never use the policy benefit, but a return of premium rider is usually pretty expensive. You’re generally better off saving or investing the additional rider cost. 

How much coverage do you need?

Most experts suggest that a physician’s disability policies should cover approximately 60-65% of their after-tax income.  Since most radiologists are paying 15 to 40% of their income toward taxes (which you presumably wouldn’t be paying if you were disabled), that is usually more than enough income on which to live.  But keep in mind that the benefits are only tax-free to you if you, and not your employer,  paid the premiums.  For example, a radiologist earning $300,000 per year generates $25,000 of monthly income, and would need disability benefits totaling $16,250 per month (65% of gross income). If she has an employer-group plan with a $10,000 monthly benefit, she could purchase an individual plan with a $6,250 monthly benefit, and the total benefit of $16,250 should be sufficient—right? Not necessarily. Since the employer paid the premium for the physician’s group coverage, the $10,000 benefit is taxable and would only create a net benefit of $6,000 (assuming a 40% tax rate). Therefore, the physician’s disability plans only replace $12,250 of income – and is short $4,000. The 40% tax rate used in this example may be high, but the point is that some of the benefit from employer coverage will be eaten up by taxes.

Should two high-income earners in a marriage each get full disability insurance?

I’ve heard this question quite a lot and there’s no one-size-fits-all answer.  I tend to say “yes” for two reasons: 1) you may wind up divorced, and 2) the older you are, the harder DI is to get and the more it costs.  

Hopefully by now, you have a better, big-picture understanding of disability insurance!  I wish I could make it easy for you and tell you exactly what kind of DI policy to get.  Alas, everyone has different needs, depending on their personal financial situation and career stage.  You will have to choose the amount of coverage you need (and can reasonably afford) and the riders that are worth the added expense.  

The most important decision you can make regarding DI, unless you are already financially independent or can live off your spouse’s or someone else’s income if you become disabled, is to buy disability insurance.

by Jannette Collins MD, MEd, FACR

Risky Business: Your No-BS Guide to Malpractice and Life Insurance

August 24, 2020 12 minute readFinance,Insurance

Don’t bother to read this post if you are omnipotent and infallible (but then, of course, you’ll already know that). For the mere mortal, however, we can all benefit from a better understanding of strategic risk management—and by taking steps that can help stack the odds in our favor for our best future.  

While we have only one past, we face all kinds of possible futures—and nobody knows which they’ll get.  We may not be able to predict the future, but we can prepare for it by controlling the range of outcomes. To that end, we have three key levers at our disposal: saving diligently, holding down financial costs and managing risk.  Over the course of the next several posts (see here, here, and here), I’ll delve into the subject of managing risk through insurance.

Do you need insurance?  The answer is YES!  But you may not need every kind of insurance available.  

Without knowing you, I can predict that you need to have health insurance, and if you drive a car you need auto insurance.  If you are a resident, fellow, or young practicing radiologist, you should have disability insurance.  No matter where you are in your career, if you have family members who rely on you for financial support, you should have life insurance (unless you have enough money to self-insure, which is the goal in retirement).  If you are a practicing radiologist, you need malpractice insurance.  If you own a home, you need homeowners insurance.  

It seems we’re more diligent about protecting our possessions than protecting ourselves. Homeowners almost always have homeowner’s insurance, in large part because the mortgage company insists. Similarly, most car owners have auto insurance, because state laws require it.  Other types of insurance?  We’re not as diligent.

Do you need insurance for that new TV you just bought?  The salesperson who sold you the TV offered you an extended warranty, right?  Should you buy such coverage when you purchase an iPhone, washing machine, automobile, snowblower, or lawn mower?  

To answer these questions and to know what kind of insurance to buy and when, you first need to understand the definition of insurance and its purpose.

What is insurance?

Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.  The payment to the insurance company is called a “premium.”  When you buy insurance you toss your premium dollars into a risk pool, along with the premium payments from all the other people who bought insurance.  When your house burns down or you total your car, you submit a “claim” to the insurance company.  The money you receive comes from the “risk pool.”

People have a tendency to think that if they paid insurance premiums but never had to file a claim, that their money was wasted.  In fact, they got exactly what they paid for, which is that they didn’t have to worry about a catastrophic event wiping them out financially.  AND they didn’t have an untimely death, lawsuit, car crash, or a burned-down house.  You should hope never to collect!

