If you are just starting your career as a physician, your ability earn an income is your most valuable asset
It is the foundation upon which your financial security and future plans are built. While you may believe that the chances of a catastrophic event occurring are low, the reality is that life is unpredictable. By insuring your income through long-term disability and life insurance policies, you can safeguard yourself and your loved ones against worst-case scenarios.
How Does Long Term Disability Work?
Let's begin by discussing long-term disability insurance. This coverage ensures that in the event of a disabling illness or injury, you will receive a portion of your income to help cover your living expenses. While larger physician groups often provide disability insurance as part of their benefits package, it's important to understand that individual circumstances can differ. As an individual physician, you should not rely solely on the group coverage offered, as it may not provide adequate protection. By securing a separate disability insurance policy, tailored to your specific needs, you can ensure comprehensive coverage and peace of mind.
How Much Long Term Disability Insurance Do You Need?
When considering how much disability insurance to purchase, you must plan for the worst-case scenario. Assume that you may never be able to work again due to a disability. By taking this approach, you can ensure that your policy provides sufficient coverage to support you and your family in such circumstances. Be diligent in reviewing the terms and conditions of the policy, paying attention to the definition of disability, elimination periods, and benefit amounts. Seek the assistance of an insurance agent experienced in working with physicians to navigate the complexities of disability insurance and find the most suitable policy for your needs.
How Much Life Insurance Do You Need?
Young physicians typically have more debt and income than their peers, and because of this the life insurance rules of thumb you see out there, don’t really apply. Life insurance isn’t a fun topic to think about but making sure you have a policy in place and for the right amount is really important. If you’re over-insured, you’re wasting money. If you’re under-insured and others rely on your income, it can spell disaster for those who depended on your future income.
Lifestyle Replacement
What does your lifestyle cost? What does it take to keep your household running? If you don’t know (and most people don’t!) - start by looking at your monthly cash flow (what’s coming in and going out each month). It often helps to take the average of what you spend over at least three months to give you a good sense of your monthly cash flow. One you’ve done that, do the math to determine what % of your gross (before taxes and retirement savings) income today you will need to cover your monthly expenses. When doing this, don’t forget to include your payroll taxes, which you can estimate as a percentage of your pay.
For example if your taxes are 20%, you have no debts, and you spend what you make each month your your lifestyle spending is 80% of your gross income.
Now, how much of that lifestyle spending do you spend on yourself? This will help you determine how your current expenses might change in the event of your death. The remainder – “spending on family” – would be the portion that would need to continue if you passed away so that your family could maintain it’s lifestyle.
If your spouse earns an income, figure out what contribution he or she will have to the household lifestyle and reduce the need accordingly. If we consider the prior 10% self-spending example, the spouse may or may not provide a contribution to the household spending.
How long you want the benefit to last
If you are the breadwinner and passed away today, how long should this lifestyle be provided for survivors (ex. forever, 20 yrs, etc)? When in doubt, we encourage people to consider providing lifestyle replacement for your spouse’s lifetime.
Let’s looks at an example based on the factors we’ve covered so far… You and your wife make $200K, spend 50% ($100K/yr), you spend 10% of that on yourself and your spouse covers 10% of spending through her income. Therefore, if you passed away, your income shortfall is 80% of spending, or $80K/yr.
Then, figure the capital necessary today to provide this lifestyle. If you’re covering lifestyle expenses for your spouse’s lifetime, you might use a 4% withdrawal rate to calculate the capital necessary today to provide this. (There are many methods and assumptions to consider when calculating the capital necessary – this is just one version). Every $1 million of capital is assumed to safely produce 4% each year increased with inflation for your survivors without ever running out.
Using the above example, you would need $2.67 million to provide $80k/yr for your survivors lifetime.
If you pass away, how much wealth do you already have available for survivors? This might come from retirement accounts, investments or business assets. We don’t recommend you include your home - your family is still going to need somewhere to live!. This number should be subtracted from the total capital necessary to provide for lifestyle continuation.
Sticking with the same example… if you need $2.67 million to replace the lifestyle and have $670K available in retirement plans and investments, you are short $2 million.
Debts
This part is simple. Make sure to have enough life insurance coverage to pay off debts that are not forgiven at death. For example, if you owe $300k between your outstanding mortgage and auto loan, add this amount to your total coverage target.
Using the same example, our total is now up to $2.3 million.
Education Funding
If you have children, you’ll also want to factor funding for k-12 (if in private school) into the lifestyle costs you will want to fund through your policy, as well as any college funding you want to make sure is available. Every family is different when it comes to home much they want to set aside for college funding, but it’s important to determine you college funding goal and make sure to add it to your desired policy coverage . An example of this goal might be: provide 4 years tuition, room & board for any in-state school. Tip: College costs have been inflating at around the same rate as reasonable expected returns for college funds. Basically, if your education goal would cost $200k today, that’s what would need to be provided today if you passed away. So add $200,000. Our example is now up to $2.5 million.
Final Expenses or Estate Taxes
This part includes anticipated estate and/or inheritance taxes expected and final expenses. Simply add this total to your number.
Student loans
Keep in mind that student loans are often forgiven at death. We recommend you verify this with your loan provider. If this applies to you, this debt should not be considered in survivor lifestyle.
Forgivable loans
Many young physicians sign employment contracts early in training. In exchange, they might receive a larger payout or medical school assistance. These contracts often come in the form of a forgivable loan. Basically, it’s a loan until you satisfy the contract. This might require working for a set number of years in practice to allow the loan to be forgiven. Is this loan forgiven at death? If not, add it to your death benefit target until it’s forgiven.
Income Potential
The training physician transitioning into practice will see a big income jump. If you are in residency or fellowship, this earning potential should definitely be a consideration. Your current lifestyle might only be $30k/yr, but do you want your family to continue living like a resident forever if you passed away during training? If yes, $1M would do the job on lifestyle replacement. If not, you should consider balancing cost of coverage with future earning potential. The closer you are to completing your training, the more you should consider your future lifestyle.
Remember to revisit your needs regularly
Putting your life insurance policy in place is a crucial first step, but unfortunately it isn’t a set it and forget it decision. Rerunning your monthly cash flow numbers every couple of years to ensure you still have enough coverage is important.
Don't Forget Life Insurance
In addition to disability insurance, life insurance is another key component of insuring your income. Life insurance provides a financial safety net for your loved ones in the event of your untimely passing. While contemplating one's mortality may be uncomfortable, it's essential to plan for the unexpected. When determining the appropriate amount of life insurance coverage, consider the financial needs of your dependents, outstanding debts, future educational expenses, and any other obligations you may have. By assuming the worst-case scenario and purchasing sufficient life insurance coverage, you can ensure that your loved ones are protected and financially secure, even in your absence
What do you Need to Consider When Working with an Insurance Agent?
When it comes to selecting insurance products and finding the right insurance agent, it's important to be cautious and well-informed. Insurance agents, while often portraying themselves as trusted advisors, are ultimately salespeople. They have a vested interest in selling you insurance policies. Therefore, it's crucial to approach their advice with a critical mindset and seek objective guidance. Look for insurance agents who specialize in physician-specific disability insurance and have a proven track record of working with medical professionals. These agents possess the expertise and knowledge to guide you through the intricacies of the insurance landscape and provide tailored solutions that suit your unique needs.
Wrenne Financial Planning is a registered investment adviser. The content of this blog post is intended for informational purposes only and is not intended to be investment advice. The views expressed in blog post are subject to change based on market and other conditions. Some information has been obtained/provided from third party sources and is believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such