Rainy day planning

What physicians need to know about liability, disability and life insurance and saving up.

By James M. Dahle, M.D. | Feature Articles | Winter 2020

 

“It is very easy as a physician to get this bulletproof mentality, but we can all get the same problems as our patients,” says Michael Lieb, D.O. – Photo by J&J Studios.

Thy fate is the common fate of all; into each life some rain must fall.” –Henry Wadsworth Longfellow

Physicians, more than most people, are well aware that bad things happen to good people. These “rainy days” may not be common, but they can be life-changing, especially if you are not prepared for them. In my work at The White Coat Investor over the years, I have run into dozens of physicians who encountered a “rainy day.” In this article, I’ll discuss four financial “rainy day” events common to physicians and how you can prepare for them while the sun is still shining.

Rainy Day 1: Being sued

Many doctors have an illogical, even unhealthy, fear of lawsuits. While the attorneys involved view a lawsuit as “just business,” it becomes personal for the doctor with the resulting lost sleep, defensive medicine and shortened career. Though a lawsuit is never pleasant, viewing it from the proper perspective is helpful. A lawsuit is a civil tort, not a criminal prosecution. It’s about money, not crime, and the vast majority of the time, it does not even involve the doctor’s money. Most of the time, the physician is essentially serving as a defense witness for an insurance company, whose money is really at stake. The doctor already spent her money when she paid the insurance premiums!

Avoiding lawsuits by practicing good medicine, communicating well with patients and their family members, and documenting well is obviously critical. An ounce of prevention is worth a pound of cure. However, once a lawsuit is initiated, insurance becomes the first line of defense. Insurance not only pays for any settlements or judgments, but it also covers the cost of defense.

The rule of thumb is to buy the same amount of malpractice insurance coverage as other doctors of your specialty and geographical area. A common benefit limit is $1 million per incident and $3 million per year. Each of the doctors interviewed for this article carried that limit, although higher limits (usually $2 million/$5 million) can be seen, particularly among high-risk specialties such as OB/GYN.

As Michael Lieb, D.O., a vascular surgeon in Hainesport, New Jersey, explained, “these are the minimum limits set by the state and I have not really heard of many people going above this.”

Be sure you understand how your policy works. If you (or your employer on your behalf) purchase a “claims-made” policy instead of an “occurrence” policy, be sure one of you purchases a “tail” policy in case you are sued after the policy ends.

Professional liability is not the only lawsuit risk you face. Personal liability coverage is also essential to purchase. Property coverage including auto, recreational vehicle, homeowner’s, and renter’s policies also include a liability component. However, the liability coverage on these policies is often much too low for the real risks you face. Increase the coverage and stack an “umbrella” (excess personal liability) policy on top of your property policies.

Lieb carries a $3 million umbrella policy because “it is quite affordable and more than my net worth currently. This level of coverage only added $500 to my annual insurance premium, as I already had the highest deductibles set on my homeowner and auto insurance. …I will likely increase this along the way.”

Despite common recommendations, the amount of needed coverage has nothing to do with your net worth, but more to do with the actual risks faced. Commonly recommended limits range from $1 million to $5 million. Luckily, personal liability insurance is dramatically cheaper than malpractice insurance, usually only a few hundred dollars a year.

Many physicians are concerned about the possibility of being successfully sued for an amount above their insurance policy limits. This is an extremely rare occurrence, but it is prudent to at least take a few basic “asset protection” steps as additional protection. These include knowing your state asset protection laws, titling property properly (married couples should use “tenants by the entirety” titling where available), maximizing the use of retirement accounts, and placing “toxic assets” such as rental property into limited liability companies. More advanced techniques such as overseas trusts, equity-stripping, irrevocable trusts, cash value insurance, and family limited partnerships may also be appropriate for some physicians in some states.

Rainy Day 2: Personal disability

By the time they finish college, medical school, and three to seven years of post-graduate training, the most valuable financial asset of a doctor is the ability to turn their specialized knowledge and skills into a revenue stream, i.e. their ability to practice medicine.

