The Physician and Dentist’s Complete Guide to Long Term Disability Insurance

The Physician and Dentist’s Complete Guide to Long Term Disability Insurance

Why Long Term Disability Insurance?

Disability insurance is not required by law. If you’re not sold on why you should own dentist or physician disability insurance, this is a great starting point.

Why is disability insurance so important?

Your future income is your biggest asset. It’s far more valuable than your home or car. Why not insure it?

Maybe you’re healthy, don’t have a high-risk life and don’t think it’s going to happen to you. Although chances are small, everyone is at risk of unexpectedly becoming disabled. A car accident, major illness or unexpected injury can limit your ability to work. The question is: what’s your plan if it does happen? Disability insurance provides income when you need it most.

As one person, you never know your chances of becoming disabled – they could be 100%. And you’d never know until it happens.

If you look at large numbers of people, the chances are very low, but the insurance companies already know this. That’s how they price it. The chances are very low but the potential cost is extremely high. This makes it one of the most efficient risks to insure first.

Good planning requires considering the good and bad scenarios and creating plans to address both. Having the worst case scenario (like permanent disability) taken care of allows you to put more focus on living a great life.

The only legitimate excuse for not owning long term disability insurance is that you’re already financially independent. Otherwise, everyone should consider owning at least some disability coverage.

How Does It Work?

For an individual policy, you must apply for coverage, be accepted and begin making payments to be covered for long term disability insurance. Group coverage works differently and will depend on the specific employer. In some cases coverage becomes effective without action from the employee. In other cases, employees must opt in.

Here are some of the basic definitions used in Long Term Disability insurance contracts:

Occupation Class – Insurance companies use their own discretion to sort occupations into a handful of classes based upon expected risk. Rates, and sometimes policy terms, are different for each class. The lowest class includes all occupations that are not eligible for coverage.

Conditional Coverage – If the applicant pays a premium when applying for coverage, he or she will receive interim coverage during the underwriting period subject to the terms and conditions of the conditional receipt.

Insured – The person or company covered by the insurance.

Definition of Disability – How an insurance policy defines when the insured is totally or partially disabled or not.

Exclusions – Specific conditions which will not be covered under the policy.

Non-Cancelable and Guaranteed Renewable – A type of disability policy where the insurer cannot change the policy terms or premiums as long as the insured pays the scheduled premiums.

Guaranteed Renewable – A policy type where insurer cannot change the policy terms (but can change premiums) as long as the insured pays the scheduled premiums.

When Should You Consider Purchasing?

Right before you get disabled, right? Maybe if you can predict the future. But for everyone else the best time to set up coverage is today.

This could be as soon as medical or dental school. Several companies and professional associations sell disability insurance to this group.

If you’re in residency or fellowship, most employers provide minimal group coverage. However, when you consider post-training earning potential, it’s a drop in the bucket. In an effort to help young doctors insure more future earnings, many individual disability insurers and professional associations offer special coverage amounts to medical and dental residents and fellows. Also, some institutions offer “guaranteed issue” coverage to employed residents and fellows.

Which Company Should You Consider?

Most people who buy disability insurance own it for many years. If you’re considering new coverage, look for established and financially strong companies that have solid claims paying experience. Thankfully, good information is much easier to find nowadays with the internet.

Ratings companies such as AM Best, S&P, Moody’s, Fitch and Weiss can help you get started assessing an insurance company’s current financial position. Also, the Comdex provides a score for each insurer based on their average ratings from AM Best, S&P, Moody’s and Fitch. Here is a report from Stan The Annuity Man the breaks down insurer ratings and Comdex scores.

Check out this disability attorney’s website to see how insurance companies handle “grey area” claims. They publish a massive collection of stories, complaints and articles providing information you’ll never hear directly from insurance companies. Below is a video explaining all the resources their website provides on the subject.

Also, another fantastic and underutilized resource for checking out insurers is the NAIC company search. You can enter any company name on the right side of the page (make sure it’s the formal company name for the product under consideration) and click find a company. Then click closed complaints, licensing or financial information for the respective company. If you select the closed complaint ratio report, select individual accident and health to pull complaint reports on individual disability. If you select financial information, you can pull up a report that shows the company’s key financials.

Most disability insurers are set up as either stock or mutual companies. Stock companies are owned by the shareholders. Mutual companies are owned by the policy owners. There are pros and cons to each structure. Stock companies deal with major challenges when stockholder demand for profit comes into direct conflict with taking care of policy owners. Mutual companies have a harder time raising capital because they’re unable to sell shares of the company. Either way, it’s good to know which type you’re dealing with.

For stock companies, pay close attention to claims paying history and consumer complaints. You’ll want to make sure they’re able to balance taking care of customers with profitability. For mutual companies. find out their dividend paying history for the particular product under consideration. Ask how they determine dividends in illustrations. Dividends are a return of premium to policyholders as a result of having more cash than what’s needed to operate (kinda like profits).

These are the companies we’re currently aware of that actively sell Individual long term disability insurance:

Guardian/Berkshire

Northwestern Mutual

Prudential

Mass Mutual

The Standard

Ameritas

Ohio National

Principal

Unum

MetLife (recently stopped selling individual LTD)

Which Contract Provisions Are Important?

Definition of Total Disability

There are many ways to define disability. The manner in which your policy defines disability directly affects your ultimate claim outcome. It’s better to do your homework now and make sure you’re clear on the policy definition.

The most common options for definition of total disability are true own occupation, modified own occupation and any occupation.

True Own Occupation

The true own occupation definition might look like this (excerpt from Guardian’s sample policy): “Totally disabled means that, solely due to Injury or Sickness, You are not able to perform the material and substantial duties of Your Occupation.”

It continues on to detail this more as follows… “You will be Totally Disabled even if You are Gainfully Employed in another occupation so long as, solely due to Injury or Sickness, You are not able to work in Your Occupation.”

Own occupation is considered the most flexible definition of disability. With own occupation, if you’re totally disabled from your job, you’re eligible for benefits even if you decide to go earn money from another job. However it’s not perfect.

Opponents say it’s more difficult than you think to qualify for “total disability”. The meaning of “Material and substantial” is up for debate. In this court case, the insurance company argued the insured was unable to perform all of the “material and substantial duties” except one and therefore wasn’t “totally disabled”.

Also, true own occupation can disincentivize totally disabled insureds from recovering. Maybe they are now working in another occupation and earning more disabled than they ever did before. Why put in the effort to get better?

Modified Own Occupation

Here’s an example modified own occupation definition: “The Insured is totally disabled when unable to perform the material and substantial duties of the regular occupation and not gainfully employed in any occupation.”

Modified own occupation is like own occupation with conditions. They’ll determine you’re totally disabled the same way as true own occupation, however, you must also not be gainfully employed (earn money) in any occupation. The intent it to limit people from double dipping and incentivize recovery. However, it’s certainly not as favorable for the insured that desires maximum flexibility.

Any Occupation

The any occupation definition might look like this: “The insured is totally disabled when unable to perform the material and substantial duties of any occupation.”

The any occupation definition is the most restrictive especially for more specialized professionals. Social security disability uses a variation of this definition of disability. The example I use is a pure any occupation definition. In my example, you must be disabled from all occupations (or unable to do any job) in order to be determined totally disabled.

When you start looking at actual policy definitions, you’ll quickly every company and policy puts it’s own little spin on their definition. Or they might have a hybrid of two. But at the end of the day, most are variations or combinations of these three.

Qualifying for Partial or Residual Disability

Partial disability is more common than people realize. Partial claims occur when you’re sick or hurt and unable to perform some (but not all) of your professional duties. These partial claims fall under a totally different set of guidelines and vary considerably from company to company. Some include partial disability language within all their contracts while others require that you purchase a separate residual disability rider. Make sure you understand how this works in the contracts you’re considering.

Contracts will also include a minimum required percentage income loss (solely due to sickness or injury) in order to begin to qualify for residual or partial benefits. Guardian’s residual disability benefit (offered as an option rider) requires that your loss of income be at least 15% of your prior income. Most other contracts require 20%.

