Your Money: Do You Have Enough Insurance?

March 1, 2009

What kinds of insurance do you need - and how much? We answer the eternal questions.


Wherever physicians congregate, questions about insurance - life, health, liability, etc. - are sure to arise. That’s partly because no real consensus has emerged among physicians about the key questions: What types of insurance do you need? And how much of it should you get?

Some physicians figure they can cut costs by self-insuring for life insurance, and doing without health coverage altogether, assuming their professional connections will help them avoid big medical expenses. “A lot of doctors think they’re never going to get sick,” argues Leslie Ellwood, a retired pediatrician in Fairfax, Va., and a past president of the Medical Society of Northern Virginia. “Insurance premiums cut into their profit margins and when they are just starting out they don’t want to bother with that.”

Others go to the opposite extreme, loading up on life insurance as an investment vehicle, for example, or scooping up pricey long-term care riders, often at the hands of insurance agents with a great sales pitch.

The optimum strategy sits somewhere in the middle, experts say.

When Ellwood retired from a large multispecialty group about a decade ago, he left with a long-term care insurance policy, obtained through his group, at cheaper rates than what he could qualify for as an individual. Few physicians these days can reap such a rich benefit, so he encourages younger doctors today to make sure they have an insurance strategy for their lives and their health, even if their practice doesn’t offer coverage.

The best strategies start not with specific policies but with a discussion of your overall financial plan.

Life and disability

In the case of life and disability insurance, for example, you’re looking to replace the portion of an income stream that can’t be covered by immediate assets on hand. The old rule of thumb of simply buying an amount of life insurance worth seven to 10 times annual pay is far too general, experts say.

Instead, start by asking yourself some questions: Would you want your spouse to be able to take substantial time off to grieve and focus on minor children? Will the kids get by with state schools or must they attend pricey private ones? Is it a priority for loved ones to be able to stay in the family home after you’re gone?

Families today often want survivors to be able to continue their affluent lifestyles, even if an early death occurs. To do that, they’ll need a nest egg capable of generating average returns roughly equal to annual spending. Spending down principal is an option, but it increases the risk of shortfall later in life. Several Internet calculators allow users to estimate their life insurance needs - there’s one at bankrate.com - but remember to consider all the assumptions and whether or not the calculator is being provided by an unbiased entity.

Using a hypothetical 45-year-old physician earning $250,000 annually with two young children, the Bankrate calculator estimated the estate would need $3 million in insurance coverage, but that assumes no other accumulated savings.

“I start with a client’s goals for retirement, funding children’s college, buying a second home, whatever they want to accomplish in life” and then calculate the costs and best insurance strategy for getting there, says Ann Laferriere, a financial planner and principal with Griffon Financial Planning in Bend, Ore.

Affluent clients planning to retire early, for example, will probably accumulate assets faster than those counting on working a long time. From an insurance point of view, this might make them better candidates for inexpensive term insurance early on, but moving them toward self-insurance as they get older, she says.

Permanent insurance, such as whole-life or universal life, can have a place in your financial game plan, says Alexis Martin Neely, a Los Angeles attorney and creator of the Web site familywealthsecrets.com.

“I don’t usually recommend permanent insurance, except in the case where you have one high earner and one stay-at-home spouse,” she says. In that situation, with today’s high medical costs and uncertain financial markets, permanent insurance can provide a much-needed financial boost. Even if it comes late in life, having that guaranteed payout can save a widow from poverty, she says.

Permanent insurance can also be used to pay estate taxes, but Neely advises going easy. If you determine your heirs would need a lump-sum insurance payout of $2 million at your death, for example, a permanent policy worth $250,000 to $500,000 would suffice to pay estate taxes, she says.

Disability

Disability insurance is often overlooked, but that’s a mistake, experts say. You’re statistically more likely to get sick or be injured than to die young.

Major disability insurance carriers include Berkshire Life Insurance Co. of America, MassMutual, and Metropolitan Life Insurance Co. Several carriers now offer retirement disability insurance as well, says Ronald Perilstein, president of The Arjay Group Inc. in Narberth, Pa., which designs insurance plans for physician groups and companies.

That’s important to consider because if you become disabled for a lengthy period of time, you’ll need to make sure you have retirement funds available that you or an employer would have contributed during your career, he says.

Another tip: Even if you have group disability coverage, consider getting a small individual policy with the flexibility to boost coverage without a physical in case you end up with a group in the future that doesn’t provide the insurance, Perilstein says.

Health

Like corporate employees, fewer physicians are retiring today with continuing health benefits. And professional courtesies can’t waive away major charges for procedures, experts say.

So if you retire before qualifying for Medicare, you’ll need to factor in the cost of buying private health insurance during the gap, as well as for extra expenses Medicare doesn’t cover down the road. Even after age 65, couples will need about $225,000 for medical expenses in retirement, according to Fidelity Investments.

Long-term care

Finally, long-term care insurance is worth studying to see if it’s right for you. Keep in mind there may be other strategies, however. One adviser recalled a client with a special-needs adult child who decided to forego long-term care insurance on himself, purchasing instead a life insurance policy for the benefit of the child in case he had to spend down assets on a long nursing home stay.

For self-employed doctors, long-term care premiums can be tax-deductible. You may want to look for a policy that allows prepayment, so you can deduct the payments while you’re working and have them paid off in retirement, says Scott Ford, president of Cornerstone Wealth Management Group in Hagerstown, Md.

Life insurance may also offer some investment opportunity. Permanent life insurance, for example, offers an investment component that can boost benefits if financial markets perform well. Whole-life products come with guarantees on premiums and the death benefit, while variable and universal policy benefits fluctuate with financial markets.

Buying a policy because it offers permanent coverage makes sense for some, but doing it to gamble that the market will multiply your coverage is risky business.

The bottom line, says Laferriere, is to make your insurance strategy fit your financial plan, rather than trying to make insurance products act like investments.

Janet Kidd Stewart is a freelance writer based in Marshfield, Wis. As a contributing columnist for the Chicago Tribune, she writes a weekly, syndicated retirement column called “The Journey” that appears in Tribune newspapers across the United States. She holds a bachelor’s degree and master’s degree from the Medill School of Journalism at Northwestern University. She can be reached via physicianspractice@cmpmedica.com.

This article originally appeared in the March 2009 issue of Physicians Practice.