2nd Step to Financial Freedom – Get Properly Insured

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Having adequate insurance is a fundamental part of your overall financial plan and the 2nd step to financial freedom after establishing an emergency fund (perhaps it should even be 1st). It is also something that most people struggle with, as there are innumerable types of insurance with many options to choose from. At it’s most basic, insurance is a method to transfer risk from you to an insurance company, and you should only pay to transfer risks that you are not willing or able to shoulder. While insurance companies are happy to insure everyone and everything, in general you should only insure against large losses. Below is one man’s attempt to treat insurance with a “KISS” (keep it simple, stupid) approach. This post will discuss insurance that you probably need, insurance you might need, and that which you probably don’t need.

TYPES OF INSURANCE YOU PROBABLY NEED

If you cannot afford the costs involved in any life scenario, then you should probably insure yourself against it.

Disability Insurance

While an emergency fund and the Navy’s disability policy can “self-insure” you against short-term disability, you may need help in the event of a long-term disability unless you are wealthy enough that you can make up the difference between your military pay, including all physician bonuses, and your disability payments, which will not reflect the higher pay of a physician. Most physicians probably rely on their higher pay, and would be pretty disappointed with the Navy and VA payments in the event of 100% disability, in which case you’d get approximately your annual/monthly basic pay.

Typically, you should obtain enough coverage to replace 60-70% of your income up to the age of 65 in the event of total disability. Ideally, the policy will cover your specific specialty as a physician, what is called “own occupation,” and will not rely on you finding alternative means of employment, such as working in a different specialty. You will also want coverage if you can only work part-time. Key components of the ideal policy include:

  • Non-cancelable – they can’t cancel your policy or raise your premiums
  • Guaranteed renewable – no medical exam is required to renew
  • Residual benefit protection – pay you part of your benefit, or “residual benefits” if you are partially disabled
  • Cost-of-living allowance – the amount you are paid is adjusted for inflation

If you think the Navy/VA disability payments would be inadequate, look for a private policy, which may be expensive and difficult to find as an active duty physician. After years of searching, I was able to get up to $2500/month of supplemental coverage from the American Medical Association. In addition, a private company called DI4MDs.com was able to get me the level of coverage I needed, although it was pretty expensive (but not as expensive as being under-insured in the event I’m disabled).

Try to reduce the expense by lengthening your “waiting” or “elimination” period. The waiting/elimination period is the amount of time you have to wait after becoming disabled until your disability payments begin. If you have a substantial emergency fund, you can lengthen your waiting/elimination period and lower your premiums. In addition, I figured it would take at least a year for the Navy to separate me if I was significantly disabled. If you don’t have a large emergency fund or you feel the Navy will move fast in the event you are disabled, you may need a shorter waiting/elimination period and will likely pay higher premiums.

Homeowner’s Insurance

You need homeowner’s insurance to protect the structure of your house, its contents, and to insure against injuries to other people or damage to other people’s property. Make sure that the contents of your home are covered for “replacement cost” and not “actual cash value.” For example, replacement cost coverage will give you $800 to replace the 3 year old laptop that was damaged, while actual cash value would only give you the $200 it is worth after 3 years. In addition, you will likely have to purchase a “floater” to cover any high-value items, such as jewelry or expensive art.

Renter’s Insurance

If you rent, you’ll need renter’s insurance to protect your belongings, but it also offers liability protection, similar to homeowner’s insurance.

Auto Insurance

You need auto insurance in case you have a serious accident and damage your car, injure yourself or others, or damage someone else’s property. Lower your rates by having a deductible on the policy that is as high as you can comfortably afford, and carefully evaluate how much collision and comprehensive coverage you need. If you are driving an older vehicle that is not worth a lot of money, paying for this coverage may not make sense.

Umbrella Liability Insurance

Umbrella liability insurance protects you in case you get sued and adds liability coverage on top of your homeowner’s, renter’s, and auto insurance. It will come in handy if your dog bites someone and they develop necrotizing fasciitis, the mailman slips and falls on your front porch and can no longer work, or a neighborhood child drowns in your pool. It is typically sold in $1 million increments and is relatively inexpensive. A $1 million dollar policy will typically run $150-300 per year. As a physician, you should have AT LEAST $1 million of coverage, and should consider up to twice your net worth.

What if you are early in your career and have very few assets? You should still have umbrella liability insurance as future wages can be garnished in some judgments against you.

TYPES OF INSURANCE YOU MIGHT NEED

Professional Liability Insurance

If you are practicing medicine outside of the Navy (moonlighting), you need professional liability insurance. (If you don’t moonlight, you don’t need it.) This insurance will cover attorney fees, expert witnesses, court costs, costs of gathering evidence, and settlements in the event you are sued.

There are two types of policies, “occurrence” and “claims-made.” Claims-made policies only cover your liability if a claim is made before the policy ends. With this type of insurance, when you leave a job you need to purchase “tail coverage” that extends your liability. Tail coverage can be expensive, and before you take a job moonlighting you need to make sure you know who is going to “pay the tail.” Occurrence policies are more expensive (and therefore less commonly offered) because they cover your liability in perpetuity and do not require a tail.

