The ABCs of insurance

When was the last time you sipped cocktails while debating about the pros and cons of life and disability insurance? Or binged on a Netflix series that followed the rise and fall of an iconic insurance dynasty? Probably never. Most people view insurance with just about the same level of enthusiasm they would expend on the grout between their bathroom tiles. But as uninspiring as insurance may be, it’s critical for physicians, their family and staff. “Insurance can seem boring and it also does get confusing,” said Jeff Blain, a Hamilton, Ont.-based insurance consultant at MD Financial Management. “But insurance is a key part of financial planning, and it’s important to have the proper solutions in place.” Ensuring the proper insurance solutions are in place isn’t a one-and-done deal, said Elliott Levine, president of Levine Financial Group, a Toronto firm that specializes in insurance, tax, wealth and estate planning for doctors. Instead, regular reviews of existing policies are a must. “Most people buy insurance when they’re young,” he explained. “So most are underinsured and even possibly paying more in premiums than they need to.” Levine cites life, disability, critical illness and office overhead insurance as essential coverage for doctors beyond the mandatory medical liability coverage. Each of these products protects a particular aspect of a physician’s life and work. Life insurance, for instance, is designed to protect doctors’ families while office overhead protects employees and the business. While each type of insurance typically comes with standard features regardless of the issuer, there are certain variations and add-ons that doctors should consider before purchasing a policy. Certain conditions also apply for doctors who have certain types of insurance from more than one provider. For example, when there’s more than one disability policy—one through a provincial association and another purchased as an individual policy—both insurers will typically co-pay benefits up to a maximum joint total. Term or permanent? The purpose of life insurance is to cover your liabilities if you die. Should you “rent” insurance through a term policy that ends—usually with an option to renew—after a certain number of years? Or should you go with a permanent policy that provides coverage for life? “Permanent life insurance can be used as a tax shelter where a lot of money grows tax free—a strategy we use for incorporated physicians,” said Levine. “In this application, the life insurance is owned and paid for by the corporation.” For doctors who leave the majority of their revenue in their corporation, one strategy to consider is investing the money inside a whole life policy where it can grow tax-free. “So you can take the money out as part of your corporate retirement plan and still have the life insurance there for when you’re gone,” said Levine. Blain at MD Financial Management underlined the importance of naming the corporation—not the doctor—as the policy’s beneficiary to avoid triggering a shareholder benefit, which in turn will trigger a tax liability. Disability: riders One of a physician’s biggest assets, said Blain, is the ability to capitalize on extensive knowledge and training to earn a good income. That’s why it’s important for doctors to have insurance that protects this critical financial asset. “Life can throw curve balls at you,” he said. “What disability insurance does is protect your ability to continue bringing in an income should you have an illness or injury that prevents you from working.” Not all disability insurance policies are the same. Levine said physicians should pay special attention to how a policy defines disability and the conditions under which benefits will be paid. As a starting point, look for insurance that covers partial, total and residual disability. Two words in particular, can make a big difference: Own occupation. “When disability insurance is an ‘own occupation’ policy, that means it will pay out benefits when the policyholder becomes disabled and can no longer work in their own job—in this case, as a doctor—even if they decide to work at another occupation,” explained Levine. Other riders that are good to have in disability insurance include cost of living adjustments, a future income option—which allows you to increase your disability benefits over time—and the ability to convert the insurance to long-term care coverage. “We tend to recommend a critical illness plan that covers up to the age of 75 because all insurance plans stop disability coverage at 65.” Critical illness While it’s not exactly income protection, critical illness insurance is a good complement to disability insurance because it provides a one-time payment upon diagnosis of a medical condition included in the policy. Levine said getting access to a significant sum of money—without having to sell assets in an investment portfolio—can make all the difference when you’re going through treatments such as chemotherapy or considering getting privately-funded care in another country. “It doesn’t matter how financially secure you are,” he said. “If you can get $100,000 tax free in a lump-sum payment, that alleviates a lot of concerns. I have some clients who have a lot of money in the bank who have felt relieved about not having to sell assets, especially if that meant selling at a lower value and triggering a tax liability. I’ve also seen people use their critical illness to cover their income and not use their disability insurance.” One thing to keep in mind with critical illness insurance is that the policy gets terminated once the insurer has paid out. Levine said some policies come with a “second event” option—where the policy stays in place and will pay out for a second and different type of critical illness—but this option comes with a higher price tag. He does suggest going with a plan that provides coverage for as long as possible. “We tend to recommend a critical illness plan that covers up to the age of 75 because all insurance plans stop disability coverage at 65,” he said. Some doctors also choose to have their critical illness insurance owned and paid for by their corporation. In these cases, the payout goes to the company, which in turn pays the money to the physician as taxable dividends. Protecting your team While your corporation can probably afford to pay for overhead expenses while you’re off sick for a few weeks, a prolonged illness or injury would likely put pressure on business finances and threaten the livelihood of your staff. This is where office overhead insurance—available through some provincial associations or as individually-owned policies—comes into play. Before taking out this type of policy, sit down and figure out all your overhead expenses for the entire year and look for a plan that will cover all, or at least most, of the total. The start and duration of coverage are also important considerations, said Levine. “This type of coverage normally starts after 30 days (of your absence from illness or injury) and can cover up to two years,” he said. “You probably won’t find anything longer than that because if someone is off for more than two years, chances are they won’t be coming back to work.” Sense in your financial plan Should you keep paying for disability insurance once you’ve accumulated enough wealth to be self-sufficient without income from work? Does that whole life insurance policy really make financial sense for you? As your income and wealth grow, you face a lower risk of not having enough money to preserve your lifestyle in the event of an illness or injury, said Blain. Consequently for many established physicians, the priority becomes tax reduction and effective estate planning versus lifestyle protection. This may render their portfolio of insurance plans ineffective or insufficient within the context of their current financial picture. “Like a lot of people, physicians often buy insurance products as the need arises but fail to look at how all these products fit into a larger financial plan. In the end, they might have all these insurance plans that no longer work with their current circumstances,” said Blain. “Financial planning is key to the whole thing.”

The ABCs of insurance

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