You can buy insurance for just about anything.  But you don’t need to.  In this and the next three posts I will tell you what you need to know about the following types of insurance 1) life and malpractice, 2) disability, 3) health and long-term care, and 4) home, auto, umbrella, and extended warranties. 

Below, I’ll guide you through some of the essentials on the different types of life insurance and malpractice insurance (spiced with some personal anecdotes), to help you determine the coverage options that may be the best fit for you and your individual circumstances.  

Life insurance

Who needs it?  If anyone depends on your income besides you, such as a spouse, children, parents, or other relatives, then you do.  Otherwise, you don’t.  How much do you need?  The answer depends on the financial goals of those left behind after you die.  If you already have a financial plan (i.e., a plan outlining your income, debts, how you will pay off those debts, how you will invest, and how you will pay for present and future expenses), buy enough insurance that allows your dependents to live just as they would with you alive.  I highly recommend you develop a financial plan if you don’t have one.  The White Coat Investor offers a practical guide to get you started.  

If you are a typical radiologist right out of training, you have little or no savings and a lot of debt.  Let’s say you have a spouse and one child.  If you die, then your federal student loans will be discharged.  Private student loan debt may or may not be.  Do you want to leave your spouse with a nest egg that will last her the rest of her life without having to work?  At what standard of living?  Do you want to leave enough money to pay for your child’s college education?  To pay off the mortgage?  The answers to these questions will determine the amount of life insurance you will need.  Most radiologists will carry between $1M to $5M in life insurance.  Since life circumstances change (e.g., you have more children, you pay off your mortgage, you save enough for your child’s education, you get divorced, or your child or spouse dies), you may need to increase or decrease the amount of life insurance coverage over time. 

Among households with children under age 18, one out of five has no life insurance. That number would likely be far higher without employer-provided coverage. Indeed, today, more families have group life insurance—often through their employer—than individual coverage.

Some married medical students and radiology residents with children choose to purchase life insurance as a student/resident and others wait until they finish training, when they can more easily afford the premiums.  Those who wait are gambling with their spouse’s and children’s financial future.  Another good reason to purchase life insurance early is that you will pay lower premiums (as you will be younger at the time of insurance purchase), and you lock in the insurance rates while you are still healthy. If you wait, and get ill or disabled as a student/resident, your premiums could rise significantly, and you may even become uninsurable.   

Most residents are offered life insurance through their employer.  A 2016 survey showed that residents were offered life insurance that was fully paid (77.1%), cost shared (15.9%), available but not paid by the institutions (5.5%), or not offered (1.6%).  

Still not convinced?  Here’s a real-life story of how tragedy hit a young medical student and his family:

Ryan Folsom was a revered football player at Brigham and Young University.  He went on to be a medical student.  In 2018, he was driving on I-5 south to attend one of several residency interviews.  A car driving in the wrong direction of traffic struck his car, killing him and leaving his wife, who was pregnant with their 3rd child, a widow.  He did not have life insurance.

There are two basic types of life insurance: term and permanent.  

Term life insurance provides a predetermined death benefit and covers you for a predetermined number of years, usually five to 30. You can buy more than one policy, each having a different term (i.e., one at 10 years and one at 20 years).  The idea behind doing this is that after a period of time you will have saved more money and require less life insurance.  The annual premiums are fixed and are based on your health and life expectancy at the time you apply for the policy.

Permanent life insurance combines a death benefit with a savings or investment account.  There are several varieties, including whole life, variable life, and numerous variations of universal life insurance.  The policy covers you for as long as you're alive. The premiums can be fixed or not, depending on the policy you purchase. Like term life insurance, the premiums are based on your health and medical history.  

Permanent life insurance is NOT the best choice for most people. It's several times as expensive as term life insurance for the same amount of coverage. While your policy does accumulate some cash value through its savings or investment component, which a term policy doesn't have, you pay a hefty premium for this feature and for having a policy that will definitely pay out one day. A term policy will hopefully expire before you do.

Nearly every radiologist will receive a pitch at some point in their career to buy permanent life insurance.  Often, the medical school or radiology department will bring someone in to “advise” residents on buying life insurance, and that person’s goal is often to sell as much expensive insurance as she can.  Residents, and often well-intended departments, may not recognize that the “advisor” is a sales person that does not have the best interests of her clients in mind.  Naive radiology residents and practicing radiologists being “sold” permanent life insurance is one of my top financial pet peeves.  

