Plug the gaps in your insurance policies

The holes may be obscured by fine print. Here's a summary of what to look for in several types of coverage.

By Brad Burg
Senior Editor

Ignorance about your insurance can leave you up that proverbial creek—if, for example, a sewer backs up into your basement. Much of the damage might not be covered, even if you have a homeowners policy and flood insurance.

"Wait," you may say. "Isn't that exactly what insurance is designed for—to pay off in case of losses?" Yes—but policies often leave coverage gaps, sometimes where you least expect them.

What you think you see isn't always what you get. You might spend good money on an umbrella policy, then find that its coverage won't unfold until a couple hundred thousand dollars' worth of liability has poured down on you. You might even mess up coverage when you think you're enhancing it: If you have both individual disability coverage and group coverage, one policy might hamper the other.

Insurance is a very tricky area that can leave you or your family expensively surprised. To help make sure that doesn't happen, consider these questions, which cover the key types of personal insurance.

Homeowners insurance

What are the most threatening potential gaps in my homeowners coverage?One huge hole can undermine the policy's promise to supply funds for rebuilding. You may think your policy will cover unlimited replacement cost for your house, because that's commonly what policies did in a kinder, gentler insurance era. Today, though, replacement cost generally means the company will pay only the face amount on the policy, plus a fixed percentage of that figure.

"That additional percentage is typically around 20 to 25 percent, though a few companies offer 50, even 100 percent," says Jim Salisbury Sr., an insurance agent in Walnut Creek, CA. "Even if your policy started out with no cap, it may have been limited at a recent renewal." To find out whether you have sufficient coverage, talk to building contractors; they'll have the best sense of how much it would really cost to rebuild your home.

The kinds of risks covered also may be dangerously limited, even if you bought the usual "all-peril" policy. That name is misleading, because insurers carve out big exceptions. To get coverage for flood damage, and perhaps for earthquakes, for instance, you need a separate policy. For hurricanes, you may at least need an addendum to your policy, which will cost extra.

It gets worse. Buying additional coverage may still leave you bare in unexpected ways. An example is flood insurance. Your flood exposure is obviously greatest in your basement, and flood insurance covers cellar essentials such as a furnace and water heater. But it won't cover all your fixtures or other possessions there—for example, home-office equipment. If a sewer or drain backs up, flood insurance won't cover that, either (unless a storm caused the backup). Nor will your homeowners policy fill these gaps, without special endorsements. If you think you're unlikely to face flood damage, consider this: 25 percent of these claims occur in areas that are not flood plains, according to the Federal Emergency Management Agency.

What other key endorsements might I miss? You've probably heard about getting special endorsements for such belongings as jewelry and collectibles, but you may not be aware of other crucial clauses to add. For example, standard policies often include an "inflation protection rider" promising automatic adjustment for cost-of-living increases, but often that's not enough. "When a disaster hits many homes in an area," Salisbury explains, "local building costs can zoom right past normal inflationary increases, so a 'demand surge' endorsement allowing for this may be wise."

Ordinance coverage also may be advisable, to pay for the extra cost of rebuilding to increasingly stringent construction codes. The cost of carting away damaged property before rebuilding isn't a direct construction cost either, so you might need a special clause for that, too.

Another thing to find out: how much and how long your insurer will pay for temporary quarters you may occupy while repairs are being made. "Some policies have no time limit, but some pay for just a few months," Salisbury warns. "Some pay for luxury accommodations; others don't."

How can I find out whether I'm truly covered? First, stay alert. When there's a spate of disasters in the news, expect insurers to re-evaluate their coverage and perhaps make future adjustments to policies in your region, and pay particular attention to any forthcoming notices from your insurer.

Indeed, always read those notices carefully; they may be more than boring boilerplate. "They often contain crucial news about limitations or modifications of coverage," says Loretta Worters of New York City's Insurance Information Institute. It's also wise to visit your insurer's Web site periodically and occasionally check on insurance news generally, which you can do on the Internet. Finally, when you have questions about specific areas of coverage, ask your insurer in writing, and demand a letter in reply. Don't rely on your own interpretation of the fine print—or on your agent's oral assurances.

If all this seems too much like writing your own policy, look into more luxury-style coverage, like that offered by Atlantic Mutual, Chubb, Fireman's Fund, and Safeco. Such high-end policies will typically include many of the sophisticated endorsements, plus fuller replacement-cost coverage.