Most companies also offer to pay at minimum 50% benefit for at least the first six months of a partial claim. Under this type provision, if you’re determined to be 25% disabled you might end up receiving 50% of your full benefit amount for the first six months of disability.

When a partial claim reaches a certain percentage of income loss, most companies will go ahead and pay 100% of the benefit amount. This is a provision that’s part of the partial or residual disability contract language. Under the Guardian residual benefit rider, more than 75% income loss is considered 100%. Northwestern Mutual’s normal policy allows more than 80% income loss to be considered 100%.

However, under their Medical Occupation Definition, they provide a spin on this which in certain situations allows for more than 50% time loss to result in full benefits paid. However, it’s not as cut and dry as typical partial contracts. Here is an article covering how this might compare to other contracts.

Recovery and Transition Benefits

Many disability contracts include some form of recovery benefit designed to continue paying some portion of benefits for lost income after the insured has fully recovered. For example, a solo practitioner pediatrician that becomes fully disabled and eventually recovers after several years will likely have lost some or all of their patient base (and resulting income). They may be fully recovered from the disability, but not the income hit.

The recovery benefit can provide benefits to help manage circumstances where it takes time to recover to pre-disability income levels. Some companies limit recovery benefits for a set period of time (like 12 months) while others may pay for up to the entire benefit period.

Elimination Period

Think of the elimination period like a deductible. You have to take the hit for a certain period of time before the insurance company starts picking up the tab.

Weaker contracts require consecutive days of disability to qualify for the elimination period. In many cases, people try their best to work through an illness or injury. Days off here and there turn into weeks off here and there. But they keep trying to go back. Eventually their doctor urges them to stop working. In this common scenario, the consecutive days elimination period will reset the clock every time they return to work. They require a set # of consecutive days to satisfy the elimination period. This contract might say you must be disabled 90 consecutive days to qualify.

Other types of contracts consider the collective days over some preset period of time instead of consecutive days. For example, a contract might say you must be disabled 90 days (out of a 180 day period) to qualify. This is much more favorable for the insured.

Maximum Benefit Period

A policy’s maximum benefit period is the maximum time or age that the policy will pay disability benefits. Maximum benefit periods range from as short as 2 years max all the way up to insured’s lifetime. The most common benefit period is to age 65.

Cost Of Living Adjustment (COLA)

COLA is an optional benefit or rider designed to allow disability insurance benefits to increase with inflation. For a long duration disability scenario, this benefit can be very impactful. It’s typically a good idea to include especially the younger you are.

Automatic Increases Option

COLA only kicks in if you’re disabled. If you’re not, automatic increase options help your coverage amount to keep up with inflation. Most policies limit the amount of time automatic increases will occur.

Future Increase Option

When income is expected to increase much faster than inflation, you can purchase another rider to lock in the ability to buy a pre-set amount of additional coverage without qualifying medically. Future increase options give you the ability to lock in coverage increase options to exercise in the future when salary jumps.

Check to see if increase options qualify for the same discounts as your underlying policy (especially females). Also, make sure you understand the process for exercising these options as some policies are much more restrictive than others.

Mental And Nervous Limitation

Most policies limit mental, nervous or substance abuse related disability benefits to two years. There are a few companies still willing to not include this limitation. For instance, Guardian offers no mental/nervous limitation for most medical specialists in states other than California and Florida.

Who Can Help You Buy Disability Insurance?

In order to purchase a policy, you must go through an insurance agent. There are independent agents and captive agents.

Captive agents are contracted to and obligated to sell product for only one insurer unless a small list of exceptions occur. Naturally, they develop a bias toward their employing insurers products.

Some insurance companies, like Northwestern Mutual, only work with their field force of captive agents. Yet most NM agents are also licensed with many independent insurers (similarly to an independent agent). But as captive agents, they are restricted contractually from going outside NM unless the individual has sub-par health.

Independent agents aren’t contracted or employed by an insurance company. Instead, they are licensed with multiple companies and act as an independent agent for the customer.

True Agent vs. Financial Advisor/Agent

Most disability insurance agents call themselves financial advisors. They want the position of trusted advisor instead of insurance salesperson. To make a living they sell disability, life, health, long term care, annuities and other insurances. It’s likely they’re selling some investments for commissions as well as managing some for fees. On top of that, many charge fees for planning and advice.

This one-stop-shop model may be appealing for some. But it also comes with downsides. Most notably, the massive conflicts of interest that exist. Also, it’s much more difficult to be really good at one thing when you’re doing so many different things.

Agents that truly specialize in disability are few and far between. You’ll know when you find one. Their expertise, objectivity and experience will be unparalleled. This is the agent you want to hire to help you find disability insurance.

Either way, it’s good to have a second set of eyes review what you’re considering purchasing. It’s best to find someone that’s somewhat knowledgeable about the products but that’s not financially connected to the deal. As fee-only advisors, we often play this role for clients.

When you’re considering hiring an agent, here are some questions to ask…

    What other products and services do you offer, and what percentage of your business is each?
    How much experience do you have?
    Which companies are you licensed with?
    Are you a captive agent? If so, what are your contractual restrictions for writing outside business? How do you handle this conflict?
    If you’re an independent agent, are there companies that you aren’t licensed with (Like companies that only work with captive agents)? How do your products compare?
    Do different companies compensate you differently (including commissions and bonuses)?
    How many disability policies have you sold to physicians?
    Do you have access to the lowest possible discount this company offers for individuals in my circumstance?

How Much Does It Cost?

Disability insurance for physicians can be expensive. It pays to do some homework before selecting a policy. Discounts are a big deal for physicians. They are typically established on an individual insurance agent level and can range considerably depending on who you talk to. For example, Joe Random insurance agent sets up a discount plan for the academic hospital with his favored insurer because he has enough clients and initiative to get it done. However, to limit competition, he chooses not to share the discount. This particular insurance company only allows one discount per institution and gives the agent full discretion on how they handle it. Therefore, all other agents must offer full rate plans. Some companies have many different discount layers and reward higher producing more established agents with captive discount plans. This makes it financially beneficial for you to consider certain agents over others.

Traditional individual policies cost up to 40% more for females. Sex-neutral policies charge the same rate for females and males. Some discount plans provide sex-neutral discounted rates while others discount based on normal rates (and are therefore much higher for females). Sex-neutral and maximum discounted plans can save females a ton on premiums. Typically, residency and fellowship has the best discount plans available because competition between agents drives more options.

Companies also charge different rates for different states. Pricing can vary 30% or more between states. The pricing is set based on the insured’s address when the policy is written and locked in. In many cases, young physicians establish disability coverage and move states. If they’re moving to a much lower cost state, it might make sense to cancel existing coverage and setup a brand new policy. Or if the reverse is true, sometimes its best to load up on coverage before moving.

Graded vs. Level Premiums

Graded or annually renewable premiums increase as you age and level premiums do not. Level premium plans will be more expensive on the front end and less expensive on the back end simply because the company levels out the cost.

The premium structure you choose should be based upon your circumstances. If you’re planning to be financially independent by age 45, and expect to drop coverage then, odds are increasing premium will provide the better deal. Or if you’re shooting for age 65, and plan to keep the coverage intact for that long, typically level premiums are the better deal. Experienced agents should be able to run a net present value comparison to help you see the true cost comparison of the two for various time periods.

Premium Frequency

Like car insurance, most disability insurers penalize you for spreading out your payment. Monthly premiums are the most expensive and annual premiums are the least. The cost difference will range from company to company. If you’re paying by any frequency other than annual, figure out the percentage difference and use it to prioritize when to switch to annual.

The white coat investor forum includes a discussion where young physicians discuss their insurance premiums. This will give you an idea of the wide range of costs people typically pay.

Group vs. Individual vs. Association Coverage

Group coverage typically is easier to qualify for and much cheaper than individual. But it usually comes with a tradeoff. Weaknesses of group plans might include:

    Any occupation definition of total disability
    No coverage for partial claims
    No portability if you leave
    Not locked in
    Offsets with other benefits (like social security)
    Benefits taxable (when employer paid)
    Capped benefit amount

There’s a lot to disability insurance. Sometimes the best resource is someone who can point you in the right direction. If you’re an agent that truly specializes in disability insurance for physicians, let us know. We’d like to consider adding you to our list of recommended agents. Or if you’ve purchased disability and had a great experience with a true disability insurance pro, let us know.