A physician’s future income is primarily protected with disability insurance. This insurance not only protects those depending on you from the loss of your income, but it also protects you! The most important thing to know about disability insurance is that you need to get something in place early in your career, when the cost is lowest, when you are healthiest, and when a permanent disability would be most devastating. The second most important thing to know is the definition of disability in your policy. You want the broadest possible definition of disability—specialty-specific, own-occupation. Consider the story of Stephanie Pearson, M.D., FACOG:

“At the height of my career as an OB/GYN in Philadelphia, I was kicked by a patient during an exceptionally difficult delivery,” she says. “I sustained a torn labrum that developed into a frozen shoulder. After surgery, I had considerable range of motion deficits and nerve damage that prevented me from performing the material and substantial duties of my job. Unknown to me at the time, my health system’s group disability insurance did not cover work-related injuries, and I was eventually terminated for being unable to satisfy my contract. Workman’s Compensation did not kick in immediately; I actually had to go to court to get the benefits that I deserved. Without the private disability insurance that I had obtained early in my career, we would have certainly had to sell our home. My children did not have to change schools or feel the brunt of my career-ending injury. While I was going through rehabilitation and trying to figure out what to do next with my career, my family did not have to worry about financial ruin.”

Private disability insurance helped Stephanie Pearson, M.D., navigate a career-ending injury without completely disrupting her family. – Photo by J&J Studios

Pearson transitioned to a career as an insurance agent and opened her own firm (Pearson Ravitz) to help physicians understand and protect against this significant risk. Her story illustrates not only the importance of having a policy, but also the differences between a group and an individual policy. While individual policies are more expensive and difficult to qualify for, they usually have a stronger definition of disability, and thus are more likely to pay out in the event there is any “gray” in your disability—and there often is. Individual policies are also portable when you change employers and generally have level pricing throughout your career.

David Antonio Mateo de Acosta Andino, M.D., is a plastic and reconstructive surgeon practicing in McAllen, Texas, married to a nurse anesthetist. They found the process of applying for disability insurance frustrating because “the insurance company really had very little grasp of what could represent a pathology down the line that could prevent either of us from practicing our professions.” He ended up with a $15,000 policy from Mass Mutual, one of the “Big Six” companies who offer own-occupation coverage to doctors. (The others are Guardian, The Standard, Ameritas, Principal, and Ohio National.)

As a general rule, one should buy a large enough disability benefit to cover spending needs and retirement savings, as most policies stop paying around age 65. However, some physicians may not need any disability insurance at all. Myung Sun Kim, M.D., an internist in Eugene, Oregon, doesn’t carry any at all. “With a financially independent spouse and extended family, I believe it is an option to ‘self insure’ for disability,” Kim says. Most physicians end up with policies with a disability benefit of $10,000 to $25,000 per month, although residents can often only afford $5,000 to $7,500 until they finish their training. They should buy a future purchase option rider on their policy. Lieb did not, and relates the following anecdote about his mistake:

“I did not get the future increase option as a resident. …Unfortunately, at the end of my fellowship I was diagnosed with hemachromatosis and when I went to get my new policy as an attending, my premium was going to be four times the standard policy for my level of coverage, and they would only offer benefits for a 10-year period instead of up to age 65. Obviously, this was a shock and not something I could afford. I shopped around and after medical underwriting, Ohio National gave me their highest health rating, as the disease was caught very early and with continuous medical management would have a low likelihood of future problems.”

Riders are extra “bells and whistles” on a policy that usually come with an additional cost. In general, every doctor should have a partial/residual disability option, which pays a benefit while they are partially disabled. Residents and other doctors expecting dramatically increased income should buy a future purchase option rider. Doctors in the first half of their career should consider an inflation protection rider as well.

Rainy Day 3: Death

Another important “rainy day” to discuss is the death of a doctor. If other people depend on your income, you need life insurance, and lots of it. The idea behind life insurance is that the financial life of your loved ones should be the same whether you die prematurely or not. Early in your career, when you are broke or worse, you likely have a large need for life insurance. Later in your career, that need decreases until it disappears completely when you become financially independent. If you and your family can live the rest of your lives on your nest egg, then they can certainly do so without you!

Since the need for a death benefit is temporary, it is almost always best to buy a term life insurance policy. Due to very high commissions, many insurance agents try to sell physicians whole life or other types of permanent life insurance policies, with a lifelong death benefit. Since everyone will die eventually, this benefit is much more expensive to provide, and so the policy premiums to pay for it are much more expensive, often eight to 20 times as much as a term policy.

The policy then becomes so unattractive in comparison that the agents often use secondary benefits to get people to buy the policy. The main secondary benefit used is the ability to borrow against the death benefit, which like all borrowing is tax-free but not interest-free. The problem with mixing insurance and investing in this manner is that you end up with the worst of both worlds—expensive life insurance you don’t need and a very low returning investment!

Since death does not involve all of the shades of gray that come into play with disability, life insurance contracts are much simpler and easier to understand than disability insurance contracts. If you are healthy, the process is very simple. Determine how much insurance you want, how long you will need it for, and who will sell it to you the cheapest. You will then need to provide vital signs, blood and urine lab tests, and a questionnaire about your health history and habits. Sign your contract, make your first premium payment, and you are all set.

