Protecting Your Future: The Importance of Life, Disability, and Long-Term Care Insurance

Dear Colleagues,

As physicians, we dedicate our lives to caring for others, often putting our patients' needs above ours. It is just who we are. We dedicate our lives to helping others first, our patients, families—often putting ourselves last on that list.

You worked and sacrificed many years to make it to this point in your career. Your biggest investment is in yourself, your talent and empathy skills in helping others.

It's a noble profession. However, it is not without its sacrifices and its stressors. Friends, you would be shocked if I told you how many colleagues disregard the basic pillars of life, estate and income protection planning. You must insure yourself, your family and your income. You are your biggest investment asset. Protect it, nurture it. Stay healthy, happy and have a loving supporting partner who loves you for you.

Today, I want to talk about three essential types of insurance—life insurance, disability insurance and long-term care insurance—and why they are vital for comprehensive financial planning for physicians.

Why Should Insurance Matter for Physicians?

Our profession is rewarding but also demanding and unpredictable. A sudden illness, injury, or even death can dramatically impact your family's financial stability and your practice's continuity of care. Proper insurance coverage ensures that you and your loved ones are protected against these risks, allowing you to focus on what you do best—caring for others—without undue worry about your own financial security.

Life Insurance: Protecting Your Legacy and Family

Physicians often have high earning potential and significant financial obligations, including student loans, mortgages, and future educational expenses for children.

Life insurance provides:

• Income replacement for your family if the unexpected occurs.
• Debt coverage prevents your loved ones from inheriting financial burdens.
• Funding for future needs, such as college tuition or retirement.
• Estate creation, planning, charity and wealth generational transfer.

Types to Consider (own more than one)

Term life insurance offers affordable coverage for a specified period—ideal for covering mortgage or student loan terms. Decreasing term life insurance results in decremental lower premiums. Mortgage insurance is a good example. As you build wealth you slowly can lower the amount of term insurance you need.

Permanent or cash value life insurance:

• Whole life insurance (WLI)
• Universal life insurance (ULI)
• Indexed universal life insurance (IUL)
• Variable life insurance (VUL)
• Premium financed life insurance (PFLI)

Life insurance is not a "glam" investment but a necessary one in any stage of a physician's career.

• It shifts risk to a 3rd party (the insurance company) that will provide income to your family if the unexpected occurs.
• Proceeds and loans from life policies are given tax favored status.
• Ability to borrow cash from the policy tax free (limits apply) with no bank loan underwriting, credit checks and at low interest rate which are not reported to any credit bureaus. You can pay the loan back at your terms. You are in essence borrowing from yourself. (IRS rule 7702 permits tax free loans from cash value life insurance.)
• Business succession planning.
• Generational wealth transfer.
• Can be partially or wholly converted via a tax-free exchange to an annuity or long-term care policy (1035 exchange).
• Can be used for executive bonus or deferred compensation for high level company executives.

Always ask for a detailed illustration before you purchase any type of life insurance product. Illustrations not only review your premium outlays but will show you how the product may perform in the worst and best case scenarios. It is required by law that you be shown the low, mid and high end of the product's potential cash value performance. You can also request a new illustration with different variable inputs from the insurance company even after the policy is in force.

Disability Insurance: Your Income Safety Net

For physicians, becoming disabled even temporarily can jeopardize your income generation. Disability insurance replaces a portion of your income if illness or injury prevents you from working in a full or diminished capacity.

Key points:

• Own-occupation policies are highly recommended. They pay benefits if you cannot perform your medical specialty, even if you're able to work in another capacity.
• Income replacement rates typically range from 60–80% of your gross income. Some allow for future income protection basically to hedge inflation.

I have known several physicians who have had to go out on disability in their 40s or 50s due to illness. Some in the prime of their careers, this is something that you do not want to leave uncovered.

Elimination period—the waiting time before benefits start; shorter periods (30–90 days) are preferable for physicians. But you can choose 180–360 days as well to keep premiums lower.

Retirement protection policies (RPPs)—these are DI supplement policies that, if you become disabled, would help you fund what would be the amount you would have mostly funded into your 401(k)/403(b) plan. Think about not just the lost income due to a disability event, but also the loss of income to fund your retirement plans.