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

10 Ways We Have Saved Our Clients Money

10 Ways We Have Saved Our Clients Money

“I can’t afford to pay for one.”
“My net worth isn’t high enough.”
“I don’t have any extra money to save.”
“I’ll do it next year.”

We hear all kinds of reasons NOT to engage in financial planning – some are legitimate, but many are just misinformed views about what financial planning really entails. Here, our ultimate objective is to put you in the best overall financial position to achieve your goals. We review all aspects of your financial life, from basic budgets and insurance, to more complicated investment and estate planning analysis. Our review of all of these areas frequently allows us to find money-saving opportunities for our clients along the way. Here are some examples of the more common ways we’ve been able to accomplish this:

1) Tax Planning & Review

To say that taxes are complicated would be an understatement. Fortunately, we see tax returns every day. We are familiar with what we should and should not see on a tax return, and spotting those errors and omissions have literally saved our clients thousands:

  • Did you miss a deduction?
  • Did you know there’s a credit for that?
  • Are you withholding too much from your paycheck instead of putting that extra cash to work for you throughout the year?
  • Would you be better off making pre-tax or roth contributions?
  • Are you tax-loss harvesting in your taxable accounts?
  • Should you file jointly or separately? (especially when considering your student loan repayment plan)

These are all things that can have a large & direct impact on your bottom line. Are you sure that you haven’t missed something? A second or third set of eyes can help make sure you don’t!

2) Insurance Analysis

Very rarely do we find that people have the right amount or type of insurance… whether it be life insurance, homeowners insurance, auto insurance, etc., it’s often in need of improvement. To be clear, we do not sell these products, but we do run an analysis on what amounts of coverage you should have and what kinds of coverage you should have.

For example, it’s very common for people to get their home & auto insurance early on and never revisit it. And you’d probably be very surprised to learn how many people are over-paying for their insurance (some significantly – $1k/yr+). We have helped clients cut back on monthly premiums just by assisting them in comparing coverage with different companies.

We also see many clients paying for insurance they DON’T need. Some are over-insured, some are paying for permanent life insurance they don’t need, some are paying for extra benefits & riders on their policies that they’ll never use, and many can save hundreds a year by paying premiums at a different frequency (semi-annually or annually vs. monthly) and just don’t realize it.

3) Employee Benefits Review

Similarly, we see a lot of people paying for benefits they don’t need, and some who are not utilizing benefits that could help them. $10/paycheck for that unneeded insurance may not sound like much now, but when you pay it for 10 years.. there’s ~$2,500 you’ll never see again.

Are you using your HSA? Most people aren’t. Do you understand the benefits of an HSA? You might be interested to know that you are potentially better off saving here than you are your IRA from a tax-standpoint. Further, did you know that many companies make HSA contributions on your behalf? We’ve seen company contributions up to $2,400/yr! That’s a lot of free money & you could be missing out! Not to mention the potential savings in health insurance premiums.

And then there’s the retirement plan – are you using this in the most efficient manner possible? Are you using the right plan? Does it make more financial sense to use your 401k, 403b, or 457? Are you getting your full employer match? Does your plan have a “true-up” option? If not, you could be missing out on part of your employer match and not even realize it.

4) Student Loan Analysis

This is a biggie – I’m talking 5-figures in potential savings big. Student loans are a bear of a topic and it’s very difficult to find a planner who truly understands the ins and outs. Fortunately, we make it a point to keep up with the changes & stay informed because it drastically affects such a large percentage of our client base. If you can’t answer these questions, you may stand to benefit from a discussion:

Especially for someone with a high student loan balance, getting help with this is CRITICAL and can have a MAJOR impact on your future.

5) Investment Expense Reduction

Most people don’t understand what they’re paying for with their investments, or the enormous effect these fees can have over the long-run. Check out the image below. This scenario assumes you have a 401k with $100k in it today. You max it out at $18k each year, and your average return before fees is 8%. Over 30 years, the difference between a portfolio with an expense ratio of .25% and .75% is over $300k! And then if you compare .25% and 1.25%, that jumps to over half a million dollars.

Capture

That is SERIOUS money, and most portfolios we review are closer to the 1.25% end than they are the .25%. Do you know how to determine what you’re paying? Are you literally missing out on hundreds of thousands of dollars without even realizing it?

6) Debt Refinance

Especially in today’s market, refinance opportunities are everywhere… auto loans, home mortgages, etc. Do you know if your rates are competitive? If not, do you know which lenders to go to? How do you keep those closing costs down? Recently, we helped a client refinance from a 30-year mortgage to a 20-year mortgage while keeping the monthly payments approximately the same. Not only did this save thousands of dollars in interest a year, they’re now going to pay off their home several years earlier than anticipated.

And then there are other questions to consider.. Should you get rid of your ARM? Are you paying PMI? What it would take to get out of PMI? What about physician mortgage loans?

7) Estate Planning Analysis

Some of the biggest potential issues we find are with beneficiary designations. Sure, you may have the right amount of life insurance coverage in place, but is it set to go to the correct person? Most of the time it is.. But sometimes that $2M death benefit is still set to go to your ex-spouse. Or your parents. We’ve seen this on a handful of occasions, and this small error could mean potential ruin for your loved ones. Make sure your hard earned money is going to fall into the right hands.

8) Salary Negotiation & Contract Review

We do a lot of pay stub and tax return analysis as a part of our services, so we likely have a pretty good idea of what people in your field can expect to be paid. We’ve encountered a few clients that were underpaid compared to what we typically observed in their field, and encouraged them to present their findings to their employers and discuss/negotiate opportunities. So far, outcomes have been positive!

Or for those going into a new job, do you know what to expect from your salary and benefits package? We are aware what the market dictates… especially for physicians. Are you getting a good (or at least fair) deal? Should you be negotiating for more? Are you missing out on anything?

9) Big Financial Decisions

Are you considering making a major purchase? Buying a new car or a new house? Have you sat down and thought about what you SHOULD afford, versus what the lenders tell you that you CAN afford? Because there is a major difference. Have you considered your financing options and how they can affect your interest rate and out of pocket costs?

Or if you have a rental property, have you taken the time to sit down and analyze its profitability? It’s not as simple adding up as the rent you collect. Have you calculated the return you actually realize after taxes, maintenance, etc? Many rental properties we analyze are not nearly as profitable as an alternative investment. Make sure you’re not missing out on earning more money somewhere else.

10) Time Savings

And for your most important asset – your time… it’s nearly impossible to put a dollar amount on this one. What is an extra hour of family time, relaxation time, time with friends, etc. worth to you? How do you quantify that? You really can’t, because time is invaluable. We allow clients to outsource tasks to professionals, which, in turn, allows them to spend more time with the people they love, doing what they love.

After running through those points, it becomes more clear that financial planning can be for everyone. It’s not just about investments, and it’s not just for the 1%. If you don’t work with an advisor yet, are you doing everything above for yourself? If not, you could be missing out on both time & money saving opportunities. Or if you do work with an advisor, is he/she doing everything above for you? If not, it might be time to consider a change – make sure you work with an advisor you trust, and who will work in your best interest 100% of the time.

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Are you interested in having a conversation? We’d love to connect! Click here to request a free consultation. We look forward to hearing from you.

Looking to create your own financial plan? Click here to download our free guide to getting started.



© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

7 Financial Planning Tips for Resident Physicians Transitioning Into Practice

7 Financial Planning Tips for Resident Physicians Transitioning Into Practice

Today we’re covering 7 financial planning tips for resident physicians transitioning into practice. By utilizing these tips early in your career, you’ll be setting yourself up for long term success.

1) Plan Your Financial Journey

Financial planning is a journey: it begins with identifying your destination and charting your path, and then you must follow it. It’s easy to get lost when you don’t have a map, especially if this is a new path for you. Let your financial plan be your guide. Creating your plan is the most important step in your journey.

