Financial Risk Management for New Physicians
New physicians have spent a decade or more building up their human capital through an enormous investment in education and training. In the process, most physicians have developed very specific skills, accumulated a staggering amount of debt, and established the potential for generating high incomes. These unique circumstances put young physicians in a position where managing financial risk needs to become a priority.
Risk management for physicians includes reviewing their disability, malpractice, life, and personal property insurance. These topics are easy to overlook but it is essential that you periodically review your situation as your career progresses and family life changes.
Disability insurance is a key method of protecting your investment in yourself. It is estimated by the Social Security Administration that the average person has a 25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} chance of being disabled for some period before they retire. Those types of odds make disability insurance one of the first things to consider during residency or shortly thereafter. Since the skills of a surgeon are not transferable to other jobs with similar income potential, your disability insurance policy (or policies) needs to cover you for full or partial disability for your own specialty and will provide benefits until you are age 65.
You will likely want to supplement your policy from work with a policy that provides additional benefits if you were disabled. If you have more than one disability policy be careful that the benefit of one policy doesn’t cancel out the benefit of a second policy. Since disability insurance is unique you may want to seek out an insurance agent that specializes in it to ensure you have appropriate coverage.
Malpractice insurance covers you for professional liability and is required for physicians in Massachusetts. Most employers will provide coverage but it is important that you understand the difference between ‘claims made’ and ‘occurrence’ malpractice insurance. If you have a claims- made policy you are only covered during the policy period in which a claim is made and you will need extra ‘tail’ coverage if you leave for another job. If you are covered by an occurrence policy, the tail coverage is part of the policy. When you are transitioning between jobs, make sure you understand the type of coverage you will have and that your previous work is covered by a policy.
Life insurance is also an important way to protect the investment you have made in yourself and ensure that your family will be provided for in the unlikely case that you were to die. Life insurance can be categorized into two general types. The first type is ‘term’ insurance, which is pure life insurance that guarantees a death benefit for a certain period of time as long as you continue to pay your premiums. Typically, term insurance will be for 20 or 30 years and when the period ends your coverage ends. Extending your coverage at the end of the period will be very expensive. Term insurance does not accumulate a cash value.
The second type of insurance is ‘permanent’ insurance which includes whole life, universal life, and variable life. As the name implies, permanent insurance offers coverage for the rest of your life as long as the policy is kept current. Permanent insurance provides a tax-advantaged savings mechanism in addition to a death benefit. This cash value can be borrowed against in the future. The cash value of whole life grows steadily over time while universal and variable life may fluctuate with the value of the underlying investments.
Term insurance is relatively inexpensive for young healthy persons. A recent quote for a $1 million, 30-year term life insurance policy for a healthy 35-year-old male from a low-cost carrier was $790 per year and for a 35-year old female the quote was $660 per year. A quote for a $1 million whole life insurance policy for a healthy 35-year-old male or female was $9,920 from the same insurance company. The huge difference in price is a result of the life-long protection and the building up of a cash value for the whole life insurance policy. One alternative is to buy a term policy that can be converted to permanent policy in the future. This benefit will come at a higher cost.
When people think about personal property insurance, such as home, rental, and auto coverage they tend to focus on claims related to damage or loss. But personal property insurance also includes protection against personal liability from accidents you may cause with your vehicle or that may occur at your home. Talk to your insurance agent about having the largest amount of liability protection available. You will likely want to have additional personal liability protection from an umbrella insurance policy.
Such umbrella policies pick up liability protection where your other personal property insurance leaves off and it is very affordable. For a physician, protecting against personal liability in additional to professional liability (from malpractice insurance) is an important risk-management step.
As young physicians start their careers it can be easy to overlook ways to protect their investment in themselves. Periodically reviewing their insurance coverage is a prudent financial risk management step to protect the physician and their family members.
Doug Wheat, CFP, is director of Family Wealth Management in Holyoke; www.fwmgt.com
