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 accumulating significant wealth. For most young physicians it’s a transition that raises 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 to build 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, so you’ve yet to accumulate much in the way of assets. The notion of retirement seems so far into the future as to be practically unfathomable. Why would you ever 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 provides 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 a complex and time-consuming effort. 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:
- Income protection: When it comes to life insurance, there’s no universal rule that says you should have a policy that provides X times your annual salary. Everybody’s situation is unique, and your insurance coverage needs to reflect that fact. More often than not, however, it comes down to an exercise of quantifying and calculating an amount your beneficiaries will need to be financially provided for and able to move on should something happen 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 educations for children (plus enough left over to provide a cushion for your spouse to get back on his or her feet) and some physicians could be looking at needing $2MM or more in coverage.
As far as structuring that coverage, assuming you are young and healthy, it typically 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 (e.g., $100K) permanent life policy,” explains SunTrust 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 $2MM in coverage that 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 make sense.
- Disability: Despite the fact that the likelihood of a disability leaving you unable to work for an extended period of time is significantly 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 more often than not, when you look closely and calculate how much after-tax compensation you would actually receive, it may often turn out to be woefully lacking.
Your financial advisor can help you assess your coverage options, as well as determine an optimal strategy for paying premiums: whether to pay with pre-tax dollars and receive a taxable disability benefit, or to pay with after-tax dollars to ensure a tax-free benefit.
- 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, Financial Consultant, SunTrust Investment Services. “And as you gradually accumulate assets, you’ll 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. Like other financial aspects of your life, however, risk management needs will shift dramatically over the years as your career and wealth pictures evolve. For example, you may find yourself with an opportunity to buy into a practice, bringing with it the need to explore key man insurance options 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 that you have the optimal coverages, terms and pricing in place.