Creating your financial plan begins with clarifying your ideal future. Take a minute and put on your long-term thinking hat. Fast forward 1, 5 & 20+ years from now. Think about the following questions:

  • What will your life look like?
  • What has to have happened for you to be excited about your progress?
  • Are you financially independent or is work still required?
  • What does financial independence look like for you?
  • How willing are you to pass on current lifestyle increases in exchange for future financial independence and security?
  • What about money is most important to you and why?

Next, map out what’s required to get there and decide if you’re willing to do what it takes today. If not, adjust your destination and tweak your map until you feel good about your future. This will require balancing spending today versus tomorrow. Weigh these options now while you still have the choice.

The Simple Dollar defines financial independence as the point when you have enough money to survive without further income.

To give you an example of how this might look, let’s say your goal is to reach financial independence by age 50 – figure out what you must save today to reach this goal. Are you willing to make the lifestyle sacrifice to make this happen?

Or maybe funding your children’s college education is important. Run the numbers on what this might look like and determine what it will take in terms of lifestyle sacrifice today. You have two options; either make the sacrifice or change your goal. The sooner you do one or the other, the better.

Maybe really big vacations every few years are important to you. Or maybe you have a big home remodel that’s a priority. It’s all about today’s lifestyle versus tomorrow’s goals. Take the initiative to make your decision on how you balance the two.

When you’re sailing across the ocean, you either have a map to keep you on course, or you don’t and you’re lost at sea. Having a financial plan is a great start, but it doesn’t ensure success. Execution is required and that begins with managing cash flow.

2) Control Your Cash Flow

You’re about to sail across the ocean to an island called “your ideal financial life.” If your financial plan is the map, cash flow is the sail for your boat.

Some of you come fully prepared, raise the sail and immediately catch the wind. As you cruise toward your destination, only minor tweaks are necessary to stay the course. And then some of you haven’t prepared as well and just assume you’ll get there okay. You’ve been on boats before – surely you can figure it out. But as soon as you hit the water, you quickly realize that sailing isn’t as easy as you once thought. You bumble around the port zig-zagging and eventually get to sailing half steam. You’re moving along, but it’s not pretty, and you’re behind on your journey. And finally, some of you don’t prepare at all. When everyone else leaves the port, you float around aimlessly in the harbor with your sail flapping in the wind.

As you approach your transition into practice, it’s the perfect time to plan all this out. It will be tempting to start knocking out lifestyle decisions before you map out cash flow. Resist the temptation! Major decisions like the home you purchase and the car you drive can eat up all your cash flow in no time.

Great cash flow plans require a basic understanding of things like taxes, student loans, and expenses. If you don’t already have a basic understanding, some reading will be necessary to get caught up to speed. Or if you don’t feel extremely confident completing these tasks yourself, talk with a cash flow focused financial planner. If you planned on hiring a financial planner eventually anyway, now is a great time to do this.

Your specific cash flow should be based upon your financial plan. Let your future destination direct today’s decisions. This will be the most impactful action you take when executing on your financial plan.

Keep in mind, though, that managing cash flow is different than a budgeting. Budgeting involves setting spending targets and tracking actual results. Although important, it’s secondary to cash flow. Cash flow includes all sources of income and outflows and takes into consideration short and long term planning. Cash flow helps you see the bigger picture. Every dollar of income should be dedicated to either taxes, giving, lifestyle (including debt) or savings. And this categorization should be based upon your financial plan.

Your cash flow plan will consist of the following components:

  • Income
  • Taxes
  • Giving
  • Saving
  • Spending (and debt)

Income is simple. It’s the total money you expect to earn from all sources (before taxes and benefits come out).

Taxes come next. Federal taxes will vary based on income. Depending on where you live, it’s likely you’ll also pay state and local income taxes so add these to your total. Don’t forget Social Security and Medicare taxes “FICA”. And if you’re planning to be an independent contractor, don’t forget you’ll pay 2x FICA tax because you pay the employer share and the employee share. Add federal, state, local and FICA to figure your total tax. When in doubt, error on conservative estimates. For example, a conservative estimate for the typical employee physician might be 30-40% for everything.

Giving should come next if that’s important to you.

Then savings. Total up your ideal savings for short term and long term. For short term, consider things like building cash reserves or major purchases. For long term, think investing for retirement, college funding and charitable desires.

And finally, spending comes last. Start by determining your major existing obligations. Everyone should include their minimum lifestyle This might be your current residency lifestyle. Add to this other necessary obligations like student loan payments.

Take total income and subtract tax, giving, savings, and necessary spending. If there is nothing leftover, you should prepare to continue living like a resident after you transition into practice (at least until your loans are paid off).

If you’re fortunate enough to have excess remaining, use it for additional debt payments, savings, or lifestyle increases. For lifestyle adjustments, it’s good to keep a priority list and use the excess to begin checking those off. This is how you decide on how much home to buy. If you’re left with $20,000, that’s the maximum you can spend on home costs. Remember, to consider all-in costs of home ownership and not just principal and interest on a mortgage.

Your cash flow plan might look like this:
Total Gross Income: $200,000
Minus Taxes: $60,000
Minus Giving: $20,000
Minus Savings: $50,000
Minus Spending: $40,000
This leaves $30,000 for increased home costs and maybe private school for the kids.

The key with cash flow is prioritizing lifestyle increases AFTER taxes, giving, saving, and obligations are addressed! Without a plan, lifestyle defaults to first priority. And nothing is leftover.

Student loans will inevitably be part of most young physicians’ cash flow plans. They have also become quite complex. Check out this student loan flowchart we put together to help you start putting together your student loan plan:

Cash flow is not a one and done deal either. You must monitor over time to keep yourself in check otherwise lifestyle creep occurs! Get in the habit of using a regular system to track your progress. At the conclusion of every month, document total cash balances at the start of the month, total income, total expenses and total cash balances at the end of the month. If you consistently see total expenses are greater than target expenses, it’s time to dig deeper. Add this financial review session as a monthly recurring appointment on your schedule. Don’t skip it!

Click here for (free) access to our cash flow tracking system we use with our clients to help them take control over their money. It’s complete with all the tools and systems you need to monitor where your money goes without spending hours every month counting pennies.

Cash flow planning gives your finances propulsion and will keep you on track toward living your great life. In summary here are the steps to creating your rock solid cash flow plan:

  • Review your financial planning goals
  • Calculate your target cash flow to hit goals
  • Identify specific changes and give every dollar a purpose
  • Setup systems for monitoring
  • Track progress and make tweaks

3) Build Cash Reserves

Cash serves many purposes for the young physician. It’s there when things don’t go as planned. Or when a unique opportunity presents itself. Cash keeps you afloat. It provides security and flexibility to make solid financial decisions.

If anything has a direct correlation to reduced financial stress, it’s cash reserves.

People with extremely low cash reserves constantly worry about being able to pay bills. They regularly make transfers between accounts to get by, never really building anything. They worry about managing life’s uncertainties and feel paralyzed when they consider life’s opportunities. Saving and investing for the long term is a battle. At best, they have automatic investment plans they occasionally tap into when emergencies occur. Although they know they aren’t saving enough, increasing their investment contributions seems absurd. Sometimes they do it anyway and go into credit card debt.

People with plenty of cash reserves don’t worry about paying bills. They always pay on time and take advantage of early payment discounts. Uncertainty never disappears totally, but it’s certainly less of a concern. This person enjoys work because they aren’t a slave to it. If they stop enjoying work, they have flexibility to pivot into something different. Automatic investment plans are a given, and occasionally this person will dump in more into investments or opportunities that make good sense for them.

Life is always predictable right? Not quite! Most people intuitively know this yet fail to build cash reserves.

Cash reserves are directly related to cash flow. If you’re not setting aside cash regularly, you’ll never build reserves. Having low cash reserves is one of the first symptoms of poor cash flow planning. Make sure you dedicate a certain portion of cash flow to building cash reserves.

If this seems difficult at first, that’s normal. We find many people struggle with this more than they do investing and saving for long term. Cash is so accessible and can cause temptation. So you must be on your game!

To begin making your customized plan for cash flow, start out with “why.” Think about why you should hold cash and prioritize your reasons. Most people end up with three main purposes for cash (organized by priority).

