Using insurance to appropriately protect our wealth is part of a comprehensive financial plan. Even though you must interact with an insurance broker as part of your financial team, you must take the lead. In the preceding post, we discussed the rules of the insurance game. In this post, apply those rules to some common types of insurance. For that we will use the wisdom of Kenny Rogers as The Gambler.
Never count your money, when you’re sittin’ at the table.
You won’t win by over-insuring, but cannot afford to lose by under-insuring. If you don’t understand that, it is like sitting across the table at a casino, showing your hand, and asking your opponents what they think you should bet. Professional poker players also know how to use fear and greed to prod you towards a bigger payout. For them.
So, you need to prepare yourself before you take your seat at the insurance table. That means having an idea of your income, costs, and the assets that you can draw upon that are relevant to the insurance. Use that information as a basis to decide how much insurance you need as a minimum. Further, consider how much insurance beyond that you want.
Spending a bit more for insurance beyond your basic need isn’t a bad thing. The future is uncertain by its very nature and you likely haven’t thought of everything. So, it may give you a strong return on your sense of security. However, if you get carried away, that is money spent that could have improved your security in other ways. Considering your objective and subjective needs helps you to make better personal decisions before you are subjected to tactics aimed at your emotions and psychology.
You gotta know when to hold’em.
Car & House Insurance
Everybody needs these. However, most doctors don’t need to pay the big premium that comes with a low deductible. If you can absorb a $1K expense, then you can have a $1K deductible. No problem. Otherwise, the odds are that you will pay more over time. The same applies with the various extra riders you can purchase. Extra liability coverage is usually worth it. In contrast, most physicians can absorb some price discrepancies for replacement rather than “new value” type riders. It may sound great, but remember that they set the prices and make the rules.
The other benefit of these types of insurance is that if you have a claim, the insurance company has skin in the game to get things dealt with properly. A bigger claim will follow if they don’t. You are buying insurance for a service in addition to protection. Of course, remember their motivations when you are interacting with them over a claim.
Umbrella Liability Insurance
This can be tacked onto a car or house insurance policy for a small additional premium. It covers being sued for amounts beyond the basic policy coverage.
One of the pitfalls of having a high status career, or if you show your wealth, is that people (and their lawyers) can see you as a big potential pay-out for a lawsuit. It is motivating. If you have a minor incident, the driver of which vehicle is more likely to be seen as a cash cow to be milked?
Most minor incidents would be well within normal insurance policies. However, for something major the ability to pay (real or perceived) will factor into the legal decisions made.
Own-Occupation Disability Insurance
This is a vital form of insurance until you have achieved full financial independence plus some buffer for increased costs that may come with a disability. It covers lost income due to disability from a wait period until age 65. The wait period is usually 90 days, but you can pay more for a shorter one. Hopefully, you prioritize building an emergency fund that could bridge those 90 days as a more flexible and cost effective alternative option.
The most important rider to have is “own occupation” to prevent you from getting pushed from your profession into a less desirable career that accommodates the disability. People will try to sell you the maximum amount of insurance that your income permits. However, the question that you should be asking yourself is how much coverage do you need?
Early in your career, you likely need a lot of disability insurance. Most of your wealth is in your human capital. Further, your financial capital requirements commonly increase rapidly. Keeping a low to moderate cost of living to quickly eliminate debt and start investing in early practice is great. However, the competing priorities of pent-up delayed gratification, perhaps kids, and the normal tendency for lifestyle inflation make the early years a shifting financial landscape.
So, It is usually best to lead the target and get more rather than less disability insurance at this phase. You may have a policy that you were able to buy while training. Using options to increase that policy after graduation and perhaps adding a second policy is usually a good idea. Multiple policies can also make it easier to unwind later when your needs decrease. However, also be aware that multiple policies will also likely co-pay up to your total lost income. You cannot get $200K of disability insurance to cover $100K of income by using two $100K policies.
Term Life Insurance
Analogous to disability insurance, we need enough life insurance to make sure that if we die prematurely that our loved ones are not saddled with our debts or unduly suffer from our lost income. Early on, when our debt and family obligations are higher than our financial resources, life insurance is vital. As you can see in the table below, the cost of shorter durations of coverage is relatively low for a young healthy person.
