Insurance planning for young physicians

After years of rigorous study and extensive training, you’ve finally turned the page—transitioning from the debt accumulation phase of your life to a future focused on building significant wealth. But it’s a transition that can also raise a host of questions:

• How much income protection do I need?
• Should I restructure my debt, and how quickly can I pay it off?
• What other protections should I put in place?

To determine the answer to any of these questions, you first need a well thought out and comprehensive financial plan. At first blush, this may seem like overkill. After all, you’ve only just started your career; you haven’t accumulated much in the way of assets; and retirement is far in the future. Why do you even need a financial plan at this point in your life?

Finding your balance

From debt reduction and cash flow management to funding your children’s education, saving for retirement, and protecting future income and assets, a well-crafted financial plan provides structure and direction to your financial life. It creates a roadmap that helps you navigate the difficult balancing act of reducing your student loan debt without neglecting saving for the future or short-term liquidity needs—all while considering ways to mitigate current and future taxes and hedging against inflation.

Done right, financial planning doesn’t have to be complex and time-consuming. It can be a very simple process that aligns each of your goals with sound financial tactics designed to help you achieve them. And a pivotal component of any plan is the implementation of protections—for your income and your growing wealth. The following are just a few of the insurance strategies you’ll want to discuss with your advisor:

1. Income protection—There’s no universal rule that says you should have a life insurance policy that provides a certain number times your annual salary. Everybody’s situation is unique, and your insurance coverage needs to reflect that fact. Often, it comes down to an exercise of quantifying and calculating an amount your beneficiaries will need to be financially provided for if something happens to you.

How much will they need to pay off your outstanding student debt and the sizable mortgage on the new house you recently bought? Add in the cost of funding college education for children (plus enough left over to provide a cushion for your spouse to get back on their feet) and some physicians could be looking at needing $2 million or more in coverage.

As far as structuring that coverage, assuming you’re young and healthy, it often makes sense at this age to take advantage of the comparatively low-cost level premium of term life insurance (seek out the longest coverage term available). “Too often I sit down with young physicians who got hooked up with an insurance advisor when they were a resident and as a result own a small $150,000 permanent life policy,” explains Truist Wealth Medical Specialty Group advisor Brandon Hogue. “It’s a rather rude awakening when they discover that for half (or less) of the annual premium they’re currently paying they could probably be securing that $2 million in coverage they need using term life.” 

Down the road, as your life evolves, you can review your coverages and other wealth goals to determine whether the cash value, optional long-term care riders and wealth transfer tax benefits of a permanent life policy may make sense.

2. Disability: Even though the likelihood of a disability leaving you unable to work for an extended period of time is much greater than the possibility of dying, many young physicians tend to overlook disability insurance. You may think you have enough coverage through your hospital or practice affiliation, but often, when you look closely and calculate how much after-tax compensation you’d actually receive, it turns out to be woefully lacking.

Your financial advisor can help you assess your coverage options and determine an optimal strategy for paying premiums—whether to pay with pre-tax dollars and receive a taxable disability benefit, or pay with after-tax dollars to ensure a tax-free benefit.

3. Asset protection: Now that you’ve turned the career corner and income generation is in full swing, adding umbrella insurance on top of your property and casualty should be a priority. While more established peers know how important and relatively inexpensive this coverage is, younger physicians are often unaware. “You’re a high-income earner now and therefore a high-dollar litigation target if you ever get into any kind of accident,” cautions Isaac Monell, a Financial Consultant at Truist Investment Services, Inc.  “As you gradually accumulate assets, you’ll also want to look more closely at how your assets and accounts are titled.”

Insurance and protection strategies play a critical role in your overall wealth plan. And like other financial aspects of your life, risk management needs will shift dramatically over the years as your career and wealth pictures evolve. You may find yourself with an opportunity to buy into a practice, bringing with it the need to explore key man insurance or additional life insurance to fund a partner buy-sell agreement.

That’s why it’s important to periodically sit down with your advisor to reassess your risk exposure and review existing coverages to ensure you have the optimal coverages, terms and pricing in place.