MD Instruct

So what’s the most important insurance for us to have? The answer is disability insurance. I don’t have much to write about this topic except that it is a NECESSITY. The question is not IF you get it, its WHEN should you get it…

Do you want numbers? In the course of a year, odds are that 1 in 10 people between the ages of 25 and 64 will suffer from a disability. When comparing those odds to the odds of being victim of a house fire (1 in 122), injured in an automobile accident (1 in 160) or even of death (1 in 117), the advantage of disability insurance is crystal clear.

There was an article in the New York Times that reported that 1 in 7 people between the ages of 35 and 60 will become disabled for five years or more. Sorry to scare you, but it’s always better to be prepared…

Most residency and fellowship programs already have some coverage which makes it hard for you to get an additional policy on top of the policy that you already have (i.e. they won’t give you more coverage than you already have) unless it’s for a substantial amount. So, before getting additional disability insurance, make sure that you really think about what specific occupational disability benefits you will need! For example, a neurosurgeon will need different benefits from a radiologist. Also, think about getting the benefit at a young age. As stated in earlier blogs and similar to other types of insurance, the younger you are, the lower the premiums, and when you want to increase the amount of coverage, the premiums will be based on your health at the time you originally purchased the insurance.

To read more about different types of insurance including disability insurance, the AMA has a nice website with resources to browse through. Click here:

http://www.amainsure.com/index.html

I also wanted to take this opportunity to disclose to those reading this blog that I am not getting paid to do these posts, nor do I work for any financial or insurance company. Do not take my advice in place of speaking to a professional . I am doing this because I myself am learning with each post. I also learn from your comments and emails, and I wish I would have thought about these things at an earlier time.

Every insurance salesman you will talk to will try their best to sell you a permanent or whole life insurance policy. Period. Why? It’s their job, and the premiums are higher which means they get more commission. This post will talk about what permanent life insurance is.

Permanent life insurance means exactly what it states. It’s permanent. There is no specified time period like “term” life insurance. With permanent life insurance, a portion of the premium you pay goes into a cash account, which acts as an investment account and grows over time with dividends paid to the account by the insurance company. Who invests it? Most of the time, it’s not you. The insurance company invests in it for you, and many times the insurance salesman will show you projections of what the entire value of the policy will be in 30 years. Remember, these are ONLY PROJECTIONS. No one can predict what the future will be, and most projections will be based on a 10% annual return. A 10% return is traditionally used in projections, but please remember that a 10% return is NOT likely, nor can it be relied upon.

One advantage of a permanent life insurance policy is that you can borrow against the account at a low interest rate (once it builds a cash value), as long as you pay your premium. Another advantage is that you can put in a disability rider that states that if you become disabled, the insurance company pays your premium until you are healthy enough to return to work or for the rest of your life.

A VUL policy (that stands for variable universal life) combines permanent life insurance with an investment account that grows tax free. Upon your death your beneficiary will be paid the death benefit of the policy in one lump sum and is paid out free of income taxes. A portion of your premium goes into an investment for which the earnings grow tax free (that is the good part). You can also pull the money out that you put in (along with whatever rate of return you have earned) later in life.
The negatives……the premiums are MUCH MORE EXPENSIVE than a simple term policy without any guarantee that all those payments are worth it.

As you can see, permanent life insurance policies are MUCH more complicated than term policies and require much more thought and research.

Next week will be the final post on life insurance. Thanks again for your emails and
comments!!

What exactly is term life insurance? Term life insurance is the cheapest type of insurance and provides coverage for a temporary period of time (1 year, 5 years, etc). Term Life Insurance was originally developed to provide temporary life insurance protection on a limited budget. All other types of life insurance policies are called permanent life insurance policies. You can get a clause in the term life insurance policy, called a “rider”, that allows you to convert it into a permanent policy, but usually it’s only for a specified period of time.

The following is an example of a term life insurance policy:

You purchase a $1,000,000 policy with a 30 year term at $100 per month. This means that you will be paying premiums totaling $36,000 (30 years*12 months*$100 per month). If you die during the term of the insurance, the time when you are paying premiums (day 1 and 30 years), your named beneficiary will get $1,000,000, but if you die after the term of the policy, then guess what? Your beneficiary will get NOTHING. All of that money that you paid to the insurance company in premiums, unfortunately, will never be seen by you or your beneficiary again.

There are positives and negatives to getting a term life insurance policy.

