life insurance

7 Steps to a More Financially Secure 2016 | Oncology Practice Management

It is a new year. That means you have another chance to start over again, to take a fresh look at your finances, and to get on track for the future. So, where should you begin? Every physician should take several steps when moving toward financial security, and we want to share a few of them with you at the beginning of 2016.

1. Delve into Your Disability Insurance Policy

When was the last time you reviewed your disability insurance for doctors policy? If it has been more than a few years, it has been too long. Things change, and your coverage should keep pace. If your earned income is higher now than when you originally purchased your policy or last updated your coverage, chances are very good that you are underinsured.

Next, sit down and read through each of your policies. Pay special attention to the definition of disability. Ideally, your policy should include a true or pure “own-occupation” definition of total disability, which specifically states that you will be considered totally disabled if you are unable to perform the material and substantial duties of your occupation.

This definition allows you to work in another occupation or medical specialty and to receive full benefits, regardless of the income you earn from another occupation or medical specialty. Some companies will even go as far as to state that if you have limited your practice to a professionally recognized specialty in medicine, that specialty will be deemed your occupation.

Look for medical exclusion riders. Were you suffering from low back pain when your policy was issued?

Were you seeing a psychologist while you were going through a divorce? If so, you may have a rider on your policy that excludes these preexisting conditions. But if that divorce is far behind you and your back is much better now, you can ask your insurance company to reconsider those exclusion riders to close the gaps in your coverage.

Last, but not least, see if your policy includes a “multilife” or association discount. Although this can provide male physicians with a savings of only 10% to 15% off of their policies, female physicians can save as much as 60% of the normal female rates, if a gender neutral or a “unisex” rate is available. Therefore, if you are still healthy, and your policy does not include any discounts, it may make sense to “shop” the marketplace to see if you can obtain a similar policy for a lower premium relative to when you first purchased your policy.

2. Lift Your Umbrella to Cover Your Assets

The past 7 years have seen a dramatic rise in stock prices and home values, so there is a good chance that your net worth has increased. That is the good news. The bad news is that you are now a bigger target for lawsuits than ever before. Although your malpractice coverage may protect you from bad outcomes in the clinic, there are plenty of dangers lurking in your everyday dealings, so you need to make sure that all those risks are covered too.

The liability coverage under your homeowners and automobile policies is your primary layer of protection. However, if you need additional protection, you should purchase an excess liability or “umbrella” policy. Personal umbrella liability protection is secondary coverage that works in conjunction with your primary policy. When the liability limit of your primary policy is exhausted, the umbrella policy will pay the balance of a liability claim against you up to the umbrella policy’s limit.

You should also avoid structuring your automobile and homeowners policies with low deductibles. Low deductibles will cause your premium rates to rise substantially. Therefore, it is best to increase your deductibles to at least $1000 and to devote the premium savings toward increasing your liability limits and/or purchasing an umbrella or excess liability policy.

3. Establish an Emergency Fund

When you look into your bank account, what do you see? Typically, we see physicians with 2 accounts, a checking account and a savings or a money market account. Although that is acceptable, it means that your emergency fund, if you have one, is pooled with all the other monies you use to pay your expenses, go on vacation, and pay your taxes. So, how much of that money is really reserved for bona fide emergencies? There is no way to tell.

You, your spouse, and your loved ones can gain great peace of mind by simply segregating your emergency fund into its own separate account, such as a checking account, savings account, or money market account, which can be easily accessed without penalty. This is a fund to be used for unforeseen or overlooked expenses. Although the size of the fund is a personal decision, suggestions range from 3 to 6 months of your living expenses. Either way, keeping this fund separate from all your other accounts makes it easier to see, so that everyone knows that the safety net is real.

4. “Max Out” the Match

You would not walk away from free money, would you? Of course not. Nonetheless, we routinely see physicians who miss out on their employer’s matching retirement plan contribution by failing to max out their own elective deferrals.

To make the most of your retirement plan, contribute all you can. The maximum elective deferral into Section 401(k), 403(b), 457(b), and government thrift savings plans remains unchanged for 2016, at $18,000 for most physicians and $24,000 for those aged 50 years or older this year.

While you are thinking about your workplace retirement accounts, take a look at the investment options in your plan. Have they changed? Each year, your plan fiduciaries (the people who put together the list of mutual funds from which you can choose) are supposed to review the options you have to choose from so you have ample opportunity to diversify your holdings. The key word here is “opportunity,” because it is your job to actually make the final decision about how to invest.

