Holistic Insurance Planning: An Important Part of Protecting a Physician’s Assets

This is especially true with the many physicians we work with. As a Physician, you face a number of occupational, financial and legal risks that are unique to your profession. In addition to malpractice lawsuits and personal liability risk, doctors may face higher nonmedical litigation risks due to their practice’s organization, capital requirements and professional relationships.
For example, you may have worries about your own disability, whether you have adequate life insurance for your beneficiaries or if your hard-earned assets are protected from taxes and/or creditors.

At DBR & CO we take a holistic approach to serving the needs of our physician clients. Our discussions on asset protection largely involve mitigating risk through comprehensive insurance planning. Here are three of the most important types we discuss with our physician clients:

1. Disability Insurance

As a physician, your career—and by extension, your earnings potential—is dependent on your ability to perform your highly specialized tasks. You in fact, are your own most valuable asset. Disability insurance replaces your income in the event you are unable to work due to an illness or injury. If you were suddenly unable to perform your duties as a physician and lost your paycheck, your entire financial plan could unravel along with your substantial investment of time and money in your career.

There are several types of disability insurance to discuss with your advisor. They can advise you on what own-occupation disability insurance is, the difference between long and short-term disability insurance, and the differences between employer and individual coverage. In the case of employer coverage, companies sometimes offer group disability policies that will cover a percentage of your Annual Gross Income (AGI), subject to a monthly cap. Often, employers will cover 60% of AGI subject to a $10,000 monthly limit, though these parameters depend on the employer. Also, it’s important to note that commonly this is a taxable benefit.

To illustrate the importance of disability insurance in a physician’s financial plan, consider the hypothetical case of a physician earning $500,000. If their employer covers 60% of AGI up to $10,000 per month, then they will max out this benefit in the event of an illness or injury. However, assuming a 35% ordinary income tax rate, the true annual coverage is $78,000, not $120,000. With an after-tax AGI of $325,000, the physician would face a disability coverage gap of $247,000. In this case, supplementing group coverage with an individual disability policy could help the physician narrow this gap and avoid financial damage caused by significant lost earnings. However, in the absence of such coverage, the physician might need to tap into savings to fund living expenses, reduce expenses altogether, or worse, take on debt.

2. Life Insurance

Medical professionals often accumulate substantial debt from schooling and establishing a practice in the form of student loans, mortgages, credit cards, and more. Taking on these debts, however, opens the door to significant lifetime earnings potential. Just as disability insurance protects physicians and other professionals from losing their short-term earnings, so too can life insurance protect your overall assets and long-term earnings potential in the event the unforeseen happens. For most early-career physicians, purchasing life insurance is focused within the framework of marriage, children, and homeownership. Later on, life insurance can provide much more value within the context of comprehensive financial planning. Having a robust life insurance plan not only provides a financial safety net but also peace of mind for you and your family.
There are two basic categories of life insurance: Term and Permanent Life.

a. Temporary Term Life Insurance

Term life insurance provides coverage for a specific ‘term’ or period, typically 10, 20, or even 30 years. One of the main reasons doctors often choose term life insurance is because of its simplicity and affordability. It’s easy to understand and the term is flexible depending on your needs. Many policies offer the ability to renew at the end of the term for an increased premium, and some offer a convertibility rider which allows the insured to convert the term policy to a permanent policy.

b. Permanent Cash-Value Life Insurance

Unlike term life insurance, permanent life insurance offers coverage for your entire life or up to a specified age. Apart from providing a death benefit, it also builds cash value over time, which you can borrow against tax free up to your cost basis. There are several types of permanent life insurance policies, including whole life, universal life, and variable life, each with its own unique features to consider. Permanent insurance policies generally have higher premiums than term life policies. However, the premiums typically remain the same throughout the life of the policy.

3. Umbrella policies

Even if you are sufficiently covered by other critical insurance – life, disability, malpractice, liability and of course health - umbrella insurance protects you beyond the limits and coverages of these policies. For example, umbrella insurance can usually cover bodily injury liability to another person, damages to another person’s property, libel, slander and defamation along with other unexpected events.

Physicians can face a multitude of financial and legal risks unique to the profession. If you have questions about what types of insurance coverage to consider or whether you are sufficiently insured, please feel free to reach out.

Thanks for reading.

Sources:

¹ Targeting the Rich, 2015 https://www.rhsb.com/wp-content/uploads/WhitePapers-PrivateClient/Targeting-the-Rich-Liability-Lawsuits-RHSB-Assurex.pdf