1) Normal Lifestyle Spending
2) Unexpected Emergency Spending
3) Expected Major Purchases

Think of these like buckets to hold cash. Once the first bucket is full, it overflows into the next.

Once you have separated and prioritized purposes for holding cash, determine exactly how much cash each account should hold. And come up with an operations plan for each. Establish ground rules and consider worst and best case scenarios. Remember to keep it simple – it’s easy to end up with 3 checking accounts and 3 savings accounts for unproductive reasons. And it’s a bear to keep up with.

Start with the #1 priority, normal lifestyle spending. Your plan might be to establish one joint checking account where all income and normal household expenses flow through. And you set a target balance of $5,000, at its low point. This will allow wiggle room and eliminate the need to make random transfers from other accounts.

Next priority is #2 emergency spending. This account is off limits unless it’s an emergency expense. Vacations are not emergency expenses! Let’s say you decide a balance equivalent to 4 months of baseline expenses would be ideal for emergency cash. This plus your checking account would allow you to operate for up to 5 months with no income. And based upon your profession and life circumstances, you feel good about this target.

Last priority is #3 major purchases. You decide it will provide better clarity and accountability if you separate out emergency savings and major purchase savings by having two separate savings accounts. This account will be for any big spending that’s not an emergency. You won’t fill this bucket until #1 and #2 are full. As this bucket fills up, you’ll create a priority list of major purchases and knock them out as you have the money.

Let’s review. Create your cash flow plan using the following steps:

  • Identify your purposes for holding cash
  • Establish and prioritize accounts for each purpose
  • Come up with specific targets balances for each account
  • Establish ground rules for each account

4) Address Life’s Risks

Life is unpredictable. Bad things sometimes happen to good people. Good planning involves anticipating potential risks and making a plan for them. The biggest financial risk young physicians face is losing their ability to earn income. This can be caused by permanent disability and death. Either scenario can cause financial catastrophe for you and your family. Fortunately, there are insurance plans that allow you to offset this risk to an insurance company.

There are plenty of other risks in life such as lawsuits, job loss or losing your home to fire. Good planning involves considering all of these kinds of risks and having a plan for each.

For example, your disability plan might look like this… If you become disabled, you would use emergency cash reserves. If the disability lasted for more than 6 months (when emergency cash would run out), your long term disability insurance would kick in for 80% income replacement.

When you’re finishing up residency, net worth may be negative but your earning potential is massive. Because you have no wealth, insurance is important. As you become financially independent, you can take on more risks yourself and decrease reliance on insurance. This is why your risk management plan should be revisited every year or two as your circumstances change.

5) Manage Advisors and Salespeople

A quality advisor can act as your expert sailing guide. You hire them to teach you how to sail, help you create the map for your journey, and ride along to help keep you on course. Although they certainly have advice on what kind of boat to buy, they don’t have any financial incentive to sell it. They work for you.

The professional salesperson is like the boat sales rep. They make the buying process extremely efficient and enjoyable. They drink their boat manufacturer’s Kool-Aid and freely share it with others. It’s obvious they know more about the boats they sell than anyone around. They are an extension of the product distribution process and ultimately work for the product manufacturer, not you.

Keep this rule in mind as you navigate working with salespeople and advisors. Use advisors for advice and salespeople to buy products. Don’t take advice from sales people. And don’t buy products from advisors. It may sound like common sense, but people screw this one up all the time. It doesn’t help that sales people tend to try giving advice and advisors sometimes choose to sell products. Do your best to figure out where someone stands before you deal with them. Are they an advisor, salesperson or combo of both?

It gets especially tricky when salespeople start acting like and calling themselves advisors. Financial services firms are especially notorious for graying the lines between salesperson and advisor. There’s an army of “financial advisors” out there that are hungry for your business. Proceed with caution. Peel back the layers and you’ll find most are generally salespeople posing as “trusted advisors.” These sales advisors work for their firms – not you. Mixing product sales AND advice creates massive conflicts of interest you should at minimum be aware of.

How can you figure out who you’re dealing with? Find out how they make money. If they earn commissions and fees (sometimes called fee-based), they sell products AND give advice. If they only earn fees (fee-only), they are strictly advisors. And if they only earn commissions (commission-only), they are strictly product salespeople.

It’s totally ok to demand awareness and transparency when working with advisors and salespeople. If they’re one of the good guys, they’ll appreciate it as much as you. Greater transparency naturally breeds trust and confidence, which are the building blocks of productive relationships.

Physician Specialist

If I was looking for the best surgeon to perform a major surgery on me, expertise and experience would be very high on my list of qualifications. If it’s their first time cutting, I’m out. My goal would be to find someone in their prime who had done my specific surgery more than anyone else. I would want the best of the best.

When you’re considering hiring others to help you navigate life and money, take consideration of their specialization, experience and expertise. Although your life isn’t at stake (most of the time), the experienced expert certainly increases your chances of positive results.

Most advisors and salespeople don’t turn away business, even when it’s not in their sweet spot. In some cases, it works out just fine for both parties. But the risk of bad advice increases exponentially the further you get from their wheelhouse. Student loans are a good example. In recent years, planning around them has become extremely complex. Very few advisors take the time to keep up with it. Bad advice is tossed around all over the place. And it’s delivered wrapped in confidence and ignorance.

Finding An Advisor

If you’re looking for advice-only financial advisors (aka fee-only) that always operate as fiduciaries, you can find many of them in NAPFA’s find an advisor search. Or if you’re looking for the same type of advisor, but specifically those who serve Gen X & Y clients, try XYPN’s find an advisor search. XYPN’s search also helps you narrow down advisors by specialization. Or if you want an hourly fee-only planner, check out the Garrett Planning Network. The White Coat Investor has a great list of physician-focused advisors and salespeople listed on his website as well. His blog is also a great resource for young physicians looking to learn more about personal finance and investing.

As you work with salespeople and advisors, keep these points in mind:

  • Use advisors strictly for advice (not to buy products)
  • Use salespeople strictly to buy products (not for advice)
  • Find advisors and salespeople that specialize in working with people like you
How To Find Your Financial Advisor

6) Build In Margin

I’m not talking about investing margin (borrowing money to invest more). I’m referring to margin of error, which is the statistic expressing random sampling error. Life has all kinds of random sampling error, yet we fail to account for this in our financial planning. Perfection in personal finance is a mirage. Planning with exactness can actually get people into trouble, especially when planning for long periods of time. In reality, life is uncertain and constantly changing.

As part of my job, I have the ability to see people’s finances all day, every day. It’s rare that we see people naturally building in margin of error. Take expenses for example. Let’s say you’re pretty confident that your normal monthly expenses are $5,000 and you bring home $6,500/mo. That leaves $1,500/mo to save for retirement and education (or overpay debts). And that’s what you do. As a result, your checking account fluctuates between $5,500 and $500 depending on the time of the month. But then life happens and you get a random $5,000 bill for a pet emergency room visit (I had a client have this happen recently).

Because you have zero margin, you’re forced to go into credit card debt. And it’s incredibly tough to dig out from the credit debt because you already have everything accounted for. Before you get it paid off, another big expense pops up and you’re in even worse shape.

People who operate without any margin of error are in and out of credit card debt, take early withdrawals from investment accounts, and remove home equity to catch up. They also tend to stress about day to day finances. And wonder why. They feel they have a good handle on expenses, and they do. They are saving, investing and making pretty good decisions. They’re not living a self-proclaimed “lavish” lifestyle. They can’t seem to figure it out, though. So what’s the problem?

They’re failing to consider margin of error. It’s not just expenses. This failure can cause problems with taxes, saving, investment projections, and pretty much every other area of personal finance. Do yourself a favor and build in some wiggle room. When you’re planning ahead and think you’ve come up with everything you can possibly think of, add more wiggle room. When you estimate taxes, be conservative and overestimate instead of trying to nail the exact number. When you plan for retirement, don’t use the online calculator that assumes everything is perfectly linear and rate of return is 12%. Be conservative and set yourself up to hit your goals in an imperfect life.

One of the benefits of adding in some margin is that you begin setting more attainable goals. Reaching your goals will provide further motivation and momentum for the future. Although margin comes in handy for all stages of life, it’s especially important early in the game when you’re figuring all this out!

