Financial Planning

  • WHAT PHYSICIANS SHOULD KNOW ABOUT DISABILITY INSURANCE

    Why Disability Insurance is Important: Protecting Your Greatest Asset

    As a physician one of your greatest assets is your ability to earn a substantial income once you have completed your training and residency, and you should protect it with disability insurance. Most physicians will graduate with a healthy amount of student loan debt from years of schooling, likely totaling in the hundreds of thousands of dollars. And while this might be a daunting amount to have to pay back, the opportunity to earn a great income throughout your working career makes the investment worthwhile.

    If your ability to practice medicine in your chosen field and use the skills that you have gained during your years of school and training were to disappear, the ability to pay off your student loans, not to mention being able to achieve your goals and live a life that you enjoy would be drastically reduced. Insurance companies estimate that as many as one in seven doctors will be disabled at some point during their career. The importance of your future income and the high likelihood of needing to rely on disability insurance are the reasons why it is such an important topic for all physicians to understand.

    Short-Term vs Long-Term Disability Insurance

    There are different variations of disability insurance: short-term and long-term disability insurance policies. The benefit period – or how long you receive payments if you become disabled – can last up to two years for short-term policies. Long-term policies are designed to cover your working career, with most policies ending at the age of 65. For this article we will be focusing on the more important of the two, long-term disability insurance (LTD).

    The Benefits and Drawbacks of Employer-Provided/Sponsored Group Long-Term Disability Insurance

    Many employers offer a group long-term disability insurance to employees. This is a great first step in protecting your long-term earning potential, but relying solely on employer-provided coverage can come with some drawbacks.

    Some of the benefits of employer sponsored long-term disability insurance are:

    • Lower cost
    • Easier to qualify for (usually does not require medical screening)

    The list of potential drawbacks for employer-provided coverage is longer, but that doesn’t mean that employer-provided disability insurance is a bad thing it just means you have some extra homework to do when choosing an individual long-term disability insurance policy to make sure you are getting the correct coverage.

    Potential drawbacks are:

    • Any occupation definition of total disability
    • No portability if you leave your employer
    • Benefits are taxable (when employer paid)
    • Offsets with other benefits such as social security
    • Capped benefit amount

    An employer-provided group long-term disability policy is a great place to start when it comes to coverage, but you are almost certainly going to want to supplement that coverage with an individual policy that provides a full level of income replacement as well as the ability to maintain coverage if you switch employers in the future. Let’s look at an example of the benefits from a group policy and why you would want to supplement with an individual policy as well.

    Employer provided long-term disability coverage typically has a maximum monthly benefit cap along with only replacing a percentage of an employee’s. Also since this is usually a benefit provided by your employer on a pretax basis, the employee ends up paying income tax on the benefit they receive, so for example:

    Let’s say Doctor Doom earns $400,000 per year and is covered by a LTD plan that covers 60% of income up to a maximum of $15,000 per month. Under the plan they are insured as if they are making $300,000 (60% of $300,000 provides for $180,000 or $15,000 per month, the plans monthly benefit). Dr. Doom would also still owe income tax on the $180,000, lowering their benefit further.

    Important Contract Provisions and Riders

    There are different provisions and riders that are included in a disability insurance policy that may affect the cost and benefits that you are entitled to receive should you need to make a claim. The list below contains a few of the most important provisions and riders to understand when choosing a policy.

    Definition of Total Disability: Own-Occupation vs Any Occupation

    The definition of disability is an important distinction within the policy. Under an own-occupation definition, someone would be considered disabled if they could not perform the functions of their occupation, whereas with an any occupation definition as long as they could perform the functions of any occupation, they would not be considered disabled.

    A basic example would be if a surgeon who through illness or injury lost their fine motor control and could no longer perform surgery (their occupation), but could still work an office job, they would be considered disabled under an own-occupation definition but not an any occupation definition.

    Residual Disability

    This is a provision that allows a partial benefit to be paid if someone is not totally disabled but are in a situation where they cannot perform all the duties of their occupation or cannot work as many hours and suffer a reduction in income.

    Elimination Period

    This is the period of time before you are able to start taking benefits. You can think of this as being similar to the deductible in a health insurance plan. 90 days is a typical length for most long-term policies, but elimination periods of 0 days, 180 days, or longer can also be selected.