Life Insurance

“More money is wasted on life insurance than probably any other insurance product…It cannot be overemphasized that cash-value life insurance is probably one of the biggest scams around.” – Paul Sutherland in the AMA Physician’s Guide to Financial Planning (2008)

If you were to die, would anyone suffer financially? If the answer is “no,” then you don’t need life insurance. If the answer is “yes,” then you need life insurance, and probably a lot of it until you build your investment portfolio.

There are two types of life insurance. First, there are products that combine insurance with an investment account, often referred to as “cash-value” or “permanent” life insurance. Many insurance agents and companies (including USAA in my experience) will try to sell this, but it is probably not the kind of insurance you need. It does have some tax advantages, but the downside of these policies is that the insurance agent/company who sells them collects high fees. In addition, early premiums go mainly toward sales commissions and other expenses and not into your investment account.

The second type of life insurance is “term” insurance. It provides a death benefit only and does not build any cash value or serve as an investment. This is likely the only kind of life insurance that you need, and this is the type that Servicemembers Group Life Insurance or SGLI is. To quote again from the AMA’s financial planning guide, “I cannot emphasize enough the importance of sticking to simple, unencumbered term life insurance – it fits 99% of insurance needs.” It is less expensive than cash-value/permanent policies and you can take the difference and invest it in a retirement account or other low-cost investment vehicle. You don’t need an insurance agent to purchase this and should simply try term4sale.com, selectquote.com, accuterm.com, insure.com, or other similar websites. Both USAA and Navy Mutual Aid Association (and other companies you can find in Navy Times) offer military-focused term life policies.

When you buy term insurance, ensure that it is renewable without a medical examination. You can also consider decreasing term insurance, where the death benefit progressively decreases. As you age, the need for life insurance typically declines as dependents age and your investment portfolio grows. Eventually you will need no life insurance at all, which is why many arguments for “permanent” life insurance should fall on deaf ears.

Long-Term Care Insurance

Sometimes called “nursing home insurance,” this is usually purchased by people over the age of 50 to pay for nursing or at-home care. If you are under 50, you should probably purchase disability insurance instead of long-term care insurance.

The rates and terms of these policies are highly variable, and whether you want to get one is an individual decision. The earlier you purchase it, the cheaper it is, but the total money you’ll pay out over the life of the policy is obviously higher. If you are a successful investor, as a physician you will probably have enough assets to self-insure in the event you need prolonged care, so I would suggest that most will not need this, but circumstances and goals obviously vary, so it is something to consider. If it is important to you that your nest egg is passed to your heirs, you may want to consider this insurance so it is not passed to a nursing home instead.

Flood Insurance

Homeowner’s and renter’s insurance do not cover flood damage. To find out if your home is at risk of a flood, go to floodsmart.gov. There you can also find out information about the government’s low-cost flood insurance programs.

Earthquake Insurance

If you live in an area at risk for earthquakes, you’ll need earthquake insurance in addition to your homeowner’s insurance. California’s earthquake website, earthquakeauthority.com, is a good place to start.

TYPES OF INSURANCE YOU PROBABLY DON’T NEED

Supplemental Medical/Health Insurance

TRICARE has got you covered here, and there is no need to consider supplemental insurance until you retire.

Life Insurance for Children

While you will be sad if one of your children dies, you do not rely on his/her income; therefore you are unlikely to need life insurance for children. The same thing is likely true for a spouse/partner who does not have a job, unless you would need money to replace the childcare he/she provides.

Rental Car Collision Insurance (Loss Damage Waiver)

They always ask if you want collision insurance or a “loss damage waiver” when you rent a car, but a lot of auto insurance policies automatically cover your rental cars. In addition, some credit cards provide this too if you use their card to pay for the rental car, which is one reason you have to use your government credit card for officially authorized rental cars. Make sure you find out if your policy or credit cards have this before you step up to the rental car counter and are put on the spot.

Flight Accident Insurance

If you need life insurance, buy it. Don’t buy insurance on a whim when purchasing tickets in the off chance that your plane goes down.

Travel Insurance

This is a common credit card benefit when you use them to pay for your trip, so check with your credit card company. Even if you don’t have it, it is unlikely to be worth your money for domestic flights.

Credit Protection Insurance

This is designed to protect your credit by insuring your credit card or mortgage payments in the event you become unemployed, disabled, or dead. If you have life or disability insurance, this is probably unnecessary.

Extended Warranties

Most products that offer extended warranties are not costly enough to insure with an extended warranty. If the new TV happens to break shortly after the warranty expires, you’ll probably be able to afford a new one. Most of these offers are a waste of your money.

GENERAL INSURANCE ADVICE

Insurance companies occasionally go under, so you want to make sure that you only get insurance from quality companies with strong financials and that you diversify your larger policies. You can find information on the finances of insurance companies from AMBest.com, FitchRatings.com, Moodys.com, and StandardAndPoors.com (NOTE: most of the sites require you to register to access their ratings). For example, if you need $2 million in life insurance, you should strongly consider diversifying and getting 2-3 different policies from various companies.

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