5. Do Not Tolerate High Interest Rates

Banks and financial institutions are bending over backward to win physicians as customers. After all, you earn 6 figures in a 5-figure world, and you are the pillar of your community—both of these make you a good risk for lenders. Make them earn your business.

Review all your loans—your student loans, your mortgage, your car loans, and your credit card balances—and then ask yourself, “Is this the best they can do?” Then call up your lender(s) and at least one other bank or financial institution, and ask them the exact same question.

When you get an offer from one, compare it with the other offers you have received. Ask if you can qualify for a lower interest rate and, if you do not, ask if they can waive an origination fee or see if you can qualify for less restrictive terms. Maybe one wants your spouse to cosign, whereas another does not. Do not forget that you are the customer and deserve only the very best.

6. Raise Your Deductible to Lower Your Taxes

Health savings accounts (HSAs) have been in use since 2003, but many physicians are just now learning how they work. If you have a qualifying high-deductible health plan, you can open an HSA for yourself or your family and contribute $6750 in 2016 (for family plans) or $3350 for individual plans, plus an additional $1000 for those aged ≥55 years.

Although $6750 may not seem all that much in the grand scheme of things, your HSA contribution can deliver permanent income tax savings plus years of tax deferral. For example, a physician in the top federal tax bracket can reduce his or her tax bill by $2673 when he or she makes the maximum family contribution.

However, many physicians who are using an HSA account are using it the wrong way. They will contribute to the account, get the tax break, and then spend the account down to zero on medical bills. A better strategy is to pay those bills out of pocket and invest the account balance, so that it can grow tax deferred for retirement, when it can be used to pay for healthcare.

7. Take a Second Look at Your Life

People are living longer today than ever before, so life insurance premiums have decreased steadily over the past several years. So if it has been many years since you reviewed your coverage, now is a great time to do so.

You should use the services of an experienced insurance agent who represents several companies to help you get the best rates, especially if your health is less than perfect.

The agent will know which carriers are likely to provide you with a better underwriting classification based on your height and weight, immediate family history, and/or other medical issues to allow you to secure a lower premium rate.

For example, if you are being treated for hypertension, certain companies will allow you to qualify for their best underwriting classification, but others will not. After all, using an agent or applying for the insurance product online will not cost you any additional money.

Conclusion

This article provides 7 steps to help you reach a more financially secure 2016. The key is to take the time to evaluate which of these concepts, if any, works for you in terms of your personal financial planning. After all, most people “don’t plan to fail, they simply fail to plan.”

W. Ben Utley, CFP, is the lead advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping doctors throughout the United States to save for college, retirement, or other financial goals. He can be reached at 541-463-0899 or by e-mail at ben@physicianfamily.com.

Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF, is the founder of Physician Financial Services, a New York–based firm specializing in income protection and wealth accumulation strategies for physicians. He can be reached at 516-677-6211 or by e-mail at Lkeller@physicianfinancialservices.com with comments or questions.

This article originally appeared in page 42 of the January 2016 print edition of Oncology Practice Management.

Should physicians buy Variable Universal Life insurance? | W. Ben Utley CFP® answers in Ophthalmology Business magazine

Should physicians buy variable universal life insurance?
Should physicians buy variable universal life insurance?

Question:

"I just became a partner in a small group practice. My tax person tells me the bump in pay is going to mean a lot higher taxes. I am maxing out my 401(k) but still I got a huge tax bill last year. The agent who sold me my disability insurance policy says I should buy some variable universal life insurance from him because it will save me taxes, but I already have $2 million in term coverage from USAA for my wife and kids. One of my partners thinks VUL is a bad deal. What do you think?"

Answer:

Since it’s early in your career and you have a family to think about, it makes sense to have life insurance. Based on what I have seen in similar cases, $2 million is a good start but it’s not enough to provide everything your family might need to pay off the house, send kids to college (or private school), and pay ongoing costs of living without you. So I do think you need more coverage, but I do not believe variable universal life insurance is the answer.

As a form of cash value insurance, VUL combines the benefits of life insurance with the features you might find in a mutual fund investment. The word “variable” refers to the fluctuations in the cash value as a result of changes in the value of the investments it holds, while the word “universal” means that premium payments are flexible (like a universal joint is flexible).

I would have named this product “variable flexible life,” or VFL for short, but I figure the “F” might be misinterpreted to stand for “fallacious” since misguided physicians who buy this stuff suffer from the mistaken impression that they will save taxes while making a great investment that will protect their families.

