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- Financial Planner: Are You Protecting Your Greatest Asset?
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Financial Planner: Are You Protecting Your Greatest Asset?
How to protect two fundamental components of your financial fortress.
By: Jason M. O’Dell, MS, CWM
Many young doctors with little savings and often large student loan debt are unaware that they have already attained the most significant asset that most physicians will ever acquire—the value of their future income. Physicians must take steps early in their careers to protect this substantial asset.
Given the considerable investment made to become a practicing physician, it should not be surprising that the value of a doctor’s future income is also significant. For example, an aesthetic physician may be offered a starting salary of $300,000, including benefits. Assuming this physician plans on practicing for 30 years (and 3.5% inflation), the present value of this annual income is $5,517,613, even if that physician never makes more than $300,000 per year, including inflation. Most people would think an asset this valuable is worth protecting.
What is needed to protect this asset? That depends on who they are protecting it for—for just themselves or for others dependent on them. In either case, the physician must have appropriate disability and life insurance policies in place if the ability to earn future income is taken away by a disability or a premature death.
Disability income insurance—tool No. 1 for young doctors to implement—is conceptually straightforward; if the insured physician becomes disabled, the policy will pay the disabled doctor. For young physicians (and doctors typically into their 50s) this protection is critical, because these individuals have not accumulated the savings to support themselves and their families in case they cannot work as a doctor.
When looking at purchasing individual disability income insurance, physicians need to determine what their true need is, not how much coverage they can get. If monthly expenses are $3,000/month, but an insurance salesman says you can get $5,000/month, you are over-insuring yourself.
Physicians will also want to make sure they are purchasing adequate coverage. The definition of disability should be occupation specific, so the physician cannot be forced to go back to work in another field. A residual or partial disability rider is another important part of the contract; if the physician suffers a partial disability they can still work part-time in their occupation. Typically, there must be an income loss of 20 percent or greater. In the event of a long-term disability, having a cost-of-living rider as protection against inflation is also important.
Young doctors should also we be wary of disability insurance available through their employers. A hospital will often provide group disability income insurance at no or minimum cost to the physician. The issue with group insurance is that it is covering the masses. This can lead to coverage that is not occupation specific, has short benefit periods, does not have a partial or inflation protection rider, and can be cancelled at any time. While that is not the case with all hospitals, group insurance is generally not adequate for a young physician.
Often, there are discounts connected to the hospital that allow a young physician to purchase individual disability income insurance at reduced or unisex rates. The unisex rate option is the most ideal and has the greatest impact on female physicians.
Young doctors with financial dependents—typically, children or spouses, but sometimes other family members—need to focus on protecting their future income value not only against disability, but also against death. This is why life insurance is tool No. 2 for most physicians.
Much like disability income insurance, young physicians first need to determine their death benefit 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 just a few examples to consider.
Young physicians who need to purchase life insurance should probably consider term insurance as their best option. Term insurance is inexpensive and provides a death benefit for a period of time (10, 20, 30 years). While term insurance is not the only type of life insurance, it is generally best for a young physician who has a specific coverage need. Permanent life insurance can be a tax efficient saving vehicle that provides tax-free growth and tax-free distributions, if structured properly, and can provide significant asset protection depending on the state of residence. For these reasons, permanent (cash value) insurance is often selected, even by young physicians, as a wealth accumulation and protection tool.
Young physicians are at the outset of their medical and financial careers; many are unaware that the value of their future income is probably the most significant asset they will acquire. We encourage them to take action early in their careers to protect this substantial asset. This article explains two key steps in that process. The authors welcome your questions.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
Jason M. O’Dell, MS, CWM
• Financial consultant and author of more than a dozen books for doctors, including For Doctors Only.
• Partner in the wealth management firm OJM Group (www.ojmgroup.com).
• He can be reached at 877-656-4362 or firstname.lastname@example.org.