Auto insurance

Does my auto insurance cover my whole family? Often, but not always. Make sure you understand who's really covered, and to what extent. Family members legally in residence are usually covered, but policies may provide extra protection for "named insureds"—generally, the people named on the policy's declarations page.

Moreover, often you might not be able to tell which changes in your life will invalidate coverage. In some cases, you might not even suspect a problem. When your son lives in a college dorm, he's still legally a resident in your home. But if he gets an apartment off-campus, he may be off-coverage, too. That might also happen when a spouse moves out during a separation, if that spouse isn't a named insured, notes Worters.

So here's a good rule to follow, she says: "Tell your insurer about any changes in living arrangements affecting covered drivers." Otherwise, after a divorce, you might find yourself trying to persuade a judge that your daughter was still in residence and covered under your auto policy, because during her stays with you she had the right to throw parties in your house. (Yes, that's from a real case.)

Are we covered when we drive other people's cars, or when they drive ours? Here, too, you might run into an exception. "If a person on your auto insurance policy uses someone else's car regularly, your coverage may not apply," warns James W. Moore, an insurance consultant based in Fairfield, CT. So if your daughter is staying with relatives for the summer, don't assume your coverage will protect you when she drives their auto; contact your insurer, to be sure. "You may need a non-owned-auto endorsement for that situation," Moore notes—and you should get it, unless you want to risk a complicated intra-family lawsuit.

You can't assume that the car owner's insurance is adequate, or even in force. Similarly, if you're in an unmarried, living-together arrangement and one of you drives the other person's car frequently, check with the insurers involved to see whether gaps exist.

What about rental cars? And driving overseas? With rental cars, your own liability coverage will apply, but be sure to tell the rental company about everyone in your family who might be driving. As for that "collision waiver" the company wants to sell you, don't automatically decline it. "Your insurer may not pay for collision without a chance to inspect the car and maybe to choose the repair shop," says William C. Wilson Jr. of the Independent Insurance Agents of America in Alexandria, VA. "But the rental company may well send the car right to the shop." Oops. No coverage for you, then. You also may be liable for the renter's lost income every day the car's in sick bay, Wilson adds. "And your policy probably won't cover that, either."

Going overseas? Better check with your insurer. "Typically, policies will cover you abroad if you're driving within US possessions, but not elsewhere," Wilson notes.

Umbrella insurance

Do I really need umbrella coverage? Almost surely. As a doctor, you're not just a target of malpractice lawsuits; personal-injury suits are a risk, too. And on the personal side, you're likely underinsured. For example, your liability coverage under your homeowners policy might be $500,000, and under your auto insurance, perhaps it's $300,000. An umbrella can boost your coverage to $1 million for a few hundred dollars a year. However, $1 million doesn't stretch as far as it once did, so you might consider an umbrella of $5 million or more.

Umbrellas just add coverage, so they're simple, right? Wrong. First of all, does your $1 million umbrella policy actually add that much coverage, or does it only raise your liability coverage to that amount? Today, it's often the former, but better make sure, because that's not always true.

A true umbrella doesn't just give you more dollars of coverage; it also covers additional territory, says insurance agent William Winters of Burns and Wilcox in Daytona Beach, FL. It may insure all-terrain vehicles, for instance, which auto coverage often doesn't apply to. And it may protect you against libel, which a homeowners policy won't do, he notes.

Given all that, it's easy to see why it's crucial to coordinate your underlying coverage with your umbrella. Indeed, often you can get such a policy only from the company that covers both your home and cars. That "restriction" may actually work to protect you. "I once got umbrella coverage through an association, not from my regular insurer," says CPA Sherman Doll of Walnut Creek, CA. "Then I found out the umbrella required $500,000 of underlying coverage before it would start paying. But my auto liability policy stopped at $300,000, so I'd be liable for the $200,000 gap." He adjusted his coverage to eliminate that gap.

Will a true umbrella cover all kinds of liability, then? No. Despite that all-embracing name, an umbrella has a very specific scope. Most important, it has nothing to do with your malpractice coverage, which strictly applies to your activities as a physician. In fact, when you get that personal umbrella, don't think that it'll extend to your ordinary business activities, either. "You need a separate umbrella for business," says Winters. A couple of reasons why: Patients can slip in your office, and you have automobile liability while you or your employees are driving on practice business.

Life insurance

How can I tell whether I'm paying too much for life insurance? Get comparative figures, which is easy to do on the Internet. An especially good site for this is Quotesmith (www.quotesmith.com ). Look for equivalence, not bargains. "With term coverage, the costs probably won't vary a great deal," says Dan Ramey, a retired business consultant and financial planner in Winter Park, FL. "They involve life expectancies and probable earnings, and actuaries all look at the same tables." So your policy should cost about what others do.

