An Asset-Protection Plan for Young Doctors

Young physicians often ask: “What is the most important thing I should be doing financially in the first years of practice?” The answer is simple: You need to build a solid foundation. Yet, the application of this concept is different for each physician.

How you approach foundation building depends on where physicians are their personal lives (single, married, kids, etc.). Also, it can and needs to begin before the physician even leaves training -- establishing the right habits are key to building a financial foundation.

Most young physicians will see a significant increase in their incomes when they begin their practices. Up to this point, most have typically been living paycheck-to-paycheck, and a jump in income by five-fold or more can be a bit euphoric. With a “spend now and plan later” attitude, many young physicians will indulge a bit and make large purchases. Often taken too far, they find themselves once again living paycheck-to-paycheck. The attitude then becomes: “Once I make partner in a few years, then I’ll address my financial plan.”

The most important factor in the building of a foundation is to protect what the young physician has already built -- before tackling the endeavor of building wealth. For many young doctors with little savings and often large student-loan debts, the question often is: “What have I built? I am in severe debt!” The answer already have a significant asset that needs protecting -- the value of their future income.

Given the significant investment made to become a practicing physician, it should not be surprising that the value of future income is also significant. For example, let’s say an orthopedic surgeon is offered a starting salary of $300,000, including benefits. Assuming this physician plans on practicing for 30 years (and 3.5% inflation), the present value of this annual income is: $5,517,613, even if that physician never makes more than $300,000 per year, including inflation.

Most people would think an asset this valuable is worth protecting. That is why disability income insurance is the most crucial tool for young doctors.

Protecting Value of Future IncomeDisability income insurance conceptually is straightforward. If one becomes disabled, it will pay the disabled doctor. For young physicians, this protection is critical because they have not accumulated the savings to support themselves and their families in case they cannot work as a doctor in the future.

When looking at purchasing individual disability income insurance, physicians need to determine their need, not how much they can get. For example, if monthly expenses are $3,000, but an insurance salesman says he can get you a policy that will pay $5,000 a month, you are paying more to over-insure yourself. While having more coverage than needed is not always wrong, controlling expenses today in order to build the proper foundation is more important.

Physicians also will want to make sure they’re purchasing adequate coverage. The definition of disability should be occupation-specific, so physicians won't be forced to go back to work in other fields if they can no longer work in their own.

A "residual," or partial disability, rider is another important part of the contract, in case the physician suffers a partial disability that leaves them able to work only part-time in their own occupations. Typically there has to be an income loss of 20% or greater for this rider. Also, in the event of a long-term disability, having a cost-of-living rider as an inflationary protector is important.

Additionally, young doctors should beware of what is available through their employer. More often than not, a hospital will provide group disability income insurance at no or minimum cost to the physician. The issue with group insurance, however, is that it is covering the masses. This can lead to coverage that is not occupation-specific, has short benefit periods, does not have a partial or inflation protection rider, and can be cancelled at any time. While that is not the case with all benefits plans, generally group insurance is not adequate for a young physician.

Often, there are discounts in place that are connected to the hospital that allow a young physician to purchase individual disability income insurance at a discount, or with unisex rates. The unisex-rate option is the most ideal and has the greatest impact on female physicians.

Looking Out for Dependents

For young doctors with financial dependents — typically, children or spouses, but sometimes other elderly family members – they need to focus on protecting their future income value not only against disability, but also against death. This is why life insurance is the second most important tool for future asset protection.

Much like disability-income insurance, you need to first determine what your need is from a death benefit perspective to make sure you don't over insure. The way to determine your need is to decide what expenses would need to be covered in the event of your death. That can include mortgage, education funding for children, car loans and other debts, income support for spouse, etc.

For life insurance, stick with term life insurance -- it's inexpensive and provides a death benefit for period of time (say 10, 20, or 30 years). Term life isn't the only insurance available, but it is generally best for young physicians starting their careers.

Physicians in training are told, “First, do no harm.” For young physicians who are at the outset of their financial careers, we give similar advice: “First, build your foundation.”

R. Paul Wilson, CRPC, is Regional Manager of Private Client Services for O’Dell Jarvis Mandell LLC, in Cincinnati, Ohio, where Michael Lewellen, CFP, serves as Director of Financial Planning. The authors welcome your questions and can be reached at (877) 656-4362, or through their website Ojmgroup.com. For a free (plus $5 shipping & handling) copy of "For Doctors Only: A Guide to Working Less and Building More," please call (877) 656-4362.