Preserve Peace of Mind with a Stable Insurance Plan

Christine Menapace

Physician's Money Digest, April15 2004, Volume 11, Issue 7

Besides taxes, is there anything we resent payingmore than insurance? Every month, wepay out large sums of money simply to coverthose "What if?" scenarios. Yet if the timecomes when we need to collect, suddenly all those billswill seem well worth the money.

Perhaps it helps to know that we in the 21st centuryare not alone in our payment of premiums. Even theancient Babylonians paid premiums to insure their tradingexpeditions, according to insurance agent KathyBayes. As found in the information she compiled, theBabylonians devised a contract system in which the capitalsupplier of a venture agreed to cancel the loan if thetrader was robbed and had paid an extra amount forsuch protection. These arrangements became wellknown to the Phoenicians, Greeks, Hindus, andRomans. In fact, the word "insurance" is derived fromthe Latin word for "security."

Today, carrying insurance is still all about security—protecting yourself and your family from somethingunexpected. But with tricky terms and a plethora ofplans, it can be hard to meet two simple goals: gettingthe right coverage and getting it at the right price.According to the National Association of InsuranceCommissioners (NAIC), even though 72% of Americansfeel they have about the right amount of insurance coverage,67% admit they don't understand the details oftheir policies "very well." Unfortunately, this informationgap can be costly. "The most common mistake peoplemake is not thoroughly understanding the productbefore they buy it," comments Sandy Praeger, chair ofthe NAIC's Health & Managed Care Committee andKansas Insurance Commissioner.

Worthwhile Research

The NAIC recommends several steps to get smartabout insurance:

  • All experts agree you should visit your state'sinsurance department Web site prior to purchasing anyinsurance coverage. You'll find information such as freeguides and premium comparison reports. Ernst Csiszar,NAIC president and South Carolina director of insurance,comments, "We believe state insurance departmentsare the best resource for insurance-related questionsand concerns." Find a link to your state atwww.naic.org/state_contacts/sid_websites.htm.
  • Praeger offers apt advice for physicians: "Theyshould do an annual physical on their policies."Schedule a routine checkup with your insuranceproviders at least once a year, or whenever there's amajor life change. Review every policy and look forareas of too much or too little coverage.
  • Ask about discounts. Do you live a healthylifestyle, have a good driving record, get good grades, orhave special education or training? You can also receivediscounts if you have two or more policies with an insurer,you've had the same insurer for a number of years, oryou choose higher deductibles.
  • Shop around. Research at least three companies for the best coverage at the best price.
  • Honesty pays. Provide accurate and complete information on an application.

Utilizing the Internet

Today, gathering information on the Web can certainlyhelp. A BankRate.com article states that theInternet will influence more than one in three insurancepurchases by this year, according to International DataCorp. The same article states that AM Best, the insurancerating agency, predicts that online quotes will influence$10 billion in auto premiums alone by 2005.

"The research that you can do on the Web is unlimited,"comments Madelyn Flannagan, VP of educationand research for the Independent Insurance Agents andBrokers of America. However, Flannagan states thatthere are very few consumers actually buying insurancethrough the Internet.

The Internet can also put the responsibility on you todetermine a company's legitimacy. Praeger warns offalling for deals that are too good to be true, and statesthat there is a proliferation of discount health plans thatmost consumers should avoid. So before signing anythingwith a company, make sure they are licensed withyour state, check with the state as to the company's complaintratio, and check the company's credit ratingthrough an entity such as AM Best.

Homeowner's Policies

Unfortunately, homeowner's insurance has recentlyrisen by about 10% to 20%. But there are a lot of discountsavailable for gated communities, new construction,deadbolt locks, smoke alarms, fire extinguishers,sprinkler systems, security systems, hurricane measures,and more.

The cost of homeowner's depends on a number offactors. "Don't buy more coverage than you need,"Flannagan cautions. Even with inflated home valuesand large property lots, many people make the mistakeof wanting to insure their homes for the amount theypaid for it—which includes the lot price.

An important point to consider, the NAIC states, isactual cash value coverage vs replacement cost coverage.Actual cash value coverage reimburses you for thecost of the property at the time of the claim, so depreciationis taken into account. Replacement cost coveragereimburses the full value of a new item. Flannagansays physicians who own particularly valuable items,such as art or jewelry, may want to look into a separatepersonal article floater, which insures these itemsfor better worth.

Buyers take note:

Homeowner's insurance does notcover flood damage—which many people don't realize.Flood protection usually can be purchased as a separatepolicy through your homeowner's agent. Rates areset through the Federal Emergency ManagementAgency, so the premium should be standard.

Praeger also warns against an issue cropping up inboth homeowner's and auto policies involving comprehensiveloss underwriting exchange (CLUE)reports. These reports track every incident reported ona home or auto. While typically the reports onlyinclude incidents for which a claim was filed, Praegersays there have been cases where phone inquiries to aninsurance company that never resulted in a claim arenevertheless recorded in a CLUE report.

Flannagan is less concerned about this issue, statingthat it might be a remote possibility if you call the insurancecompany directly, but "if you call your agent, that'snot the case." Still, Praeger thinks this situation createsyet another good reason to know and understand yourpolicy thoroughly. It's also a good reason to carry higherdeductibles if you can afford it. Not only do higherdeductibles keep your premium down, but it meansmore minor incidents don't end up as claims on theCLUE report, which can affect future premiums.

Both Praeger and Flannagan point out that creditreports also affect homeowner's and auto premiums.So to achieve cost savings, you need to keep your creditin good shape. Many consumers, "don't understandthe impact," Flannagan says.