    Benefit Period

    The benefit period is the period of time that the policy will pay out disability benefits. This can range in time from two years all the way up to the insured’s lifetime. The most common benefit period is up to age 65

    Recovery and Transition Benefits

    Policies can offer a recovery or transition benefits to continue paying benefits to someone after the insured has fully recovered. For example, in the case of a solo-practitioner who has been disabled for a significant period of time and eventually recovers. They will likely have seen a number of their patients leave and find other physicians. Transition benefits could be used to supplement their income as they build back their patient base and income.

    Non-Cancellable and Guaranteed Renewable

    When a policy is both non-cancelable and guaranteed renewable it means that the insurer cannot change the policy terms or increase the premiums as long as the insured pays the scheduled premium. This offers the insured the greatest amount of protection. There are policies that are only guaranteed renewal (not non-cancellable) which allow the insurer to change premium rates in the future. This may provide the insured with savings on the initial premiums but leaves them open to rate increases in the future.

    Future Increase Option, Benefit Increase Rider, Benefit Purchase Rider, Benefit Update

    These options allow the insured to increase benefits or purchase more coverage in the future. Importantly the insured is able purchase additional benefits without undergoing additional medical underwriting. These are beneficial options for physicians early in their career as they can purchase increased benefits to keep up with their increases in salary without having to go through the medical underwriting process again.

    Catastrophic Coverage

    A catastrophic disability benefit rider allows you to receive an additional monthly benefit if you are unable to perform 2 or more functions of daily living (dressing, bathing yourself, etc), total and permanent loss of sight or hearing, or cognitive impairment. The reasoning behind this rider is that the additional benefits could be used to pay for someone to provide in-home care or medical expenses not covered under your traditional health insurance.

    Cost of Living Adjustments

    COLA is a rider that provides increased cost of living adjustments for claim payments to keep up with inflation. This is especially important the younger you are when purchasing your policy as inflation can take a toll on benefit payments over time.

    Long-Term Disability Insurance Cost

    Long-term disability insurance for physicians can be expensive. Premium costs tend to be in the range of 2-6% of income, and traditionally policies are much more expensive for women than men. This is primarily due to the higher risk of disability for women due to pregnancy and pregnancy related illnesses. According to the Journal of the American Society of Certified Life Underwriters a 35-year old woman is three times as likely as a man of the same age to become disabled for 90 days or more.

    Graded vs Level Premiums

    Graded premiums start out lower than level premiums and increase over time, whereas level premiums will remain the same for the life of the policy. If you are hell-bent on paying off your student loans, saving a ton and becoming financially independent early in your career then the graded premiums might make sense. But for most physicians, getting coverage early in their careers and choosing level premiums is the better bet.

    Premium Frequency

    Insurers offer a few different payment frequency options: annual, quarterly, monthly. With more frequent payments costing more than making one annual payment. This can usually be changed without affecting the policy so starting out with monthly payments early in your career and then switching to an annual payment once you can afford it is a good option.

    This article provides an overview on the basics of disability insurance and is by no means an exhaustive guide. When selecting a disability policy make sure to get multiple quotes and understand the specifics of your policy and what it covers. Your skills and your income, especially at the start of your career, are your most important asset. Make sure to protect it by including disability insurance in your financial plan.

  • SURVIVING THE HOLIDAY HANGOVER

    The calendar page has turned from December to January and another holiday season is in the rear-view mirror. If your holidays were anything like mine then you might be feeling a bit of a hangover from all of the overindulging of the last few weeks. It’s easy to get caught up while in the thick of the season and come out of December more stressed than when you went in. In my case this stems from a few different areas you might relate to: spending on gifts and other things, holiday travel, enjoying too many special treats at holiday get-togethers, and children gone feral after two weeks of too-much sugar and not enough routine.

    It’s easier than ever to spend more than you planned these days and that’s especially true during the Christmas shopping season. With every retailer touting their best prices of the year during black Friday, and again on cyber Monday, and yet again on the final weekend before Christmas (funny how that works), it just makes sense to pick up a few things for yourself while you’re at it. All of this can lead to a painful shock in January when you receive your credit card bill. This is another point for using cash for your purchases when you can, since it helps prevent adding on just “one more thing” that you probably didn’t need or budget for.

