Understanding Insurance for Physicians
At Statgo, we ensure your medical billings are accurately and completely managed. Getting correctly paid for the work you do is the first step in successfully managing your finances. But there are many other aspects a physician has to consider to ensure they achieve financial success and independence, including the right accounting support and good financial planning. Physician insurance is a critical part of good financial planning and can be difficult to understand. To get a better picture of physician insurance, we sat down with Lukas Hayes, B.COMM, CFP, CHS of insurance advisory ADVICO to help us get a better understanding.
What is Physician Insurance Used For?
It seems like an obvious question, but there are actually 2 main reasons physicians get insurance:
1. Financial protection and support. The first is financial protection in the case of an unexpected event. These events are usually something that stops you from working and earning income for your family. Examples are critical illnesses, disability or death. An insurance policy can provide financial important financial support.
2. Retirement and estate planning. Some insurance policies can provide tax protection, allowing you to retain more of your savings for retirement or to leave more of your estate to your loved ones. Certain insurance payouts are not taxed or are taxed at lower rates than other savings and investment approaches.
Your own personal situation will dictate what types of insurance makes the most sense and why you buy insurance may change over time. For example, a doctor just starting their practice with significant debts, a young family, and a spouse who stays at home will be focused on financial protection. An older doctor with significant financial assets, no dependent children and a financially independent spouse will be focused on retirement and estate planning.
What types of insurance should I consider?
There are many types of insurance, but we’ll cover the key ones physicians should consider here: Life insurance, critical illness insurance, and disability insurance.
Life Insurance:
There are two popular types of life insurance: term life insurance and whole life insurance.
Term Life Insurance is the simplest life insurance and has the lowest cost. The policy covers you for a fixed term, usually 10, 20 or 30 years. It is designed to protect your family or other beneficiaries by providing a one time payout in the case where you die prematurely. The payout could be used to pay off a mortgage, put your children through university, or replace your income for your spouse. Once the term expires, the policy has no further value. Ideally at the end of the policy, your personal situation will be secure – the children have left home and you have enough assets to provide for your family – and so no longer require term life insurance. Alternately, if you renew the term life insurance, expect to have a significant jump in cost. Depending on age and personal specifics, annual costs for term life insurance are typically $500-$1000 for $1 million in coverage and prorate with policy value.
Whole Life Insurance is more complex and has higher costs, but it provides lifelong coverage and includes an investment component. Lifelong coverage means that there will be a financial payment when you die – the policy does not have a term expiry. The policy also accumulates a cash surrender value that is paid out if you cancel the policy. This cash surrender value means the policy becomes an asset that you can borrow against. The asset value is considered very safe by banks and loans against the cash surrender value have very low interest rates. Why build cash value in an insurance policy and then take out a loan to access that value? The cash value accumulated within the whole life policy is tax deferred and is not treated as an investment for tax purposes within passive investment rules. Within your professional corporation, this can be helpful to remain under the small business tax rate passive investment threshold, keeping a corporate tax rate of 11% vs. 27%. Depending on age, personal details and policy specifics, annual costs for whole life insurance range from $5000-$20,000 for $1 million in coverage and prorate with policy value and terms. There are a variety of whole life insurance options and any policy should be closely considered by your insurance advisor, financial advisory and accountant to ensure the policy meets the needs of your overall financial situation.
| Term Life Insurance | Whole Life Insurance | |
|---|---|---|
| Monthly Cost | Lower | Higher |
| Coverage | Defined Term | Lifelong |
| Premium | Generally constant for term, Higher on Renewal | Generally constant for life |
| Cash Value | N/A | Accumulates during policy |
| Investment Value | N/A | Can be part of overall investment strategy |
| Common Use Case | Financial protection, minimize current financial cost | Financial protection, Retirement and estate planning |
Critical Illness:
50% of people experience a critical illness by the time they are 65. Critical Illness insurance provides an insurance benefit to help reduce financial stress associated with a critical illness. It covers 26 conditions (heart attack, stroke, cancer, Parkinson’s disease, dementia, etc.) and provides a lump sum benefit, usually $500,000 to $2 million. The payout comes after being diagnosed with one of the covered conditions, usually after a short waiting period. For tax reasons, the policies are usually best managed within your professional corporation. Cost is situational, depending on your current age and health condition. The policies are usually set for a defined fixed year term or until you are 65. Critical illness policies can have return of premium options, meaning if you do not make a claim or cancel your policy, you get 100% of your money back at the end of the policy. This feature can allow the policy to become a savings strategy with tax benefits.
