Disability

Finding the Untapped Market for Disability Insurance for Doctors
by Michael Hagedorn CLU, CFP

I magine a niche market of highly educated and affluent business owners who demand your product. Business disability products offer a unique opportunity to deliver a benefit solution far in excess of perceived limitations. Since many agents ignore this market, there is an enormous opportunity for agents who specialize in it.

The market for individual disability income insurance (IDI) is practically saturated. Consumer awareness and product penetration is highest in the medical market. It accounts for more than 50% of total in-force premium among many IDI insurers that offer the highly sought after “own occupation” definition of total disability.

Quick math brings the total potential benefit of the business products into the millions of dollars, yet market penetration of business products is only 3% to 8% compared to the estimated 90% penetration for IDI in the medical market.

Many potential consumers are aware of the product, they need increased protection, and they can afford to pay the premium. Perception is the key to unlocking this marketplace. Most doctors work as small business owners, partnerships, and closely held professional corporations. Doctors demand increased protection, but domestic IDI insurers limit coverage for some medical specialties to a $10,000 monthly benefit and others cap benefits at $15,000 a month. Agents simply apologize when these limits are reached instead of offering alternatives. Some agents look to boutique non-domestic insurers to satisfy the need for higher monthly benefits. Domestic insurers offer disability products with millions of dollars in additional protection, only in a different form.

Why is there a huge -disparity between sales of IDI and business products? People usually purchase their first IDI policy as medical students or residents. Agents encourage these doctors to purchase the maximum potential benefit amount using a combination of base benefits and future purchase options. IDI insurers have attractive discounted group long-term disability conversion programs and special benefit amount starter plans to solicit this market.

 The training hospital is a target rich environment. Mentors often instruct willing buyers to buy IDI. But breaking into the training hospital marketplace can be very difficult since it is blanketed with incumbent agents who have refined sales tactics. Agents have solicited these doctors consistently during the four to seven training period. Agents know where the doctors work, they know their specialty of medicine or dentistry, and they know when the doctor will complete their training.

Agents who solicit these residency programs are so busy marketing and selling that they fail to follow-up when a doctor moves out of state to begin their career. So there is your opportunity. When doctors complete their training and enter practice, they are less accessible and marketing becomes less effective.

Most doctors have little or no awareness of business disability insurance products. If they initiate a conversation with an agent, it is usually about the disability product they know: IDI. The doctors are really asking for more money, but they ask the only question they know, “Can I buy more IDI?” The sales opportunity comes in translating the inquiry. Business products provide millions of dollars more in potential benefits and may lead to additional sales opportunities including life insurance, health plans, and pension planning.

Here’s a real case example: A young dentist purchased the maximum IDI benefit package during training, which included a $3,500 a month base benefit and a $6,500 future option. After completing training, she began her practice in a distant city. The original agent failed to maintain contact with her. The dentist wanted more IDI so the next agent sold the $6,500 future increase option, business overhead expense, and business reducing term. The agent also sold the dentist’s husband his future increase option, business overhead expense, and business reducing term.

The dentist remembered that she purchased the maximum, but she and her husband failed to implement the coverage, which created a quick guaranteed issue sale for the next agent. Instead of asking, “Do you have disability insurance?” A better question is, “How much coverage do you own?” or better yet, “Can I read your policy?”

Future Increase Options

This guaranteed issue policy only requires evidence of financial insurability. It does not require medical questions or testing. You show the insurer proof of an increase in income, you collect the premium, and you get paid.  IDI is only the beginning. Business products offer millions more in benefit dollars to satisfy the doctor’s demand for protection. Rather than speaking in insurance industry jargon, the following business products are communicated in a language that the doctor understands, “I want more money; how do I get it?”

Business Reducing Term

Many doctors begin their careers by buying an established practice from a retiring doctor. They end up with seven to 10 year practice loans, equipment loans, and student loans. Many lending institutions require new doctors to purchase life and disability insurance to insure these loans. Sadly, many doctors assign their IDI benefits to the bank thereby exposing themselves and their dependents to financial hardship during a disability. The bank’s loan gets paid, but the doctor and the family get only the net benefit after the assignment is paid. This is common because the bank requires assignment of benefits to fund the loan.

An alternative is for the doctor to buy business-reducing term to insure their $700,000 practice/equipment loan while retaining full use of their IDI benefit during claim. There is a net increase in protection of $700,000 or $8,333 a month. Business reducing term pays the remaining loan installments during a disability freeing IDI benefits for personal use.

Business Overhead Expense

Doctors are small business owners with practice and equipment loans. They pay monthly expenses and employee salaries. A doctor may have protected their personal lifestyle with IDI, but could still lose their investment in their business and damage their credit rating.

The conversation about insuring loans with business reducing term brings up the question of insuring other large monthly expenses. Rent, utilities, insurance, malpractice insurance, staff salaries, and other expenses can swamp a small business when revenues are declining due to the owners’ illness or injury. The doctor may be forced to close the business or sell it prematurely rather than depleting personal savings or incurring additional debt to finance operating expenses.

The doctor can buy business overhead expense to get reimbursed for the fixed recurring monthly operating expenses up to the $720,000 policy maximum, reimbursed monthly up to $30,000. This reimbursement protects the doctor’s credit history and personal savings during a disability. It is paid in addition to business reducing term loan payments and personal IDI monthly benefits. Business overhead expense also helps keep up employee morale by reimbursing salaries despite declining cash flow. Otherwise, worried employees may seek employment elsewhere accelerating the devaluation of the business. Preserving the value of the business and retaining employees is another hard dollar advantage of business overhead expense.

Disability Buy-Out

Doctors may take on partners as their practices grow, which leads us to the biggest supplemental pot of money. The largest reimbursement is for the remaining partners to buy out the disabled doctor. The buy-sell agreement is a separate legal document, which outlines the value of the business and the method of exchanging cash for equity. The buy-sell agreement creates the liability and the disability buy-out provides the funding.

The disability buy-out allows partners to reimburse themselves up to $2 million to purchase the disabled doctor’s ownership in the practice. Without this funding, the remaining partners would have to use cash flow and loans to buy out the disabled doctor. Failing those options, the disabled doctor may force the sale of the practice to satisfy the unfunded liability that the buy-sell agreement has created.
Some doctors choose the most catastrophic alternative -- having no buy-sell agreement. Not agreeing on reasonable valuation when all the partners are healthy and insurable practically guarantees that there will be differing opinions about valuation along with an imminent and unfunded obligation to pay. The disabled partner generally has a much higher value in mind than do remaining partners who are obligated to pay it. All of these alternatives are less favorable than using insurance.

Business disability products offer a unique opportunity to deliver a benefit solution far in excess of perceived limitations. Doctors represent the best opportunity to increase your disability insurance sales because they want more money and you can deliver it using business products. The irony is that, despite tremendous consumer demand, few agents solicit the practicing doctor because they think the market is saturated. Three percent is far from saturation. So if you want a market of affluent business owners who demand your products with little or no competition from other agents, this is your market. Go get it! Lastly, both agents and doctors have something in common, they both say “I want more money; how do I get it?” Now you know how.
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Michael Hagedorn, CLU, CFP began his career as a brokerage manager with Provident Life & Accident in 1990; in 1995 he joined Guardian Life; his agency, California Guardian Brokerage, a division of Pacific Advisors Inc., has been the leading brokerage agency for individual disability insurance for Guardian Life and Berkshire Life since 1995. For more information, call 800-790-7711, or e-mail michael_hagedorn@glic.com.