    There’s not much good to be said about traveling for the holidays. Icy roads, flight delays, and sleeping in a bed that’s a size or two smaller than what you’re used to at home (god bless those of you sleeping on an air mattress). But we endure it all to be with those we love this time of year. As we get older the guest beds become harder to endure and the prospect of not making the trip so we can sleep in our own house is that much more desirable. But for now, our boys are four and six years old and we feel fortunate that we are in a position where we can travel and they can spend the holidays playing with their cousins and being spoiled by their grandparents. I guess one silver lining is that after all of the time away, the first night back in your own bed is some of the best sleep you’ll have all year (absence does make the heart grow fonder after all).

    If your family is anything like mine, the holidays can seem like a competitive eating event staged over the course of two weeks. It’s hard not to overindulge when there are so many events and get-togethers where it seems the main purpose is to try to consume as many cakes, cookies, pies, and other sweet things as possible. The general consensus seems to be that any health eating habits can wait until everybody starts dieting with their new year’s resolutions. 

    Reading the preceding paragraphs might give you the impression that I’m a scrooge who doesn’t enjoy the holidays and only focuses on the downside of it all. But that’s part of what makes the January hangover so real. I have the memories of the time spent with family and giving and receiving gifts, but as the glow from those experiences fades we need to deal with the effects of our overindulgence, lack of sleep and higher than normal (or anticipated) bills coming due. So, what can we do about it?

    Well it’s no surprise that January is the biggest month for new gym signups and participation, and that Dry January is a new trend that people are jumping on as well. For most folks though, I recommend focusing on the basics rather than starting a new routine and hoping you’ll stick with it. If your budget feels stretched, and you feel stressed, use that as motivation to get back to basics and focus on a routine that works for you. One thing we’re doing in our household is preparing healthy meal plans for a week or more ahead of time to prevent falling back on going out for lunch or dinner.

    If you feel you have to try something bold to make a new start, like sign up for a new exercise class, try out a whole 30 or keto diet, or commit to a no-spend or dry January, then give yourself the best shot at sticking with it that you can by finding a way to hold yourself accountable. Some good ways to do this are to find a friend or partner that will participate with you so you can keep each other honest. If no one wants to join you, you can still ask a friend to hold you to your goal, or make a public announcement that you will donate money to a cause you dislike if you start to slack off. There’s a reason so many New Year’s resolutions never make it to February, but having an accountability partner or consequence can go a long way towards ensuring your success.

    Good luck to all of you. We made it through the holidays, we can make it through this too.

  • HOW CAN A FINANCIAL ADVISOR HELP

    Need a hand with your finances?

    Starting out your initial financial decisions are relatively simple. Try to save more than you spend, set aside a sensible amount for emergencies, and invest the rest for longer term goals. As you grow and advance in your career the decisions tend to become more complicated. As you near retirement the decisions become even more important, and delaying major decisions can have huge consequences down the road.

    Balancing saving for education and family vacations, choosing between different health and life insurance plans, and managing tax and estate planning issues are just a few of the issues to tackle.

    A qualified financial advisor can provide support and guidance as your financial situation becomes more complicated. Building a financial plan, providing answers to challenging financial questions and helping you implement the action steps in your plan are three key ways that a financial advisor can help. 

    Building Your Financial Plan

    One of the top benefits of working with a financial planner is creating a written financial plan. Most of us have a general sense of our goals and what we are doing to achieve them, but taking the time to clearly define and write down what we want and how we will achieve is an extremely worthwhile exercise, but it can be a challenging task to do on your own. 

    Building a financial plan involves analyzing your financial situation (job, savings, investing, debts) and your goals (family, home, travel, retirement) to create a to-do list to make your goals a reality. The process of creating a written plan helps reduce the anxiety that comes from having a hazy picture of your finances and wondering if you are on track or not. Creating an accurate map of your current situation is the best way to identify the next step on your financial journey.

    Answering Challenging Financial Questions

    An advisor can provide answers to the questions that often paralyze us into indecision: 

    • Am I saving enough for retirement?
    • Can I afford college tuition for my kids?
    • Should I pay off my mortgage early?
    • Am I on the right track?
    • Can I afford to start a family?
    • How do I manage my student loans while still investing?
    • How much insurance do I need? 

    If you have any of these questions or concerns you could benefit from meeting with a qualified financial advisor. During the process of creating a financial plan an advisor can provide guidance and answers to these questions as well as other important life decisions.

    Implement the Plan and Adjusting Along the Way

    Creating a written financial plan is a great first step that can help you gain a clear understanding of your current situation and the actions you need to take. Just as important, is following through and accomplishing the tasks identified in the plan, as well as making adjustments when things change.

