Asset protection: personal insurances for a medical practice physician owner

For most of us, insurance will be the biggest waste of money, but it is a necessary evil.  I thought my personal insurance costs were bad enough, but business insurance can be just as brutal.

Some of these products are necessary to complete a lease or to secure financing.

These are the insurance policies that you will need.

Personal Insurance

1. Health

In residency, I received free health insurance benefits.  Now that I’m self-employed, there’s no such thing as free benefits.  I either go without health insurance or I pay for it.  As a young, healthy person with no medical problems, I was tempted to go uninsured, especially since I was trying to save every single penny.  However,  as I get older, I know that my risk of acquiring ailments increase, and  the last thing I want to do is to pay $20,000 for my appendicitis.  So, I’m paying for health insurance.  Besides, since I am indeed healthy, my insurance policy isn’t too expensive.  For a PPO medical and dental plan, I’m paying $90 a month.  Depending on which business entity you end up choosing, there may be certain restrictions on health insurance tax deductions.

Howie’s comments: thankfully I’m grandfathered into a pre- Obamacare exchange plan. I have a BCBS PPO plan with a wide network. When I first opened, my premiums were $108 per month. This year they’re $260 a month for the same benefits and $5500 deductible.

The problem with the Obamacare plans is the premiums are much higher because it’s a smaller pool and lots of folks in the pool have significant health problems. So healthy self employed practice owners like us are lumped in with them. I shopped around the exchange plans and my monthly premium would be about $500, twice as much as my grandfathered plan.

Also, most exchange plans are narrow network plans. Which means you’re limited to seeing a certain set of doctors, usually in a health system or ACO. If you get a serious problem and you need to see a specialist in a different system, then they may be network and you’re out of luck. I would happily pay extra for a plan with a bigger network.

Finally, if you have a employee or employees who can’t get health insurance through their spouse they may want insurance. You can contact a broker for a small group plan. Many folks on our thread have done so. I heard that even Costco sells small business plans.

Two of the ACOs I participate in will both start their own health plan as they realize it’s difficult for small practices to obtain health insurance. I’m curious to see what their premiums will be. I’m assuming the plans will be narrow network, the doctors in network the same ones as the ACO.

Unfortunately, the ACO plans for small offices will only cover offices with eight or more employees at first. Let’s hope that eventually they will be expanded to smaller offices like mine.

If you’re young and healthy, get a high deductible plan with a HSA. You are responsible for the first $5500, but you can put $3500 into a HSA account, get a tax deduction, invest the money, and when you take the money out for health care it’s tax free of capital gains. A stealth Roth IRA with a triple tax advantage! Use your post tax dollars to pay for health care if you can afford it. That way your HSA money can grow.

When I was at AAO last month I was surprised how many folks were reluctant to start their own practice because of concerns about the price of health insurance and retirement plans (more about retirement plans in a later post).

Unless you or your family member have a serious condition, it shouldn’t even be a second thought to stop you. And even if they do, chances are you’ll find a compatible plan.

2. Auto

OK.  Everyone pays for this one, but I decided to include it for completeness sake.  I’m paying $130 a month on a 2002 Lexus IS300.  Had I not missed the window period to sign up for traffic school 2 years ago, it would’ve been $100 a month.  You live and learn.

Howie’s comments: you want to make sure your limits are high enough. Pay special attention to your liability limits. Usually your liability has to be at least $300,000 to be able to buy umbrella insurance. You also want to make sure you have uninsured and underinsured motorists coverage which covers your bills in case if you’re hit by some sleazebag who doesn’t have insurance or just drives off (yes, this happened to me).

3. Renter’s

The only reason I got this was because I would have had to pay just as much in auto insurance without it. $12 a month.

Howie’s comments: you definitely need renters or homeowners insurance. What if your guest or mover has a slip and fall accident and decides to go after you? Again, you want to make sure you have at least $300,000 of liability so you’re eligible for umbrella insurance.

As with auto insurance, if you can afford it get a plan with a higher deductible ($1000, $1500 or more). Insurance should be for stuff that costs a lot that you truly couldn’t afford. There’s no need to keep your deductible at $200, the insurance company doesn’t want you to file nickel and dime claims.

4. Disability Insurance

Disability insurance protects you from losing income if you are permanently unable to perform your duties as a physician.  I actually signed up in my third year of residency.  The younger you are at enrollment, the lower the rates will be.  Also, I think some companies offer resident discounts that continues on after graduation.  When you do sign up, make sure that you obtain an “own occupation” coverage policy that insures against disability in your specialty only.  That way, even if you did injure your hand and are unable to practice ophthalmology, you would still be able to practice psychiatry while collecting insurance benefits.   If you are going to finance your startup, banks will often require you to have disability insurance that covers the amount of your monthly loan payments. I currently have a $5,000 a month noncancelable/renewable policy for $155 a month.

