I am happy to have a guest post for today’s article, written by Jamie K. Fleischner with Set for Life Insurance. Planning your financial future should include risk management. Part of risk mitigation is obtaining the right amount and the right kind of insurance. Spending money to help mitigate a one time financial loss that could lead to bankruptcy is on the surface a wise choice. However, there are many differences in types of policies that can lead to inadequate coverage for your families or personal needs. In my previous post, I talked about how my company was only offering $400,000 in disability insurance. In the event I became disabled, $400,000 would disappear very quickly and not be of much use. I have no financial conflicts of interest to report with this post and Set for Life.
The first few years post training or medical/dental/veterinary school can be very active when it comes to your insurance planning. All of the following life events can have an impact on your insurance planning and are likely to occur in this phase post training.
- New job
- House purchase
- Student loan payments due
- Started a new practice or purchased a practice
New Job/Changed Employer
A new job will require you to review and evaluate your life and disability insurance. As a medical resident, most residency programs offered you these benefits. If you purchased a disability policy during residency, you were eligible to purchase up to $5000/month benefit regardless of income. The same is true if you purchased your policy while in school as a CRNA, veterinarian or dentist (or PA, optometrist, etc…) Once you finish your training, the amount you are eligible for will be based on your new income and if you have a group disability policy in force. Most group policies require you to enroll. As a result, there will be a maximum amount you are able to supplement based on the size of the group.
An exception to this is if you are in your first year as an attending. A first year attending may purchase up to $6500/month benefit regardless of income and it does not require any financial documentation. This is especially helpful if you have not yet secured a full time job or are doing locum work.
A lot of professionals have the misconception that if they have benefits through work, they do not need to supplement with an individual policy. Here are a few considerations:
- Most group disability policies require you to be totally disabled to retrieve benefits whereas an individual policy will pay benefits if you can’t work in your occupation or specialty.
- If your employer is paying the premiums, the benefits are taxable.
- If you leave your employer, your life and disability insurance will most likely not be portable. If you have an adverse change in health, you may not be able to obtain the benefits elsewhere.
If you purchased a home, it is important to ensure that you will be able to pay your mortgage if you become disabled. If you purchased your home with a spouse or partner, it may be important to insure the mortgage with a life insurance policy. When considering the appropriate amount of life insurance to purchase, it is important to consider the loan balance on your mortgage.
Marriage can significantly change your situation when it comes to insurance planning. If you signed up for life insurance through your work, make sure you contact your benefits office to see if you need to name your new spouse as beneficiary of your life insurance. If you are now married, life insurance may now become more significant. Talk to your spouse to discuss what would happen if either of you were to pass. Would you be able to sustain your lifestyle on just your income or do you need to insure each other to be able to keep your finances afloat? Typically you need to purchase 10-12x your income to be able to replace your income.
When people have children, life insurance planning becomes especially important. Now it is critical to not only be able to replace each other’s income, but you have dependents who rely on your income. The rule of thumb is you need 10-12x your income until your youngest child is 25. So if you just start a family, you ought to consider a 30 year term if you plan to have more than one child. If your income is $200k, you would need approximately $2mil to $2.5mil of life insurance.
One of the biggest mistakes people make is naming their children as beneficiaries of their life insurance. Minors cannot receive life insurance proceeds until they are at least age 18. As such, it is best to create a will and/or trust to state how you wish the proceeds to be disbursed if you and your spouse both die. Or, you can name whomever would be guardian of your children as your contingent beneficiary.
Student Loan Payments
It is important your disability insurance can cover the amount of your loan payment if you become disabled. Some policies have a rider to cover the loans. Most federal loans are forgiven at death but private ones typically are not. This is important to discern to see if you need to cover your loans with life insurance.
Started or Purchased a Practice
If you are purchasing a practice or are obtaining a business loan to start a practice, oftentimes the bank will require you to insure this loan in the event of death or disability. There are specific disability policies designed to pay the bank the balance of the loan directly. These can be paid out of your business account.
The first few years out of training can be exciting and full of life changes. When you have a life change, it is critical to evaluate your insurance needs to ensure you are properly insured.
Jamie K. Fleischner, CLU, ChFC is President of Set for Life Insurance, a nationally recognized life and disability insurance brokerage specializing in helping professionals with their life and disability insurance needs. For more information, you may visit Set for Life at www.setforlifeinsurance.com