How do I know whether I have enough? Life insurance proceeds should be enough to provide any income that will be needed by heirs but that won't be available from other sources, such as investments or a spouse's income. You may have a good idea of what that income is, yet it still may not be obvious how much of a nest egg you'd need to keep supplying it, after factoring in inflation and the probable timing of distributions.

These are thorny issues with no easy answers, so before you buy life insurance or add to your existing coverage, seek a financial planner's counsel. (For a list of advisers we think are best for physicians, see "The 150 Best Financial Advisers for Doctors," Aug. 7, 2000.)

Don't I have to watch out for estate taxes? Yes, although insurance proceeds can escape estate taxes if you employ certain strategies (like having a trust own the policy). You should discuss the options with your financial adviser. Don't rely solely on the advice of an insurance salesperson, who may see you as a commission wearing a white coat.

Term insurance is cheaper than whole life, but will it stay that way as time goes by? Yes, term is cheaper—and depending on what kind of coverage you buy, your policy cost may not go up for quite a long time. Many companies offer "level term," which can lock in premium and coverage amounts for 20 years or longer. At renewal time, the premiums will be much higher, but by then, presumably you'll have more assets and won't need as much life insurance. You should also try to get a term policy that's convertible to whole life, with no physical required, in case you do change your plans.

Is it ever reasonable to buy whole life? Only if you're not going to invest the savings you get from buying term. Unlike plain-vanilla term, whole life has an investment component. But even though a whole life policy serves as a type of forced savings plan and offers tax-deferred growth, your return is often eroded by the insurer's high administrative costs. You can usually do better by putting your dollars elsewhere.

Disability insurance

Is it harder to get disability coverage today? Absolutely. For doctors, it's a case of "Honey, they shrunk my coverage." If you're lucky enough to have an old policy, hang on to it.

Doctors used to be disability insurers' favorites, since their love of their work meant they'd hurry back after illness or injury. But managed care has turned that around. In years past, you might have paid $4,000 for a policy with monthly coverage of $15,000; today, you might pay $8,000 a year or more for $10,000 a month in coverage, notes Jim Fleming Jr., a Walnut Creek, CA, agent who specializes in disability.

How much coverage do I really need? You'd probably like to get an amount equivalent to your after-tax income—which will mean 60 to 70 percent of your pre-tax income. The amount you'd truly need—enough to pay your living expenses— may be lower.

Either way, you may not be able to get the amount of coverage you hope for. The higher your earnings, the more likely it is that you'll be limited to a lesser percentage. In California, $10,000 a month is the maximum individual coverage available, Fleming says.

In any case, keep the tax effect in mind: If you buy a policy individually, you'll pay for it with after-tax dollars, so the benefits won't be taxed coming in. But when your employer pays for coverage, your benefits will be taxable as you receive them, so the net amount may be less than you expect. Knowing that, you might decide to buy extra coverage yourself.

Can I at least be sure that group coverage will be available? Better not count on it, warns Ronald P. Perilstein, whose Narberth, PA, firm, The Arjay Group, specializes in disability insurance for doctors. "Rates have been rising dramatically, especially for the surgical specialties, and the insurance company can arbitrarily cancel group coverage," he says. "In contrast, most individual policies have guaranteed premiums, and coverage can't be canceled unless you don't pay the premiums." So when doctors join a group practice offering group disability benefits, he cautions them not to cancel their individual policies too soon—"and maybe not at all, in case they shift jobs."

In fact, group coverage can work with individual coverage. Jim Fleming gives this example: "If you have $6,000 a month of coverage through your group, you might carry just $3,000 or so more individually. You may even be able to negotiate the right to increase that amount if you lose the group coverage." (You could make that right a part of the policy, as a rider.) Get advice from a knowledgeable source, though, because the wrong combination of plans can be disastrous, he adds. "Some group policies won't pay if you have coverage elsewhere."

Will I lose out if I don't have "own occupation" coverage? In a way, you will. "Say you're an orthopedist netting $180,000 a year," says Perilstein, "and because of a hand injury, you switch to teaching, part time, netting $60,000. That's a loss of two-thirds of your income. Without own-occupation coverage, you'd get only two-thirds of your policy's maximum payment. With it, you'd get the full payment."