Personal tip

Our chances of dying are 100%.  Thus, the insurance component of permanent life insurance, which is intended to be held until death, will invariably be costlier than that of term life insurance, which provides coverage for maybe 20 or 30 years.  In fact, the premiums on permanent insurance are so high that even after paying thousands of dollars in premium and commission costs, many people let their policies lapse.  Let me say that again.  After paying thousands of dollars in premium and commission costs, many people let their policies lapse!!!  Among physicians that purchase whole life insurance, 3/4 of them regret their decision. Even among the general population, over 80% of whole life insurance policies, a product designed to be held until death, are surrendered prior to death.

For a period of years after purchase, the cash value of a whole life policy, which is based on earnings from the “investment” portion, will be less than the total of premiums paid. Thus, it may take up to 15 years after purchase before you “break even.”  

In general, I don’t recommend mixing insurance with investing.  There’s almost never a reason to do it.  I won’t go into the tiny minority of people who might benefit from a whole life insurance policy but chances are you’re not one of them.  Why do I nix policies that mix insurance and investing?  Because you can almost always do better investing outside of an insurance policy.  

As a personal aside, I was a school teacher before going to medical school.  This was back in the early 1980’s.  My annual salary was around $20,000.  The school brought in a “financial advisor” (an insurance agent, really) to meet with the teachers.  This advisor recommended to me that I buy a whole life insurance policy, which I did.  I had every confidence that my boss wouldn’t have arranged for someone to meet with me unless that person was selling something I needed.  I was young, married to a graduate student, and had no kids.  We had no debt.  We didn’t even need life insurance!  I paid about $35 a month in premiums for that policy, which “conveniently” came out of my salary before I even saw it.  To put this into perspective, $35 in 1980 is equivalent to $110 today.  After a couple years I realized that I was paying for something I didn’t need and dropped the policy.  So yeah, been there, done that.

Way too many of my radiologist colleagues have suffered “buyer’s remorse” from having bought whole life insurance.

How much does life insurance cost?

A healthy 45-year-old non-smoking man could get a 20-year, $500,000 term life policy for about $615 a year. In contrast, he'd have to pay $2,900 to $3,400 per year for a permanent universal life policy with a guaranteed $500,000 death benefit. Invested over those same two decades, the difference in premiums could yield more than $130,000 in savings.

Most radiologists will want at least twice if not ten times that amount of coverage.  It would not be unusual for a radiologist to be paying $20,000 to $40,000 a year in premiums for permanent life insurance.  The agent selling the policy may receive $40,000 as a commission.  Imagine how you will feel if in 5 years you discover that a term policy is all you need and is a lot cheaper, so you buy a term policy and let your whole life policy lapse.  You’ve paid well over $100,000 in premiums and fees for a policy that has little or no cash value.  By the way, if you are or have been in this position, you are not alone.  Way too many of my radiologist colleagues have suffered “buyer’s remorse” from having bought whole life insurance. They were sold something they didn’t need by a person who didn’t have their client’s best interest in mind when the radiologist was naive and vulnerable.  I think that meets the definition of “predatory.”

Another thing I don’t like about whole life insurance is that the premiums are not only much higher than term life premiums, but they are high forever.  With a whole life policy, you are locked into a high fixed expense.  I personally don’t like to have high fixed expenses, especially those that are costly to extricate from, because it affords me less flexibility.  Your life will change.  What if you want to work part-time, transition to a lower paying profession because you got burnt out from reading a volume of radiologic exams at the 90th percentile for 15 years, or take a break from working to raise a child?  With low fixed expenses you have more flexibility to make those changes.  And as I’ve already pointed out, your life insurance needs will likely change over time.  If you win the lottery, you might not need life insurance!  You need a lot of life insurance for 25 to 40 years, but not much after that—which is what term policies are designed for. Why would you want to be tied down to an expensive policy that provides more coverage than you now need?  

Malpractice insurance

While I covered the subject of malpractice insurance in a previous post, here I will expand on the importance of tail coverage.  

There are two types of malpractice coverage:  Occurrence policies and claims-made policies. 

Occurrence policies cover radiologists for events that happened during employment, even after they have left the facility and are no longer paying premiums.  This is the Cadillac of malpractice insurance.  

However, most malpractice policies (as many as 85%) are claims-made because they are significantly less expensive than occurrence policies.  A claims-made policy covers events and claims filed only while the radiologist is employed and paying premiums.  The down side of this type of policy is that coverage must be continued indefinitely to assure coverage for claims filed in the future for actions that occurred in the past. Essentially, once the policy has lapsed the radiologist no longer has coverage.  In this case the radiologist can purchase “tail” insurance to protect her from the past.  

