As advisors to new physicians across the country, we’re often asked the question: “What is the most important thing I should be doing financially in the first years of practice?” Our answer is simple: “You need to build a solid foundation.”
Young Physicians’ Greatest Asset: Future Value of Income
The most important factor in the building of a foundation is to protect what the young physician has already built. For many young doctors with little savings and large student loan debts, their question is “what have I built? I am in debt!” The answer is that they have actually built a significant asset that needs protecting—the value of their future income.
What is needed to protect this asset? That depends on who they are protecting it for—themselves or others dependent on them. For both types of doctors, they need to protect their ability to earn this income in the future. That is why disability income insurance is so critical—and is tool #1 for young doctors.
Protecting Future Income for the Physician & Dependents
Disability income insurance conceptually is straightforward; if one becomes disabled it will pay the disabled doctor. For young physicians (and doctors typically into their 50s) this protection is critical because they 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 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. While having more coverage than what’s needed is not always wrong, controlling expenses in order to build the proper foundation is more important.
Physicians will also want to make sure they’re purchasing adequate coverage. The definition of disability should be occupation specific, thus a physician cannot be forced to go back to work in another field. Residual or partial disability rider is another important part of the contract, in case the physician suffers a partial disability they can still work part-time in their occupation. Typically there has to be an income loss of 20% or greater. Also, in the event of a long-term disability, having a cost of living rider as an inflationary protector is important.
Protecting Future Income for Dependents
For young doctors with financial dependents—typically, children or spouses, but sometimes other family members—they need to focus on protecting their future income value not only against disability, but also against death. This is why life insurance is tool #2 that we typically recommend.
Much like disability income insurance, you need to first determine what your need is from a death benefit perspective to make sure you are being cost efficient. The way to determine your need is to decide what expenses would need to be covered. For example: mortgage, education funding for children, car loans & other debts, income support for spouse.
Young physicians in a position of purchasing life insurance should probably consider term insurance as their best option. Term insurance is inexpensive and provides a death benefit for period of time (10, 20, 30 years). This does not mean term insurance is the only or best type of insurance, it is generally best for a young physician who has a specific need. Permanent life insurance can be a very tax efficient saving vehicle that provides tax-free growth and tax-free distributions, if structured properly, and can provide great 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 vehicle.
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