Protecting Your Most Valuable Asset: Insurance
A refresher on what you need to know about term life, permanent (cash value) life, and disability insurance.
Given the substantial investment made to become a practicing dermatologist, it should not be surprising that the most significant asset that most doctors have is the value of their future incomes. Physicians in all phases of their careers must take steps to protect this valuable asset.
Disability and life insurance are fundamental tools doctors use to protect the value of their future incomes for themselves and for others dependent on them. Young doctors should secure these tools early in their careers, and established physicians should regularly review existing insurance policies to ensure that they are maintaining necessary levels of protection.
The Need for Disability Insurance
The disability of the family breadwinner can be more financially devastating to a family than premature death. With many disability cases, medical care alone can cost hundreds of dollars per day, causing expenses to significantly increase while income is reduced or eliminated.
Employer Provided Coverage Often Inadequate
If you are an employee of a university or other large corporation, your employer may provide long-term disability coverage. Group disability often limits either the term of the coverage or the amount of benefits paid. For instance, benefits may last only a few years or benefit payments may represent only a small part of your annual compensation. Since this is most commonly an employer-paid benefit, the money received during your disability will be income taxable to you. Additionally, employer or group disability coverage can be terminated at any time for any reason leaving you without coverage.
Getting the Best Insurance Coverage for the Money: Individual Disability
Consider the following questions when evaluating a personal disability policy:
1. What is the benefit amount? Most policies are capped at a benefit amount that equals 60 percent of income. You must ask yourself how much money your family would need if you were to become disabled.
2. What is the waiting period (elimination period)? This is the period of time that you must be disabled before the insurance company will pay you disability benefits. The longer the waiting period before benefits begin, the less your premium will be. Essentially, the waiting period serves as a deductible relative to time—you cover your expenses for the waiting period, then the insurance company steps in from that point forward.
3. How long will coverage last? It’s a good idea to get a benefit period of coverage that lasts until age 66/67, at which point Social Security payments will begin. Unless you are so young that you haven’t yet had time to qualify for Social Security, a policy that provides lifetime benefits, at costly premiums, is generally not worth the added expense.
4. What is the definition of disability? Definitions vary from insurance company to insurance company, and even from policy to policy within the same company. The definition of disability used for a policy is of the utmost importance. The main categories are Own-occupation, Any-occupation, and Loss of Income. The Own-occupation policies, which pay a benefit if you can’t continue your own occupation (even if you can and do work in another occupation after the disability), are the most comprehensive.
5. Does the policy offer partial benefits? If you can work only part-time instead of your previous full-time hours, will you receive benefits? Unless your policy states that you are entitled to partial benefits, you won’t receive anything unless you are totally unable to work. Also, are extended partial benefits paid if you go back to work and suffer a reduction in income because you cannot keep up the same rigorous schedule you had before you became disabled?
6. Is business overhead expense (BOE) covered? If you are a practice owner, whether you have $10,000 or $20,000 of monthly disability benefit, you likely don’t have enough to cover your lost income plus the costs of running the practice.
7. Is it non-cancelable or guaranteed renewable? The difference between these two terms is very important. If a policy is non-cancelable, you will pay a fixed premium throughout the contract term, and your premium will not go up for the term of the contract. If it is guaranteed renewable, the policy cannot be cancelled, but your premiums could go up. Ideally you want a policy that is both non-cancelable and guaranteed renewable.
8. How financially stable is the insurance company? Before buying a policy, check the financial soundness of your insurer.
Protecting Future Income for Dependents: Life Insurance
As with any insurance purchase, you first need to determine the amount of life insurance coverage you need. What expenses would need to be covered in the event of your death? A mortgage, education funding for children, income support for your spouse, car loans, and other debts are a few to consider.
Next, you will need to evaluate the pros and cons of term vs. permanent (cash value) life insurance to choose the best type of policy to meet their budget and coverage needs.
Term Life Insurance
A term life insurance policy pays a specific lump sum to your designated beneficiary upon your death. As such, it plays an important role in providing temporary income protection for your family (or practice/partners as part of a buy-sell arrangement).
Given its affordability, term life insurance is the most common type of life insurance policy. The premium on a term policy is low compared to other types of life insurance policies because the term policy carries no cash value and provides protection for a limited period of time (referred to as a term; usually five, 10, 15, or 20 years).
Permanent or Cash Value Life Insurance
Whole Life, Universal Life, Variable Life, Index Universal Life, and Private Placement Life Insurance are all types of permanent (cash value) life insurance products. All types of permanent life insurance provide a death benefit to beneficiaries, accumulate cash value, and offer lifetime coverage that does not expire. The primary distinction between permanent life insurance products is that they accumulate cash value in different ways, including dividends, fixed interest rates, and interest rates tied to major market indexes.
Permanent life insurance products can offer these additional benefits:
• Tax-deferred accumulation of cash value and tax-free distributions, if properly structured
• Potential asset protection for the cash value, depending on the state of residence
• Tax-efficient distribution of cash value via loans and withdrawals
Protecting Your Most Valuable Asset Throughout Your Career
Because the value of future income is likely to be a physician’s most significant asset, young doctors are encouraged to secure disability and life insurance early in their careers to protect this asset. All physicians, including dermatologists, should review their disability and life insurance policies regularly throughout their careers to ensure that they are maintaining adequate coverage for the most cost-effective premiums.
An experienced insurance advisor can assist you in evaluating your options and selecting policies that fit your needs and long-term financial goals. The authors welcome your questions.