Auto Insurance Policies

Insuring a teenage driver can be a painful experiencesaddled with nightmare premiums. Unfortunately,there are no surefire ways to escape those premiums,but you can be savvy about grabbing discounts, such ashaving a good driving record, two or more cars on apolicy, driver education courses, a teenager with a part-timejob, and a mature driver ages 50 to 65.

Other ways to reduce your costs include raising thedeductibles on collision and comprehensive coverages,and lowering or eliminating physical damage coverageon older vehicles—unless required by a loan. However,one thing you don't want to skimp on is liability. "Theperception of a doctor is that they might have deeppockets," Flannagan warns.

You can also lower premiums by shopping smart before you buy a car. Check premiums with yourinsurance company for the various cars you are considering. Safety issues, cost of repairs, and high theftrates can all raise or lower premiums.

Finally, compare quotes to ensure a competitive rate.According to NAIC statistics, the average annual autoinsurance premium nationwide in 2001 was $718 pervehicle. However, a few higher premium states skew theaverage. In general, 36 states had average annual expendituresbetween $500 and $750 per car. The least expensivestate was North Dakota at $497.79. The mostexpensive state was New Jersey at $1027.71.

Life Insurance Policies

According to the NAIC, life insurance policies areavailable from more than 2000 companies in the US, somake sure you are working with a reputable companyand agent. According to the American Council of LifeInsurers (ACLI), professional designations agents mayearn include Chartered Life Underwriter and LifeUnderwriter Training Council Fellow. You may also askif they are a member of the National Association ofInsurance and Financial Advisors.

When buying life insurance, it is important to thoroughlyevaluate your needs. The NAIC cautions that itmay be costly to replace your insurance if you changeyour mind during the early years of the policy.Consider outstanding debts, ongoing expenses, andthe immediate expenses of losing a family member.One good rule of thumb is to buy life insurance equalto 5 to 7 times your annual income.

There are two basic types of life insurance: term andpermanent. Term provides protection for a specific timeperiod from 1 to 30 years and pays a benefit only if youdie. It generally has lower premiums, allowing you tohave greater levels of coverage while you are young andstill carry high levels of debt. Permanent insuranceremains in force over your entire life and can usually beborrowed from, using the cash value in your life insuranceas collateral.

If buying a term policy, the ACLI recommends askingthe following questions: How long can I keep thispolicy? What are the terms of renewal? Will my premiumsincrease? If so, when? Can I convert to a permanentpolicy? Will I need a medical exam when I convert?

For a permanent policy, you may ask yourself: Arethe premiums within my budget? Can I commit to thesepremiums over the long term? How much will I receiveif I surrender the policy?

Lifetime Annuities

Your life insurance agent can also help you withannuities. An annuity is a financial tool to help makesure you won't outlive your money. It provides fixed orvariable payments on an investment. Fixed annuitiesguarantee specific returns, and your death benefit isgenerally equal to your premium payments, plus interest.With variable annuities, your assets are typicallyinvested in stock or bond funds.

Praeger says older physicians or those already inretirement should be careful about variable annuityproducts. "We really caution against some of theseproducts for older persons," Praeger says. "Or at leastgo into it with your eyes open." Because of their connectionto the stock market, these annuities can bevolatile. For younger physicians, however, they are fine.

According to the ACLI, annuities have several benefitsyou should be aware of:

  • There's no limit to the amount of money you can put into an annuity.
  • They are tax-deferred until payout.
  • You choose how and when you receive payouts.

This past March, the Internal Revenue Service issuednew guidance that will provide annuity policyholdersunder age 59 1/2 more flexibility in taking distributions.In effect, you can now restructure payment schedules totake advantage of changing market conditions.

"This is real good news for people who havesecured an income stream through an annuity. It furtherillustrates the flexibility of the product, and howits owners can use it to meet their current needs," commentsLaurie Lewis, ACLI vice president and chiefcounsel, federal taxes.

Long-Term Care Insurance

"Long-term care is something that we get lots ofquestions about," Praeger says. Long-term care (LTC)insurance is designed to cover a wide range of servicesassociated with prolonged illness or disability, such ashome health care, respite care, adult day care, or astay in a nursing home or assisted living facility. "It'ssomething physician's should start to think about intheir 40s or 50s," Praeger says.

Considerthis:

While LTC isn't necessarily for all income levels, it'sa good choice for those with a large amount of assetsthey don't want to use up by paying for long-term care—and most physicians fall into that category. according to the Health Insurance Association ofAmerica, the average cost of a nursing home exceeds$50,000 a year nationwide. In 25 years, this cost couldrise to over $190,000, the ACLI warns. And research bythe Employee Benefit Research Institute shows thatretirees with employer health coverage face lifetimeout-of-pocket health costs of up to $75,000. For thosewithout coverage, the number can be as high as $1.5million. Praeger states that the situationcan be especially hard on asurviving spouse.

LTC policies can be very differentfrom one company to the next,and the age at which you purchasea policy affects its cost. Accordingto the ACLI, someone age 45pays about half of what someoneage 60 pays. The ACLIasserts, "Generally, what youpay in premiums is far less thanwhat you would pay for LTCservices. A 60-year-old womantoday might pay $1265 a yearfor a policy that pays LTC benefitsfor 2 years. At age 85, she willhave paid $31,625 in premiums—far less than the projected $380,000that 2 years in a nursing home likelywill cost in 25 years."

You can buy an individual policy,an employer-group plan foryour practice, or you may be ableto purchase a policy through anassociation. According to theNAIC, one advantage of anemployer-group plan is you maynot have to meet any medicalrequirements to get a policy. Andsome LTC policies offer federal incometax advantages. These policies arecalled "tax-qualified long-term careinsurance contracts," or simply"qualified contracts."

For more information onthe NAIC, IIABA, and ACLI, awealth of consumer tips areavailable on their Web sites.Be sure to visit www.naic.org,www.iiaa.org, and www.acli.org.