Most of these policies phase out by age 65, some have higher age phase outs. You should obtain this type of coverage early on in your medical career.

Many physicians are self-employed or practice in settings where disability coverage isn't provided or is insufficient. Many hospital owned practices may offer benefit packages that include guaranteed issue DI policies. That means they have sufficient numbers of employees (greater than 75 usually to qualify)—therefore no medical exam required and only a few medical questions need to be answered. It is a prudent question to ask when you are joining a medical group.

Tax Considerations of DI Policies

Out of pocket disability premiums translate to non-taxable on claim distributions. If your employer pays for your disability insurance premiums, on claim distributions are usually taxable. If your DI premium is too expensive you can ask for a graded premium option, which starts out at a lower price point and then levels off over time.

Long-Term Care Insurance (LTC)

This should be a no-brainer, but most people, including physicians, neglect to add this to their financial planning tree. We all see patients at the end of the life spectrum (or earlier) and it only takes one time making rounds in the nursing home to contemplate one's own mortality.

My 91 year old mother had a decline in her health status last year. She had been living independently in her own home until she developed hypertensive encephalopathy and anasarca due to medication resistance. This led to multiple hospital admissions which ultimately led to a lengthy rehab stay. The whole episode lasted about two months. The "care" at her facility was terrible and I couldn't wait to get her back home. I had to quickly secure in-home 24/7 care for her. The cost of monthly care is stratospheric. I was contemplating a leave of absence from work or premature retirement in order to help take care of her. Fortunately, she had a long-term care policy which is paying about 40% of her monthly care. Thankfully with her LTC policy, fixed income pensions, and her savings she is able to continue to live in the comfort of her own home rather than live out her final years in a facility.

Patients in the United States are forced to spend down their life savings before Medicaid will pay for their long term residential care. This is known as the "Medicaid spend down." Medicare only pays 100 days per qualifying episode of long-term care stay and a one lifetime 60-day additional benefit. The individual can keep $8,000 to their name and the nursing facility takes the rest (annuities, pension, homes, etc.). Get the picture.

Long-term care (LTC) planning is often overlooked until it's needed, but early planning can save you money and stress later. LTC covers services like nursing home stays, assisted living, or home health aide assistance.

Policies vary in coverage, benefit periods, and inflation riders. The average claim is about 2.7 years. If a person survives the first year of the claim, the average time on claim goes up to about 3.9 years. Females usually are on claim longer than males by up to 2 years. About 15–22% of claims last longer than 5 years. There are also elimination periods of 60–100 days to satisfy before claim benefits can be paid out to the beneficiary. Eligibility to receive benefits is usually the inability to perform 2 out of 6 ADLs.

So here are your options:

• Buy a long-term care policy to cover 3–6 years of care for both you and your partner. Do this in your early 50s–60s in order to secure lower premiums.
• A good prudent hedging approach is to purchase a cash value permanent life insurance policy with a long-term care rider. In event of death, the policy pays out like a normal life policy. Should you need the long-term care benefit, it will pay a certain daily amount for in-home or nursing home care and deduct it from the death benefit. If the coverage isn't needed, you can surrender the policy or take out a policy loan. Most will cover 3 to 6 years of long-term care to make the premiums affordable.
• Downsize your home in your 70s–80s to buy an "entry fee" to a transition of care facility ($300,000–$800,000), then pay a monthly facility fee of $5,000–$8,000 (today's rates). Transitions to assisted living and nursing care would be covered.
• Self-insure with a ready cash liquid reserve of about 2 million dollars dedicated to cover long-term care expenses later in life if needed, opting not to buy an LTC policy.

In Summary

Physicians face unique occupational risks, making tailored insurance coverage a cornerstone of financial health. Life, disability, and long-term care insurance are not just safety nets—they're investments in your peace of mind and your family's security.

Regularly review your coverage to ensure it aligns with your current income and family situation. Consult with a financial professional familiar with physicians' needs.

Stay Protected, Stay Prosperous!

Your health is your greatest asset—protect your financial future with sound common sense and straightforward financial planning. I look forward in continuing to share my personal financial journey with you.

Until next time!
David Chesner, DO
Your Financial Wellness Coach

The Physician's Financial Post
Helping physicians navigate the holistic path to financial wellness.