Howie’s comments: Ho Sun is spot on that you should buy disability when you’re a resident, when you’re poor and have the most to lose. Often times the maximum amount of disability insurance is a percent of your income over the last year or two years. So if you earned $200,000 you can’t buy a policy that will replace $300,000 per year.

I’m not going to discuss the nuances of choosing a company, but you want to buy from one that is financially stable (won’t go bankrupt) and doesn’t have a history of trying to stiff you and won’t pay up if you truly become disabled

I hear that it isn’t uncommon for doctors to have to sue disability insurance companies to get them to pay up, but do not have firsthand experience with this (and never hope to!)

Many policies have aggregate limits across all disability policies, like $15,000 per month. One way to get around this is to use post tax dollars to purchase disability insurance. If you use pre tax dollars to pay the premiums, then the payouts are taxed. So if you use post tax money, the $15,000 per month is equivalent to more like $20,000 per month pretax.

If you’re employed, make sure that your insurance is portable. If you develop a health condition while you’re employed, this might either make your premiums high or disqualify you from coverage if you left your job for another that didn’t provide disability, or started your solo practice.

As your income goes up, you will want to increase your coverage. But one very good reason to save your money and become financially independent is that you won’t need as much disability insurance. If you have $4 million in your 401k/IRA/ defined benefit plan, your house is paid off, and you have enough in your 529 plans to pay for your kids’ tuition, then guess what, you don’t need disability insurance.

Save the money on the premiums and take a trip to Hawaii. I doubt that Mark Zuckerberg has or needs disability insurance.

Another way to reduce premiums is to increase the waiting period for benefits from 90 days to 180 days. Once you save up six months of emergency expenses in a rainy day fund you could consider doing this.

You don’t have to drop your disability all of a sudden. You can gradually reduce your benefits (and premiums) as you accumulate wealth and move closer to financial independence.

Disability insurance is worth the most when you’re young and broke. The premiums will pay out for many years (most policies until age 65) and the cost of the premiums are very low.

I don’t envy folks who are 59 and need to earn a bunch of cash before age 68 because they didn’t save enough. The premiums in your 60s are extremely high, and if you become disabled they only pay out a few years, rather than for many years.

5. Umbrella insurance

Umbrella insurance is a important and basic component of asset protection. It increases the liability limits on your auto and homeowners or renters policy, so if you are involved in an accident with your house or car, it raises your liability limits in case if someone sues you for damages.

If your neighbor’s child plays on your backyard swingset without your permission and gets injured, guess which “rich doctor” they’re going after?

Umbrella insurance also covers you for libel and slander.

If you have parties at your house and serve alcohol be careful, it may or may not be covered by your umbrella insurance, or you may have to purchase a rider. If you have pets, check to see if they are covered under your umbrella policy or if you need a rider.

Very importantly, if you serve on a board of directors for a organization, even your hospital medical staff, make sure that you’re indemnified or have board of directors insurance or purchase a rider from your umbrella insurance company if not covered. This is a common reason for lawsuits against doctors. Read this post for an actual story about what happened!!!!

You should purchase umbrella insurance for $1 million over what your assets are. Once your net worth begins to build, increase your limits to about $5 million.

Umbrella insurance isn’t expensive at all, it usually costs about $125-150 for each million of coverage per year.

Here’s a good article about umbrella insurance.

6. Life Insurance

Another policy that lenders require for loan disbursement.  Makes sense as well.  I haven’t gotten it yet, so I don’t have exact rates, but I’m expecting somewhere in the $30 range, since I don’t plan on dying any time soon.

Howie’s comments: be sure to get TERM life insurance, NOT whole life insurance. Many so called “financial advisors” will try to swindle you by selling you whole life. The salesman are experts at pushing the right buttons, they tout it as a great investment (you have negative returns the first several years and returns lower than the average of the stock market for life), and they earn high commissions (up to a year’s premiums) for selling it to you. They often tout asset protection as a reason to buy it, but there are better and less expensive ways to protect your assets.

Most doctors who get suckered into buying whole life insurance regret it and give it up, surrendering any premiums. Google it if you don’t believe me.

I’m not going to go into every detail but here’s an article about why whole life insurance is usually inappropriate.

And here’s another article. The panelist cites the example that you’ve maxed out all retirement plans, HSA and 529 plans and expect to have over $10 million net worth (subject to estate tax) and want a conservative bondlike investment as a candidate for whole life. Pretty common scenario, right? I would argue even in that scenario you could consider investing in stocks or even real estate rather than whole life.

Even if you have no dependents buy term life insurance anyway. Just like with disability, you don’t want have higher premiums or even be excluded from coverage if you develop a health condition and need it in the future.

Just like with disability insurance, you can lower your coverage and eventually drop life insurance once you accumulate wealth and move towards financial independence.

Whole life salesman often will tell you that you can accumulate wealth tax advantaged and often asset protected by paying your premiums. But the truth is you can accumulate MORE wealth by buying term and investing the difference, especially if you max out your 401k which has ironclad asset protection.