7) Make Logical Values Based Decisions

Up to this point, we’ve focused on the logical numbers side of personal finance and planning. And this would be the end of the list if humans were perfectly logical and unemotional. But that’s far from true. Humans make irrational and emotional decisions most of the time, but then convince themselves they are being logical and unemotional.

First, you must learn to make more logical decisions. When people approach decisions, they like to talk about the logical, measurable things you would think of. They use words like budgets, planning, and calculated return. They create spreadsheets and cost/benefit analysis. But when it comes down to decision making time, the vast majority throw out all the spreadsheets and resort to pure emotion. They go with the gut. And then after the fact, no matter how it turns out, they convince themselves it was a smart move. Most people don’t even realize it’s happening. And that’s the danger – lack of awareness.

The first step to avoiding these irrational decisions is awareness. Like I said, most people don’t even know it’s happening. You’ll be ahead of the curve if you’re aware. Then, you must accept that it’s going to happen to you. People, especially smart people, seem to struggle with acceptance – they are aware it happens but they believe they aren’t susceptible.

If you’re thinking, “I’m good here, on to the next point” – stop! I’m probably talking to you.
I’m sure you’re smart, logical, have good self-awareness and know this stuff. But thinking you’re better than this is ignorant. There’s actually a word for it. Overconfidence. This may take a little time to get over, especially for the most intelligent, logical and proud thinkers. But be open minded. I’m sure you know that guy who knows everything (or thinks he does). That’s what overconfidence develops into. You don’t want to be that guy. It can spill over into all areas of your life if you’re not careful. If you don’t want to take my word for it, read up on behavioral finance. A great starting point is “Thinking, Fast And Slow” by Daniel Kahneman.

Kahneman - Thinking Fast Slow

Once you have gotten past awareness and acceptance, it’s about developing strategy to avoid illogical decisions. Here are some example strategies:

  • Intentionally slow down life instead of running on autopilot
  • Forbid making quick decisions, especially big ones
  • With big decisions, think about how your logical and unemotional self would handle it
  • Run decisions by others that are knowledgeable and not emotionally connected

The second part about making decisions is learning to incorporate your values into them. Most people agree this makes sense, but fail to execute. How can you avoid this? It starts with Tip #1 – identifying where you’re going and why. You can’t incorporate your values into decisions until you’re clear on what they actually are. Once you have clear values, this it’s all about making intentional effort to keep values at the forefront. Before you make decisions, make an intentional effort to think about if it aligns with your values. When you’re reviewing expenses, view them from the lens of what’s most important to you. This will give purpose to your decision making. It’s more exciting to do something because it’s aligned with your life’s purpose.

Let’s summarize the finance tips for young physicians:

    1) Plan Your Financial Journey
    2) Control Your Cash Flow
    3) Build Cash Reserves
    4) Address Life’s Risks
    5) Manage Advisors And Salespeople
    6) Learn To Use Margin
    7) Make Logical Values Based Decisions

The trick is mixing all this together to create your ideal financial life. It’s not going to be perfect, especially the first few years you’re figuring this all out. But it’s all about making the effort.

If you’re ready to start planning out your future, check out our young physician’s complete guide to financial planning. It’s filled with all kinds of time and money saving systems and strategy that’ll take your personal finances to the next level. You can download it by clicking below.

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© Wrenne Financial Planning | Crafted by Harris & Ward

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Financial Planning For Physicians – How To Avoid Common Problems

Financial Planning For Physicians – How To Avoid Common Problems

No one’s story is the same. Everyone has their own unique set of circumstances and needs. There is no “one size fits all” when it comes to financial planning for physicians.

Let’s consider some common planning needs of the young physician:

  • They generally have limited financial training/experience
  • Often have limited time and many important financial decisions to make
  • They have very different financial needs than Average Joe: long duration training, big student loans, doctor mortgages, asset protection, unique income structure, employment contract analysis, tax planning for high income, etc.
  • Early on, financial planning is typically far more important for them than managing wealth
  • There are plenty of people in the financial industry who can provide these services to physicians: Bankers, Financial Advisors, Realtors, Mortgage Brokers, Insurance Agents, Benefits Salespeople, etc. When choosing someone to work with, there are some very important points to keep in mind:

    1) Is this person acting in your best interest? Most financial service providers, including financial advisors, are NOT required to act in their client’s best interest. Their job is to sell products, and not necessarily to be a fiduciary.

    2) Transparency – do you know exactly what you’re paying for? Are there hidden fees? Are there better alternatives? Who is making money off of this transaction, and how much? It’s a common topic but a rare occurrence. Conflicts of interest and expenses are rarely disclosed.

    3) Do you need the product or service being sold? Training to become a physician involves very little financial training. Many are unable to identify the solution that is in their best interest.

    4) Is this person a specialist? Most financial services people are generalists. Physician’s have unique needs that would be better served by a specialist (or team of specialists). However, you’ll find many work with generalists that don’t refer to specialists.

    5) Can this person relate to your situation? Do they have experience with your peers? There are plenty of financial product salespeople that sell to young doctors – they are targets. There are also plenty of wealth managers that try to focus on people with assets. But there are very few planners that advise young people – the people that often need it most.

    As a result of things like these, physicians tend to overpay for (at-best) mediocre financial products and services. They often don’t even realize it’s occurring – they don’t have any training on this type stuff. And many don’t have the time to learn. Many advisors don’t pause to think about it either – they are simply doing their job. Eventually, some physicians figure it out and become skeptical of all financial services people – they stop taking their advice or avoid them altogether.

    My Experience:

    I was once a typical financial service provider myself. Eventually, I realized that I was not in the best spot for providing financial planning for physicians and any other professional for that matter.


    To be clear, I believe the financial services industry creates and distributes great products and services that make life better for people. However, it’s very clear (if you look) that the financial services industry is not as interested in providing people with advice that is in their BEST interest. They make money selling their financial products, not objective advice. Most want to provide GOOD advice, but maybe not the BEST advice, because that may steer you away from their products. I was interested in providing clients with the best advice. And the natural conflicts associated with selling products made this difficult.

    It’s an interesting contradiction – financial services firms don’t always steer you to what’s in your best interest, but they still want their salespeople to be a trusted advisor to clients. It’s much easier to sell products if the salesperson is viewed as an advisor instead of a salesperson. And it reduces the company’s liability. I was a product salesperson that called himself a financial advisor.

    As a result, I left my previous company and started my own firm to provide physicians with a better alternative. I created my firm to provide the most objective, relevant advice to physicians in the most transparent manner possible. We work strictly in our clients’ BEST interest. We understand and stay on top of their unique needs. We have very transparent fees that must come directly from clients – no kickbacks, hidden fees, etc.

    The Solution:

    Physicians should be seeking help from an objective, transparent, physician-focused advisor. Someone that understands their unique needs and can provide the best possible advice. Someone who has experience with their peers. Someone that works for them, on their side of the table.

    Examples Of Bad Advice

    Question: How should I prioritize paying off my $200k Federal Student Loan (7% interest rate) and investing for the future? I want to make the most of my income from the teaching hospital I work for as an attending physician?

    A: Use all of your extra money to pay off the loan ASAP! Except for your retirement contributions that are matched.

    B: Set a reasonable and specific timeline for paying off the loan that’s more aggressive than the normal payoff plan. Divert extra money to retirement savings – you can’t get behind on that. And you should expect a higher return than 7%.

    Answer: Both are wrong! This is a not for profit hospital. This person should be making sure they do what’s necessary to qualify for and maximize Public Service Loan Forgiveness (PSLF). This involves paying the LEAST amount possible each year on the loans until they are forgiven at year 10. If they are not eligible for PSLF, they should REFINANCE the loans ASAP. They should chose the specific lender that’s going to provide them the best terms and rate (there are around 15 lenders in the US).

    The estimated cost variance in your typical advice vs. the best solution in this situation is likely in the neighborhood of $50k – $150k

    Question: I will be a new physician in the area – should I buy a home? How much should I spend on my first home purchase?

    A: You qualify for an $800k mortgage and we would suggest starting there!