How much insurance do you need? Well, first determine what you want insurance to pay for. What is the financial plan in the event of your untimely death? Perhaps you want the mortgage paid off. Perhaps you want $100,000 per child for college expenses. Perhaps you want your spouse to never have to work again. Even stay-at-home parents may wish to carry some insurance, as there would be significant costs involved to hire someone to replace their child care, food preparation, shopping, cleaning, laundry, money management and transportation duties. Add all of this up, round up to the nearest million, and that should be the amount of term life insurance that is purchased. A typical physician will be covered with $1 to $5 million in term life insurance. The good news is that the premiums on even those large amounts are much cheaper than disability insurance, not to mention malpractice insurance!

Some physicians, recognizing that their need for insurance will go down over the course of their career, opt to “ladder” their policies. Agnes Wang, M.D., a urologist in San Francisco, carries $4 million in coverage split between a 20-year and a 30-year policy. Even in expensive San Francisco, “It would be enough off our mortgage,” she says. Other doctors don’t buy insurance at all. For example, Dhaval Pau, M.D., a critical care physician, does not own a life insurance policy because he has a physician spouse, no children, and no debt. Lieb found himself in a different situation, and says:

“I chose a $3 million, 20-year term policy, as this will be enough for my family to live comfortably until the kids go to college. My wife and I discussed this and she would ultimately go back to work, but this amount of benefit would allow her to continue to stay home with the kids until they go to college. I did not choose a larger policy as I do not believe it will change their lifestyle dramatically from $3 million to $5 million and so was not worth the extra premiums. We also already have college funds set up for the kids.”

Determining how much life insurance to carry may not be an exact science, but it is important to personalize it to your situation. The length of term is similarly customizable, but most doctors end up with 20- to 30-year, level premium term policies. It is relatively easy to use online websites to determine the going rate for your policy. Buying from an independent agent allows you to buy the least expensive policy that meets your needs. The expertise of the independent agent becomes even more important if you are not healthy or have dangerous hobbies. They can “shop you around” to the various companies informally before making a formal application that could be denied and cause you difficulties getting adequate coverage later in life.

Rainy Day 4: Emergency fund

While most attending physicians can easily pay for minor emergencies such as a plane ticket or a broken appliance out of their monthly cash flow, many early career doctors would be well served to have a traditional emergency fund equal to three to six months of expenses invested in very safe, liquid assets.

Perhaps the most significant emergency a doctor is likely to face is job loss. Even if you have long-term disability coverage, it usually does not kick in for 90 days, and there are plenty of reasons for job loss besides disability. A traditional emergency fund reduces the stress of knowing how to pay household expenses for months while you seek out new work and wait on licensing and credentialing. Of course, the less you spend, the smaller your emergency fund can be.

Andino’s emergency fund is a year’s worth of expenses, and Lieb’s is currently similarly sized, although he says it is far more than he really needs and plans to invest a good chunk of it soon.

Other doctors interviewed for this article find themselves in the middle, with emergency funds of $20,000 to $25,000. The main point is to have something. Not only does it get you in the habit of saving, but it also prevents the use of high interest rate credit cards for emergencies and the psychological reassurance that you can take some profitable risks with your investments and your career.

Money is a lot like oxygen. You don’t think about it until you don’t have quite enough of it, and then you can think of nothing else. An emergency fund prevents a lot of financial worries. Thankfully, none of the doctors interviewed for this article have ever had to use their emergency fund, but each of them is still grateful to have it.

Rainy days affect doctors just as much as their non-physician peers. Insuring against financial catastrophe and making sure you have cash on hand to cover deductibles and waiting periods will enable you to ride out financial storms until your retirement savings become large enough to provide financial independence. As Lieb explains, “Just like the weathermen, no one seems to be very good at predicting when it is going to rain, and how much. I have seen many colleagues have terrible things happen that they were not financially prepared for. It is very easy as a physician to get this bulletproof mentality, but we can all get the same problems as our patients. …I sleep a lot better at night knowing that my family is protected.”

Wang agrees: “It seems like a lot of money to spend on something you hope to never use, but I hope that my family and I are lucky enough to never need it.”

Real physicians just like you are sued, become disabled, die, lose their jobs, and encounter other rainy day emergencies all the time. Be prepared for them with a smart insurance plan and an emergency fund.

James M. Dahle, M.D., is the founder of The White Coat Investor.

 

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