If you have trouble remembering which is which, think of when the coverage is triggered:  occurrence-based coverage triggers when the incident occurred, and claims-based coverage triggers when the claim is made against you.  Or, you can remember that  “claim is lame” (at least from the perspective of requiring tail insurance).

Physicians in all stages of their career may need tail coverage when they leave a job, change malpractice carriers, or retire. In training, malpractice coverage is not a problem, because it’s provided by the sponsoring institution.  Accreditation standards require that teaching hospitals buy coverage, including tail coverage, when residents leave.  Hundreds of residents and fellows (including radiology trainees) lost their jobs, and with it, their malpractice coverage, when Hahnemann University Hospital in Philadelphia went out of business.  Because of the impending liability of not having tail coverage when they went to a new program, and the fact that many hospitals and insurers require tail coverage for privileges, trainees started looking into the cost of purchasing tail coverage.  They received individual quotes of between $25,000 to $50,000.  Eventually, and fortunately, the bankrupt parent of the former Hahnemann University Hospital agreed to buy tail insurance for the trainees (pending approval by the bankruptcy judge at the time of this writing), eliminating the possibility of residents’ losing their licenses by not having the insurance.

More than half of new physicians leave their first job within 5 years, and of those, more than half leave after only 1 or 2 years.  The prospect of having to pay for tail insurance may result in a radiologist feeling forced to stay with a job she doesn’t like.

Many newly graduated radiologists never ask about tail coverage when negotiating a contract.  They aren’t aware of the nuances of malpractice insurance and chances are, their training didn’t include education in the importance and art of negotiation. Large employers—systems, hospitals, and large practices—are much more likely to cover the tail than small and medium-sized practices. 

Ideally, a radiologist’s employment contract will state that in the event of a claims-made policy, the employer is responsible.  This is because tail coverage is very expensive.  And the expense is why many employers are reluctant or unwilling to cover tail insurance.  Also, the employer may feel that providing tail insurance would make it easier for the employee to leave, but that doesn’t mean it can’t be negotiated.  

For example, the employer may be willing to assume part of tail coverage cost based on the length of service (e.g., a portion of the cost per year of service).  Another compromise that would allay the employer's concerns of the employee leaving is for the employee to pay two-thirds of the tail in the first year, but then the employer would pay two-thirds in the second year and the full premium in the third year and beyond.  

It is also advantageous if the contract states that in the event of a malpractice suit, the employee has a right to the patient’s medical records without a subpoena, even when no longer employed.  It’s important to know whether the practice will provide indemnification (i.e., cover the radiologist if the malpractice verdict or settlement is in excess of the malpractice insurance limits).  A contract lawyer can be particularly helpful in explaining the malpractice coverage offered by a group.

Tail coverage premium costs are often waived for older radiologists heading into retirement, if they’ve been with the carrier for at least 5 years and are age 55 or older.  This is very important to confirm because without tail insurance, you are at risk for a lawsuit for many years to come. Even in so-called frivolous suits, radiologists still have to cover the legal expenses of defending a case, which can cost upwards of $250,000.  The statute of limitations varies by state, but is typically between 2-6 years.  However, some states make exceptions to the statute of limitations, such that the clock doesn’t start ticking until the mistake is discovered, or in the case of children, when they reach adulthood.  This means that without a tail, you are always at risk.

Speaking from personal experience

When I was a practicing radiologist at the University of Wisconsin-Madison, I was covered under the State of Wisconsin Self-Funded Liability Program for any lawsuit brought against me while I was acting within the scope of my employment.  UW radiologists are covered by the State of Wisconsin medical malpractice policy under statute. The liability coverage provided by the State is occurrence based, meaning that I was covered by the State for any claims arising out of any acts or omissions during my employment, regardless of when a claim was made. This was true even if the claim was made after my employment with the University ended, meaning I didn’t have to purchase expensive tail insurance when I moved to a different job.  

Wrap-up

After reading all that, I hope you now know whether you need life insurance, and if the answer is yes, that you will get it as soon as possible (if you don’t have it already).  I also hope that you will always ask about the type of malpractice coverage provided by a group that you’re contracting with, and make sure that the terms are clearly stated in the contract.  Don’t feel bad about paying a contract lawyer with experience in radiology contracts in your area to review the contract.  

You don’t want to miss my next post, which is about another very important type of insurance that you MUST know about—disability insurance.  Cue suspense music. 

by Jannette Collins MD, MEd, FACR