    B: You must first figure out your take home pay, organize your assets and liabilities, and come up with a plan for making sure your money goes where you want it to go based on your long range planning FIRST and then make the home purchase decision based on these factors.

    Answer: B. Often, mortgage brokers and/or realtors will offer option A. They get paid to sell more house – and this may or may not be in your best interest… you could end up house rich and cash poor.

    Question: I have an old retirement plan I need to do something with. What should I do?

    A: You should buy this mutual fund from our platform here at the bank. It’s a great fund!

    B: You should open an account with Vanguard and use their target date retirement funds for now.

    Answer: B. The bank load funds are often 10x more expensive than no-load funds (like you can find at Vanguard).

    Question: Where should I save $100,000 for my kid’s college expenses coming due in 18 years?

    A: 529 – $100,000 – Virginia – American Funds Target College Date 2033 – A Shares, Advisor Plan

    B: 529 – $100,000 – NY – Vanguard – Age Based Investments – Direct Plan

    Answer: B is in the best interest of the customer, but provides no commission for the advisor. A is in the best interest of the advisor and ok for customer. When you net out all the fees, performance tends to be comparable. Why? Because most of the excess fees are going to non-performance related things… like advisor comp, marketing and sales.

    A: All In Fees – Commissions to advisor – ($4250) plus .25%/yr ($250/yr)
    Fees to American Funds – .55%/yr ($550/yr)
    18 Year Total fees and commission without growth = $18,650

    B: All In Fees – .16%/yr ($160/yr)
    18 Year Total fees and commission without growth = $2,880

    Why not pay a few hundred dollars now to hire someone who will tell you all of this and help you get set up with the best plan and keep the $15k+?

    Question: What is the best way to protect my assets from potential creditors after I have maxed out all my retirement plans?

    A: Maximize 529’s, HSA’s, IRA’s and any other creditor protected asset in your state.

    B: Create a trust that’s protected from your creditors and begin transferring assets to it.

    C: Pay off your home.

    Answer: A (unless no other creditor protected choices exist in your state). Often people choose B prematurely. C is way wrong in KY, but not in other states. People should seek advice from an attorney and input from their other advisors first.

    Question: How much life insurance should I buy?


    Should I buy permanent or term life insurance? I don’t anticipate having an estate tax issue. I am not maximizing retirement plans yet. I don’t have an emergency fund. I need $2 mil of coverage to protect my family.

    A: Term – the most efficient way to cover risk – $1k/yr

    B: Permanent – you want to own your life insurance instead of rent it so that it pays out when you die – $20k/yr

    C: Combo – You probably need mostly term, but it’s a good idea to get started with a small portion of permanent to balance it out – $3k/yr

    Answer – A. You should have your ducks in a row before even considering permanent life insurance. Most advisors get paid to sell life insurance – I used to myself – and inevitably had to deal with this conflict. Consumers should, at minimum, understand the conflicts and compensation. To give you an idea, advisors often get paid 50-100% of first year total premium no matter how large it is. Higher premium = higher commission.

    Financial planning for physicians can be a slippery slope. These are just a few examples of situations we’ve heard from clients. The bottom line is that you want to work with someone who does not have an incentive to benefit themselves first – find someone who will work for you and your BEST interest.

    Do you have any examples of situations where you received bad advice? Please share your story with us!

    Don’t miss out!

    Join our growing network of other smart people who get financial tools and tips delivered right to their inbox.

    Feeling like you don’t have control over your money?

    Let's fix it! Download this guide now and take control in less than 15 minutes.

    What's Next

    Have questions or care to share your experience? Ask/share in the comments!

    Are you interested in having a conversation? We’d love to connect! Click here to request a free consultation. We look forward to hearing from you.

    Looking to create your own financial plan? Click here to download our free guide to getting started.



    © Wrenne Financial Planning | Crafted by Harris & Ward

    Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

    All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

    Comparing Term Life Insurance Strategies For Physicians

    Comparing Term Life Insurance Strategies For Physicians

    The most common type of term life insurance among physicians is level term. Often, it’s purchased and forgotten about. But is this the best strategy?

    In this post, we will compare several different strategies physicians might for owning term life insurance. We will then use a case study to show how the numbers shake out over time.

    We will assume everyone reading already knows how much life insurance they should own and has determined term life insurance is the best solution. What we will be looking at is the most efficient method for owning term life insurance as you become financially independent.

    Physician Specific Considerations

  • Above average earning capacity often requires purchasing large amounts of individual life insurance
  • Income increases 3 to 10x overnight when transitioning into practice
  • Some have another big income jump several years after being in practice
  • Student loan repayment takes a big chunk of income. Once paid off, this is essentially another big pay raise
  • Job changes are common – especially early in careers
  • Delayed entry into the workforce requires higher than normal savings rate and aggressive wealth building
  • What does all this amount to in regard to owning term life insurance? Tons of changes! Lifestyle and existing wealth are the biggest drivers for determining your life insurance death benefit. Death benefit needs tend to change over time, and change more quickly for the young physician.

    There are two main types of term life insurance to choose from…
    1) Level Term
    2) Annually Renewable Term “ART”

    Level Term

    The cost of owning life insurance naturally increases as people age. This is primarily due to the fact that more people die as they get older. Insurance companies would call this “increasing mortality costs.” They create all sorts of life insurance products ultimately all based on the underlying mortality cost.

    Level term products take an otherwise increasing cost (risk) and flatten or “level” it out over the period or “term” of the policy. The most common term periods are 10, 20 and 30 year, and are often guaranteed to remain level for the term. Often, when the term is up, your policy ends.

    You are paying additional costs to lock in or guarantee your rates. You are also paying future mortality costs in advance. The risk with level term is: what if you need it less than expected? Then you overpaid for the period. Or, what if you need it longer than the term and have health issues when you must reapply?

    It works best when you need the exact amount of death benefit for the specific term period and then none thereafter. It also works well for people that want the guarantees and predictability associated with a level premium (premium = what the consumer pays the insurance company each year to maintain coverage).

    Annually Renewable Term (ART)

    Like level term, mortality costs drive pricing with ART. The main difference with ART is that the pricing is not artificially leveled out over the “term”. The premium increases as you age because with age, chances of death increase. Some ART requires that you qualify your health every year, however, in this article we will only consider ART that locks in your health class for the duration of the policy.

    ART has very weak guarantees – so pricing could go up higher than scheduled. Keep in mind that the biggest driver in pricing is mortality (or paying for the people that pass away). Mortality has been improving for the best health classes consistently over time. Therefore, historically, the companies we talked to that sell ART have been able to keep pricing very close to scheduled premiums.

    For example, one company has historically charged lower prices (below scheduled premiums) on ART over time in the form of dividends. And another has increased rates above scheduled premiums one time in the past 20 – 30 years – and that increase was around 3%.

    See below example cost comparison using the lowest reasonably rated company we could find for L30 and ART (locked into the health class for at least 30 years). We assume that both males are in the best health class available, beginning age is 26, and both continue for 30 years. Legal & General was the lowest premium for L30 and AXA was the lowest ART.

    Capture1

    Comparing Long Term Ownership Strategy

    The Lazy Approach (Buy And Hold)

    The most common strategy for young physicians is to purchase term life insurance two times: once during residency and once again after transitioning into practice – and then most leave as is.

    The problem with the lazy strategy is that it almost always results in being over-insured as you become financially independent (and although this is better than being under-insured, it will cost you).

    ART works well when you have a lot of unknowns but hope to achieve financial independence quickly. However, it can become the worst approach if you do nothing and keep coverage as is for longer than 20 years and/or into your 50’s.

    Lazily buying level 30 (or any single level term policy for that matter) and holding it works best in circumstances when your death benefits needs rigidly end at a predictable year. It can also work well if you literally will do nothing once you buy term life because it will automatically go away once the term is up.

    So let’s consider an example. Frugal Freddy is 25 and in residency. He’s done his calculations and knows he will need $1.5 million during residency and $3.5 million once he transitions into practice. He expects to need life insurance coverage until around age 60 at the latest. He is considering either purchasing one Level 30 policy at $1.5 million and one more for $2 million 3 years later OR purchasing the same exact death benefit but using ART.