Own-occupation coverage is still obtainable, though doctors in most surgical specialties and those who work in extra-stressful specialties, like ER physicians and anesthesiologists, may have trouble getting it. And if you can get the coverage, it will drive up your insurance costs by 20 to 30 percent, says Perilstein. Still, you might decide that's worth it; doctors often feel it's the only way they can insure all their years of training. Many nonsurgical physicians are buying policies without own-occupation coverage, however.

What else merits checking out with disability coverage? Investigate carefully the waiting period before coverage kicks in. It's often 90 days, but beware how those are counted, says Jim Fleming: I know an ob/gyn whose policy requires her to be fully disabled for the entire period, before payments begin." So if she were well enough to work several days a week, her waiting period would never end. "With a good policy, the 90 days are tallied up as they occur, and you may even have six or seven months to accumulate them," Fleming says.

Also, try to avoid buying a policy that covers only a short period for mental disability, adds Fleming's partner (and father), Jim Fleming Sr. "Today, a lot of policies only pay for 24 months," he cautions.

Long-term care insurance

Do I need long-term care coverage? To answer that question, estimate your risk. First consider that the average stay in a nursing home is anywhere from nine to 30 months, depending on what source you consult, and that women generally have longer stays than men. Moreover, your stay could be longer than average, so to feel safer, you might figure on five to seven years, says Al Zdenek, a financial planner in Flemington, NJ.

When you estimate the cost, use local figures, because rates vary hugely—from about $33,000 annually in Minnesota to $108,000 in New York. In New York, then, your seven-year cost could be $754,000. "If you can afford that easily—perhaps for your spouse as well as yourself—then you can self-insure," Zdenek says. "If not, better look into the coverage."

Don't forget your estate plan. Even if your savings could pay for long-term care, you might want the coverage, to make sure you won't be cutting off your heirs. "One client is 78 and has about $1.3 million—which will probably be plenty for long-term care here in Georgia, where it runs about $40,000 a year," says Atlanta planner William Hammond. "But she's gifting a lot to her heirs and wants to keep doing so. That's why she has LTC coverage."

When should I lock in LTC coverage? If you're 50 or older, now's the time to think about it, notes Gary Schatsky, a New York City attorney and financial planner. "The cost rises pretty fast after your mid-50s," he notes. Indeed, according to the most recent survey of the Health Insurance Association of America (which uses 1997 figures), a policy that would pay for four years of care at about $36,000 annually would cost $385 per year at age 50, $1,007 at 65, and $4,100 at age 79. Those averages assume a 20-day waiting period.

But that's not all: You might want 5 percent inflation protection, compounded annually—which can make a policy cost twice as much, or more.

You may be tempted to start before age 50, to lock in your rate for life. But as with other long-term coverage, such as life insurance, an insurer usually can still raise rates for entire age groups. (They just can't single you out for higher costs if, say, you develop a health problem.)

If you're younger than 40, you needn't worry about this yet. "Yes, an LTC policy is cheaper when you're young," Schatsky says, "but with more older people around in the future, competition is likely to mean the policies will become less expensive and provide better coverage, too."

But won't Medicare pay many of my LTC costs? No. Medicare will pay little for nursing care, either in your home or in a facility. Medicaid may pay for most of it, but because state law governs the eligibility rules, coverage can vary widely.

In effect, though, you can qualify for those state payments if you give up most of your assets. But you can't do that in the morning and then apply for the aid after lunch; you have to be eligible for a while. The "lookback" period is three years or, if you make transfers to trusts, five years.

Is relying on Medicaid worth considering? "Only for doctors with truly minimal financial situations," Schatsky says. "You probably wouldn't want to be in the kind of lower-cost facility Medicaid would pay for, anyway."

Are there dangers in an LTC policy? Plenty. A big one involves fuzzy language. "The policy should be not only guaranteed renewable, but noncancellable, too," Zdenek says. "Those terms may sound similar," he says, "but they're not. 'Guaranteed' renewable basically means your coverage can't be cancelled because you're in poor health. 'Noncancellable' means the rates can be changed only for a whole class of policyholders; they can't be raised for you individually."

Also check carefully on the wording of the policy's inflation protection, he notes. "Make sure those increases are compounded—that is, the increase should be calculated based on each prior year, not on the first year." Otherwise, he notes, you can fall far behind cost-of-living increases.

Consider whether the policy sets limits—on dollars paid, the number of years covered, or what "lifetime" means. And check on the front end, too: How many days must you wait before coverage begins? Anywhere from 20 to 90 is common, and rates vary accordingly.

 

Brad Burg. Plug the gaps in your insurance policies. Medical Economics 2001;4:56.