Positives include 1) low premiums and 2) the option to invest all of the money that you will be saving by not purchasing permanent life insurance (i.e. permanent policies are more expensive).

Negatives include 1) the fact that it does expire, and 2) you will most likely outlive the policy. Despite all of the health problems we have in the United States, people are living longer than ever. Statistically speaking, you will be living into your 80’s.

Next week I will get into permanent policies……Please post comments below if there’s anything else that you would like me to add regarding term life insurance.

Now that we have talked about the fact that every physician will most likely need life insurance at some point in the future, the next logical question is: when should this purchase be made?

Well, most people start thinking about purchasing life insurance when they get married or when they have children, and this makes sense! If something happens to you, you want to be sure that your family is financially secure so that your kids can go to college or so your wife can pay off your mortgage, for example.

The following is a bold statement: You should purchase life insurance before you turn 30, even if you are healthy, single, have no dependents or own any properties. I know this doesn’t make sense, but here is my argument. Whatever policy you get will be based on your health AT THE TIME YOU GET THE POLICY. This is very important. So, for example, if you purchase life insurance at age 29 at a healthy weight of 150 pounds, and then, when you’re 35, you go on a show called “America’s Biggest Eater” and gain 300 pounds, well guess what? YOUR PREMIUMS DON’T GO UP! Being doctors, you know all too well that we could develop any disease at any time in our lives, and that could also cause any of us to have major difficulty in securing a policy at a reasonable price.

So, if you contract any illness, gain weight or get older (at least one of these will happen to ALL of us) you wont be eligible for the great rate that you could have gotten if you had just taken the time to get a policy when you were healthy.

Also, since you wont be getting term life insurance because of this blog (I will explain why ), you can get a policy that builds a cash value. Here’s a great article to look at below:
http://business-finance-major.info/the-best-kept-secret-about-life-insurance

Next week, I will try to break down the different types of policies, and finally the week after, I will reveal which one I think is the best for physicians (I know, the excitement is palpable ).

Since medical school, I have had numerous salesmen from hundreds of different insurance companies approach me about purchasing life insurance. They threw out a bunch of different reasons why I needed it (ex. if something happens to you, your wife can have the money to get the Ferrari that she always wanted ) gave me the hard sell and watched me squirm my way out of it time and time again. Finally, one month before I turned 30, I went ahead and gave in but only after doing lots of research.

So, the first question is, do you really need life insurance? I think the answer to that if you are a physician is a resounding “yes”! I will go as far as by saying that EVERY physician needs life insurance (and no, I am not employed by any life insurance company).

From four years of medical school, I learned that one thing is certain, and that is, that our health can be unexpectedly affected at any time and that death is unpredictable. There are several “Ways to Go”. Click on the link below in National Geographic article, published in February of 2007:

http://ngm.nationalgeographic.com/2007/02/hearts/death-text

I once told an insurance agent, “If I die, why would I need the money?” Well, 99% of us will start a family and/or take a mortgage. So ANYONE with dependents will need life insurance. Personally, I sleep better knowing that if something happens to me on my way to work tomorrow, my wife will not be on the hook for our mortgage. Besides, property, funeral expenses, burial costs, estate taxes (yes, there is tax when you pass on your property to your family) and medical bills can add up leaving a healthy amount of debt behind. If you have children, leaving money for their college educations may be something that you want to do as well. Even if you don’t have dependents, another reason for having life insurance is that it can also be a good way to leave some cash behind to be donated to whatever cause you are passionate about after you die.

Helpful things to know when purchasing life insurance can be found in the CNN money article below.

http://money.cnn.com/magazines/moneymag/money101/lesson20/

Other questions that arise are: 1) What type of insurance should you get?, 2) When should you get it? 3) If you got pressured into a plan that isn’t right for you, can you get out of it? and 4) Why do hospitals or companies offer insurance?
There are several books available out there that try to answer all of these questions, but I am going to try my best to simplify them. I will try to touch on all these topics in the next few blogs….

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I just want to let all of you know that I appreciate your emails, comments, and suggestions, and I promise to try and cover every topic that has been brought up so far in future posts (i.e. converting from Traditional to Roth IRA, tail insurance on contracts, etc.) I hear you! There is a LOT to talk about, and as I have written these posts, I realize that each topic has many more layers to it. I will try my best to cover them. I plan to start posting every Wednesday morning from now on.

I also wanted to thank the University of Illinois at Chicago Internal Medicine Residency Program for inviting me back to give a talk for the third straight year! If any other institutions are interested please let me know!