Disability Insurance:
Disability Insurance provide you with financial support when you cannot work for health reasons. The intent is to replace your working income. Your monthly benefit is set when you purchase your plan and is triggered if you are told by a physician that you cannot work. As a basic rule, the monthly benefit is usually not more than 2/3 of your current income, usually based on your earnings over the previous year. For new physicians starting in practice, insurance companies will usually allow a base amount of insured income between $7,000 – $11,000 per month. You can usually add a future income option, which allows you to increase the monthly benefit over time as your income increases. Typical maximum benefit increases are $3,000 per month each year. So if your policy benefit started at $10,000 per month, you could increase the monthly benefit to $13,000 in year 2, $16,000 in year 3, etc., within the 2/3 income limit.
Disability insurance policies usually have elimination periods which are time frames from when a physicain tells you not to work and to when the policy begins payments. These can be from immediately to 2 years wait, with the common time period being 90 days. The elimination period has an impact on policy cost, with lower cost policies having longer waiting periods. The right elimination period for each physician is situational, depending on financial resources and impact of a sudden stop in income.
There are three levels of disability which define what type of work you can do and when coverage applies. You should be aware what level your policy covers:
1. Any Occupation – If you can do any occupation, you are not covered. This level of coverage only applies if you cannot work in any capacity. For example, if you cannot be a physician but you can work in a different job, then you do not receive coverage.
2. Regular Occupation – If you can’t fulfill your regular occupation, you are covered. For example, if a surgeon injures their hand and can no longer be a surgeon, coverage applies. But if the surgeon starts earning income as a family physician (or in any other job), the policy will no longer provide coverage. You are financially protected, but you can be trapped not working.
3. Own Occupation – If you cannot do your regular occupation, you are covered. Coverage does not stop if you start a different job. For example, if a surgeon injures their hand and cannot practice surgery, coverage applies. Coverage continues if the surgeon continues practicing as a physician in a different capacity (eg family practice, academic, etc.).
Disability insurance is the most complex type of insurance discussed here and has the most strict underwriting terms. There are other policy riders not discussed here that may or may not be right for your individual circumstances. Not all of them are worth the cost to all physicians, and the policy should be discussed with your insurance advisor.
Summary of Insurance Policies:
| Term Life Insurance | Whole Life Insurance | Critical Illness | Disability | |
|---|---|---|---|---|
| Covers | Death | Death | Critical Illness | Disability |
| Benefit Type | Lump Sum | Lump Sum | Lump Sum | Monthly Payments |
| Requirement to claim | Death Certificate | Death Certificate | Physician Diagnosis | Physician Order to Not Work |
| Typical Benefit Amounts | $1 million - $10 million | $1 million - $10 million | $500,000 - $2 million | up to 2/3 of income |
| Cost | $500-$1,000 per month | $5,000 - $20,000 per month | $100 - $1,000 per month | $200 - $2,000 per month |
| Cash Value at end of policy | NO | YES | YES | NO |
| Part of estate and retirement planning | NO | YES | YES | NO |
Choosing an Insurance Advisor:
Insurance policies can be complicated and situational, so you want the right advisor. Your insurance advisor should work with your accountant and financial advisors to select the right policies and ensure all tax implications are considered. In the words of Lukas, “Insurance advisors help provide solutions to problems your accountant and financial advisor identify”.
When selecting an insurance advisor, designations are important. Looks for advisors who hold a CFP (Certified Financial Planner) or CLU (Chartered Life Underwriter). Your advisor should have experience working with physicians and understand the nuances and tax implications of professional corporations. Lastly, your insurance advisor should work closely with your other professional advisors. If you are getting recommendations to purchase expensive policies without any input from your accountant or financial advisor, it is a red flag that you might not have the right advisor.
Last tips on physician insurance:
Here are Lukas’ top tips for physician insurance:
Protect your spouse: Insurance policies are generally designed to provide financial protection in case of lost income – ie. your income as a physician. But even if you spouse does not earn substantial income, you should consider also having insurance for them. Any critical illness or death in the family can be difficult and, although your health is not directly impacted, these events can have an impact on your ability to work.
Insurance is situational: The right insurance policies depend on your own personal situation. If you have limited financial resources or your family will rely on you for income, choose options for simple low cost plans that cover you for unexpected events. If you have significant financial resources or your family won’t need your income, choose options that best protect your savings and investments.
Insurance is part of your overall financial plan: Get a good insurance advisor and ensure you accountant and financial advisor are included in the conversation.
Consider where your policies are held: Generally, insurance policies are best managed within your professional corporation. Disability is an exception to this rule. Disability insurance policies are usually best held personally as the benefit is tax free. Like all policies, you should discuss these options with your insurance advisor and accountant.
Sooner rather than later: Lastly, Lukas advises doctors to get insurance organized earlier rather than later. Costs are lower when you’re young and you are more likely to be medically insurable.
That’s the basics of physician insurance. Many thanks to Lukas Hayes with ADVICO for sharing his insights with us. If you want to learn more about physician insurance, you can connect with Lukas Hayes directly. And if you have any questions for us at Statgo, get in touch. We’re always happy to chat.