The promise of tax savings is more fiction than fact. Sure, the cash value has potential to grow tax-deferred and the death benefit might be income tax-free, but these benefits are not the same as true, permanent tax savings. Since Congress closed most of the loopholes with the Tax Reform Act of 1986, permanent tax savings have grown increasingly scarce, particularly for medical specialists and other taxpayers in the top brackets.

A VUL policy’s tax deferral feature—arguably the only attribute of any value to an investor—may actually cost physicians more money in both the short and long term.

Under current tax law, long-term capital gains and qualified dividends are taxed at a lower rate than ordinary income, but the gain on complete withdrawals from a VUL policy will be taxed as ordinary income. Given that the top federal tax rate on ordinary income is fully 23 percentage points higher than the capital gains rate, equity-based investments made in a variable universal life product may result in taxes that are twice as high as those paid on gains from investments in an after-tax account (a jointly held mutual fund account, for example).

To be clear, a VUL policy will not save you a dime in taxes but it may cost a fortune in fees. The mutual fund-like “separate account” investment options available inside these policies are laden with costs, including operating expenses for underlying funds, management fees layered on top of that, plus an annual policy fee. “Paying those expenses is like rowing a boat with a hole in it. No matter how fast you row, you’re gonna sink,” says Lawrence Keller, an insurance expert with Physician Financial Services, Woodbury, N.Y.

There’s a huge incentive to push these policies. Since it’s common for agents to receive at least half of the first year’s premium as commission, your $50,000 investment means the agent will walk away with $25,000. Not a bad payday… for him. But when you try to walk away from the policy yourself, you will trip over one last expense that physicians often overlook: the surrender charge. Since the insurance company pays the agent up front, it can only recoup the cost by locking you into the policy or charging you heavily if you pull out before they’re done, which may be 10 or 15 years. “Buying a VUL policy is a lot like buying a new car,” said Mr. Keller. “The day after you buy it, it’s worth less than you paid for it.”

Your partner had it right when he cautioned you against VUL, especially when there are so many other vehicles that might be a better fit for you.

Consider term life insurance. Like auto or homeowner’s coverage, term life is pure insurance without cash value. Term life costs far less than VUL on a dollars-per-thousand basis, so every premium dollar buys you more coverage than it would with VUL. You will send less money to the insurance company and keep more for your family.

What can you do with the money you save?

Look into a Section 529 college savings plan. Contributions grow tax-deferred (just like VUL) but withdrawals from a 529 plan are free from income tax when used for qualified higher education expense. Some states will even give you a break on your state income taxes when you contribute—a real, permanent tax savings. (See “Section 529 plans: The best way for doctors to save for college” in the July 2012 issue of Ophthalmology Business.)

Check out a “back door” Roth IRA contribution. Given the average physician’s income, it’s unlikely that you can make a direct contribution to a Roth IRA, and you probably cannot deduct contributions to a Traditional IRA (not unlike VUL). However, you can still make non-deductible contributions to a Traditional IRA, and your spouse can too. After you have made your contribution, ask your tax advisor if it makes sense to convert your Traditional IRA to a Roth, where those contributions can grow tax-free for retirement, no matter how much Congress amps the pain on taxpayers in the top brackets.

After you have maxed out your 401(k), your IRAs, and your 529 plan, think about investing in low-cost, tax efficient equity index funds or exchange-traded funds (ETFs) from companies like Vanguard, Barclays, or Dimensional Fund Advisors. To keep the balance right (and avoid the dreaded Medicare surtax on unearned income), you might also pick up some tax-free income from a municipal bond fund. Finally, you and your partners might want to adopt a defined benefit retirement plan (a “pension plan”) to soak up excess cash that can grow tax-deferred for the long haul.

Keep an Eye on Your Money

The key to financial security is vigilance. Get curious. Ask questions! Dig for answers … or email your questions to eyeonyourmoney@physicianfamily.com so I can do the digging for you. If I use your question in “Eye on your money,” I will send you one of my favorite personal finance books to feed your head and a cool “Eye on your money” coffee mug to satisfy your thirst for answers.

Mr. Utley is president and founder of Physician Family Financial Advisors Inc., which delivers fee-only financial planning and independent investment advice to clients coast-to-coast. Contact him at 541-463-0899 or visit www.physicianfamily.com.

This article originally appeared in the April 2013 ezine of Ophthalmology Business, pages 12-13. To download a PDF version, click here.