ISSUE 4: Branding Your Practice

Your Money

Ensuring Insurance

What you need to know about term life, permanent life, and disability insurance.

Jason M. O’Dell, MS, CWM; Carole C. Foos, CPA; and Michael Lewellen, CFP

At A Glance
  • Young doctors should secure disability and life insurance early in their careers, and established physicians should regularly review their insurance policies to ensure that they are maintaining necessary levels of protection.
  • In considering life insurance policies, keep in mind what expenses would have to be covered in the event of your death. These might include a mortgage, education funding for children, income support for your spouse, car loans, and other debts.

For most young doctors, given the substantial investment they have made to become practicing physicians, the most significant asset they 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 can use to protect the value of their future incomes for themselves and those dependent upon them. Young doctors should secure these tools early in their careers, and established physicians should regularly review their existing insurance policies to ensure that they are maintaining necessary levels of protection.

ENSURING ADEQUATE DISABILITY INSURANCE

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.

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. Because this is most commonly an employer-paid benefit, the money you receive during disability will be income taxable to you. Additionally, employer or group disability coverage can be terminated at any time and for any reason, potentially leaving you without coverage.

Consider the questions below when evaluating a personal disability policy.

What is the benefit amount?

Most policies are capped at a benefit amount that equals 60% of income. You must ask yourself how much money your family would need if you were to become disabled.

What is the waiting period?

Also called the elimination period, this is the amount of time 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, and the insurance company steps in from that point onward.

How long will coverage last?

It’s a good idea to get a benefit period of coverage that lasts until age 66 or 67, at which point Social Security payments begin. Unless you are so young that you haven’t yet had time to qualify for Social Security, a policy that provides limited benefits with costly premiums is generally not worth the added expense.

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 utmost importance. The main categories are own-occupation (pays benefits if you cannot continue your own occupation), any-occupation (pays benefits if you cannot work in another occupation suitable to your education and experience), and loss of income (pays benefits in the event of loss of income from disability). Own-occupation policies, which, for example, would pay a benefit if you can’t continue in your occupation as a surgeon, even if you could continue to work as a physician after the disability, are the most comprehensive.

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 important is whether extended partial benefits will be paid if you go back to work but suffer a reduction in income because you cannot keep up the same rigorous schedule as you had before you became disabled.

Is business overhead expense 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.

Is the policy noncancelable or guaranteed renewable?

The difference between these two terms is important. If a policy is noncancelable, 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 canceled, but your premiums could go up. Ideally, you want a policy that is both noncancelable and guaranteed renewable.

How financially stable is the insurance company?

Before buying a policy, check the financial soundness of your insurer.

PROTECTING DEPENDENTS: LIFE INSURANCE

For life insurance, like any insurance purchase, you first need to determine how much coverage you need. What expenses must 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 just a few factors to consider.

Next, the physician must evaluate the pros and cons of term versus permanent (cash value) life insurance to choose the best type of policy to meet 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 can play an important role in providing temporary income protection for your family—or your practice and your 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 with 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 5, 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, or 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 the various permanent life insurance products is that they accumulate cash value in different ways, such as 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

PROTECT YOUR MOST VALUABLE ASSET

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 it. All physicians should review their disability and life insurance policies regularly throughout their careers to ensure that they are maintaining adequate coverage and 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.