    Having regular check-ins with a financial advisor can ensure you remain on track towards your goals. Providing ongoing guidance when new situations pop up such as the birth of another child, an unexpected career move or any of the other things that life might throw your way. An advisor can help you make the necessary adjustments so that these changes don’t derail your plan.

    Would you benefit from having professional advice when it comes to planning and achieving your financial goals? A financial advisor can guide you along the path to grow and protect your assets, and secure your future.

  • 4 QUESTIONS TO ASK YOUR FINANCIAL ADVISOR

    Making the choice to hire a financial advisor is a big decision, but after deciding to work with a financial advisor, finding someone that you trust and are comfortable working with can seem like an even bigger challenge. Most people start the process by asking friends or co-workers if they work with or know someone who is an advisor, or searching google for “name of their town + financial advisor” and seeing what pops up.

    After you’ve put together a list of a few advisors to look into, how do you actually evaluate who to work with? I suppose you could always go by their photos on the website; are you more comfortable with jeans and a sportcoat guy or is it pantsuit/suit & tie all the way?

    Rather than evaluating them on how close their office is to your house, or if you have the same choice in fashion designers, I’ve come up with a few questions that you should consider asking them instead. By starting with the questions below you’ll learn more about their business and what types of clients they work with, helping you to make a more informed choice.

    Are you a fiduciary?

    A fiduciary is someone who is legally bound to make decisions and recommendations that are in the best interest of their client regardless of the impact on the advisor. I believe this is the best and most honest way for a financial planner or advisor to work with clients. When your advisor is a fiduciary it reduces the chances of a potential conflict of interest between you and your advisor.

    You can feel confident that you are receiving the best advice for your situation, rather than being sold investments or financial advice that may result in higher sales commissions for your advisor.

    How do you get paid?

    This may seem like a surprising question to ask since you are the client and expect you will pay for your advisor’s services. Aside from the question of how you pay your advisor, whether that’s in the form of an upfront fee, a monthly retainer, hourly, for assets under management (AUM); you may not be the only one that pays them.

    Your advisor could also be paid a commission by Mutual Fund companies in exchange for selling their specific funds to clients. In this case the client, you, are still paying the planner, but indirectly through the price of the investment or insurance products.

    A fee-only advisor on the other hand is exactly what it sounds like, an advisor that is paid only in direct fees by you the client. With a fee-only, fiduciary advisor you can be sure to understand how much you are paying and what services you are paying for.

    Are you stuck in the 20th century?

    Maybe a more polite way to ask this question of an advisor is with a set of questions: How do you usually communicate with clients and what technology do you use for managing your client’s information? Do all client conversations take place in the office? Do you use electronic signature software or do all documents require a physical signature, which can mean more time spent visiting the office, printing, signing, and faxing documents. How long does it take you to respond to emails or texts? Do you text?

    Some of these questions might be more important to you than others, maybe you are unavailable during normal business hours so email and text are the best ways for you to communicate. Or you travel a ton for business and will need to use skype for meetings most of the time.

    We all lead busy lives these days and you need an advisor that is comfortable communicating with you in the way that works best for you. Whether that’s with in-person meetings, over email, on a skype or phone call, or texting, you should find an advisor capable of having conversations with you where you are most comfortable.

    What does your typical client look like?

    One of the keys to a successful client-advisor relationship is for the advisor to have an understanding of the client’s specific situation, goals, needs, and the options to achieve them. You will have a more successful relationship working with an advisor that specializes in clients with a similar profile to yours. As an example, an advisor who specializes in working with doctors will be better suited to continue working with doctors as she builds up expertise about the specific challenges and opportunities facing doctors and the potential solutions and recommendations available.

    A good way to find out if a potential advisor is a good fit for you to work with for you, is to ask about the types of clients they currently help. Do they work mainly with small business owners and entrepreneurs, do they work with folks in their 50s and 60s making their final preparations for retirement, or do they work with young families and individuals helping with investment decisions and college debt/savings strategies? All three of these groups require financial advice, but the financial plans for each group would tend to look quite different. Regardless of which group you belong to, you want to make sure your advisor is specialized and knowledgeable in the areas that affect you.

    Making your selection

    Asking potential advisors these four questions will help you to find an advisor that has the qualities and expertise that you are looking for. And almost as important, by having a plan in place for how to evaluate potential advisors, you’ll feel more in control of the process and feel confident that you are selecting someone who will be a good fit to work with for years to come.