    If you compare the cost of Level 30 guaranteed premiums vs. ART scheduled premiums, the cost over the 30 years is very comparable – it ends up being around $65K for both.

    Therefore, if you want to be really lazy, level 30 seems appealing. If pricing is similar, you might as well take the guaranteed route. However, BOTH strategies are far more expensive than the not-so-lazy approach. The cost savings might be motivation enough.

    The Semi-Lazy Approach (Layer Level Term And Hold)

    The semi-lazy strategy involves a little bit more strategic planning and proactive thinking on the front end, however, it’s still pretty lazy over time. Instead of simply buying two Level 30 policies and holding onto them, you buy different types of Level Term (they typically come in 5 year increments) based on your circumstances.

    With this strategy, you structure in a couple automatic future reductions that are more in line with the fact that your death benefit needs will decrease incrementally as you become financially independent. Unlike the Lazy Strategy, this strategy requires that you project out your expected death benefit needs over time and use that to decide how to layer your term.

    Let’s consider Frugal Freddy again. He decided he wants to be a little more proactive and is considering the semi-lazy approach. After going through his financial planning, he is able to project his future death benefit needs and comes up with the following…

    Capture2

    This projection takes into consideration Freddy’s current and projected lifestyle and savings habits. As you can see, Freddy’s frugality allows for financial independence by age 50 – 10 years faster than he had originally estimated. Based on this projection, he decides to purchase Level 25 in residency (age 25) for 1.5 million. He wants the first policy he buys to last the longest because he is locking it in at a younger age. He knows this will provide the lowest rates and it will be the best chunk to hang onto for the long haul. He is also confident he will be totally financially independent by age 50 at which point it will end. When he transitions into practice, he purchases two additional Level Term policies. One is Level 10 for $1 million and the other is Level 20 for $1 million.

    As you can see below, Freddy uses his projected death benefit values to structure (or layer) term policies that more closely follow what he expects his actual needs to be.

    Capture3

    This provides a lot of cost savings for Freddy. The total cost over this period of time ends up being just over $24K (more than $40K less than the lazy approach!). This approach works much better than the lazy approach if you can confidently project your future needs. However, there are risks associated with this approach. If things don’t work out as planned or if the projection is wrong, flexibility is limited for longer and greater death benefit needs.

    The Proactive Approach

    The proactive approach involves annually revisiting your ideal death benefit and reducing it each year as you approach financial independence (we’re assuming the insurance company allows for incremental reduction of death benefit – most should but it’s a good idea to check first). This approach will provide maximum flexibility and the lowest costs but it also requires proactive behavior.

    Is the cost worth the effort? And which specific proactive strategy provides the best possible value? Let’s look at the numbers using Frugal Freddy’s case. In this example, we will compare the Level 30 strategy, the ART strategy, and the Layering Term strategy but we will adjust the death benefit each year to match the projected death benefit needs. With the Level 30 strategy, his total cost is just under $32K. The ART and Layering strategies are very close in cost – both total around $19K over the full period (around $46K less than the lazy approach!).

    Keep in mind, with all three of these strategies, the death benefit will be exactly what is needed (or projected to be needed) each year. Below graph shows the cost projections for each strategy using low cost term life insurance for each solution.

    Capture4

    As you can see, the proactive approach is a very efficient method for owning term life insurance… particularly the ART and layering proactive approach. If you want to have guaranteed costs and you are very confident in your future projections, the layering proactive approach will work best.

    Comparing The Strategies

    Generally, we discourage the lazy approach – no matter which type of life insurance you purchase. Life insurance death benefit needs are always changing – especially for the young physician. The semi-lazy approach can work well, but your initial projection must be fairly accurate or else you could get into trouble. The proactive approach – using ART or Layering Level Term – works best, however, you must be proactive or hire an advisor or planner to help you be proactive (I would not count on the average life insurance agent to be proactive about reducing your coverage).

    What strategy are you using for owning term life insurance? Have you used any other strategies we didn’t cover?

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    © Wrenne Financial Planning | Crafted by Harris & Ward

    Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

    All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

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    10 Financial Planning Resolutions For The New Year

    10 Financial Planning Resolutions For The New Year

    January is a great time to plan ahead for the year. How are you going to make 2016 your best year ever? Here are a few personal finance ideas to help you start thinking of goals for 2016:

    1) Get a Will

    A will is absolutely essential for people with children because it tells the courts who will take care of them if something happens to you. If you are having trouble deciding, think about how much trouble the courts will have if you don’t do anything. Make a decision and, if need be, change it in the future. You don’t want to leave that decision to a judge. And while you’re at it, you might as well get the other important legal documents everyone should have as well: a Durable Power of Attorney, a Health Care Power of Attorney, and a Living Will Directive.

    2) Get Life Insurance

    If you have children you support financially, you need life insurance – no excuse. Term life insurance is crazy cheap for most people. Find an agent that can help you look at different options, and then run those options by a trusted advisor that knows your financial situation well.

    3) Maximize Long Term Disability Insurance

    This is one of the most overlooked risks. For young people, your future income is your most important asset. It should be insured well. You probably have your home insured well – but what about your income? If there is no income, there is no home.

    4) Build Cash Reserves

    There are two types of cash reserve accounts everyone should have.

    • Operating reserves:
    • – You don’t get paid every day. You need to have a buffer to avoid constant transfers, overdrafts, and credit card debt. We typically suggest keeping at minimum 1 month’s worth of expenses in your checking account. This should be funded first before the emergency reserve.

    • Emergency reserves:
    • – Life is not perfect. Everyone will have unplanned financial issues come up. The emergency reserve is set up to help you keep operating your household for a period of time when things don’t go as planned. We typically suggest keeping 2 – 12 months of baseline expenses in emergency reserves (depending on your circumstances). This will help you avoid transfers, overdrafts, and credit card debt.

    5) Start Keeping Score Of Your Finances

    Keeping score consists of three parts…

    • Tracking Net Worth
    • – Track your net worth at least quarterly – but preferably monthly. Use a spreadsheet to list all of your asset and liability balances by month. Include information in the notes about interest rates, minimum payments, current payments, terms, and investment contributions.

    • Tracking Cash Flow
    • – It’s not necessary to track every penny every month if you can develop a general understanding of monthly expenses AND track monthly cash flow. You can build this expense awareness by auditing expenses every few months or when cash flow is off schedule. Let the cash flow tracker drive your expense audits.

    • Expense Awareness
    • – The cash flow tracker requires that you estimate monthly expenses and over time it will help you keep a general awareness of these figures. Every once in a while, you will get off track and it will be evident from the cash flow tracking. When this occurs, you may decide to audit expenses – or dig deeper to identify areas of improvement.

    6) Create A Formal Investment Plan

    If you are managing your investments, you should have a formal written plan that outlines your process, expectations, and worst case scenario. Your investment plan might include the following…

    • Your investment management philosophy
    • The purpose of the money
    • How you plan to do it
    • Expected returns (best and worst case) over various periods of time
    • Your process for reviewing and updating

    7) Review Your Retirement Plan

    Each year, you should revisit your goals for retirement and asses how you are doing in relation to those goals. If you are off track, come up with a plan to bring you back on track. If you are on track, you might consider upping the ante or adjusting the risk you’re taking with your investments.

    8) Create A Debt Payoff Plan

    Similar to the retirement plan, you should also have a formal plan that outlines how you are going to pay off your various debts.

    9) Ask For A Pay increase

    People don’t ask for pay raises enough. You should be asking if you haven’t lately. View the discussion from the perspective of how you’re adding value to the company. You are valuable to the company and feel you should be compensated more based on your results. Come into the discussion prepared and remember it’s not about you… You don’t “deserve more money” … it’s all about the value you bring to the company. If they say no, you might ask what you can do going forward that puts you in better position to receive a pay raise in the future. How can you add more value to the company?

    10) Cut Expenses Without Reducing Lifestyle

    There are lots of ways to cut expenses without changing your lifestyle. Find discounts, shop insurances, ask for lower rates on services and utilities, use credit card rewards responsibly, or pay things annually for a discount.

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    © Wrenne Financial Planning | Crafted by Harris & Ward

    Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

    All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.