You will need enough insurance to cover your debts and buy enough time for your family to get back on their feet. Most people will want enough to eliminate a mortgage so that there is housing security, plus cover the costs of raising their kids. As those obligations decrease and our investments have grown enough to cover our lost income, then we need less insurance. We will compare a couple of approaches to that in the next section.
Those without dependents, or someone to collect on debts from, probably do not need life insurance. Of course, they should also attend to that need without delay if the situation changes (marriage, kids, or a family-secured loan).
Travel Health Insurance
We often don’t think about the costs of healthcare when travelling around Canada. Our public system covers most emergencies and there are good reciprocation agreements between the provinces (with the possible exception of Quebec). However, if you are travelling outside of Canada, then you should usually buy travel health insurance.
The costs of healthcare can quickly devastate all but the largest of nest eggs. Further, this is another situation where an insurance company can provide service. It makes receiving timely treatment more seamless. The insurance company will also be motivated to get you back to Canada as soon as safely possible and arrange medical transport. If you are critically ill, being close to your family and friends is vital.
Personally, this is a type of insurance that I would use regardless of age for the above reasons. Fortunately, it is cheap if you are young and healthy. If you are not, then be sure to fully disclose your health information when buying it. You don’t want the insurance company denying a claim because you did not.
Know when to fold’em.
A doctor who lives within their means and invests should be able to eventually become their own “insurance-provider” at some point for disability and life insurance. For disability insurance, that would be when their cost of living, care costs, and retirement are secured (since disability payments usually stop at age 65). For life insurance, it would be when your current and future liabilities are covered by your assets. How long it takes you to get to that point will vary. It is also not an all or nothing event. There are many flavors of financial independence.
Term Life Insurance Ladders
For life insurance, it may make sense to have a policy ladder. For example, you may have a ten or fifteen year term life insurance policy to cover you while you pay off your mortgage, and raise kids. A second longer term policy could bridge the rest of the way to financial independence. You could then ditch them easily when they expire and are not needed. This laddered approach could save considerable money by reducing insurance as your needs decrease compared to buying a single large policy that leaves you over-insured later in life.
For those who get caught in the earning-spending trap. Well, ongoing life insurance is another cost you’ll need to add to the spending treadmill. Some will use this as a reason to try and sell you permanent life insurance. The specter of being expensive or uninsurable after age 65 may be trotted out. However, if you require life insurance past the age of 65, that likely represents a long-term planning problem.
Ditching Disability Insurance
As mentioned, disability insurance is a must-have in your early to mid-career. However, it is also important to re-evaluate your insurance needs when your spending is in a more steady state and you have built financial assets. Hopefully by mid to late career, you have enough liquid assets to offset some loss of income. You could choose to reduce some disability insurance at that time. That may mean simply dropping one of multiple policies, or negotiating a reduction.
It is likely that you and your broker will have different perspectives on disability insurance. By dropping insurance, you are taking the risk of lost future income. Insuring against that risk, if it won’t impact your financial security anymore, is valid if the purpose of money is to have as much as you can when you die. It is not logical if you feel that the purpose of money is buy time, security, comfort, and to see your excess money help causes important to you. You can only experience that while alive. If you do not need more money than you currently have, then you are betting against The House. If you still find that comforting, then go ahead.
Know when to walk away.
There are some other insurance policies that you could get, or use a better alternative strategy instead. You may decide that they are right for you and worth the price. Or you may decide to walk away, towards other options.
Critical Illness Insurance
Buying critical illness insurance is a bet that you will get one of a list of horrible diseases or injuries. All docs have a list of those! It pays out cash to bridge the financial gap between either disability insurance kicks in, or you kick the bucket, and life insurance pays out. This type of insurance is valuable if you don’t have enough financial reserve to bridge yourself to one of those outcomes.
Again, early in our careers this is the case for many of us. However, if we develop an emergency fund or have access to an unused line of credit, those may be better approaches. They are much more flexible. Hammering your line of credit debt and building a cashflow buffer should be a top priority that is achievable in the first few years of practice. Hopefully, you have done that long before your are more at risk of heart attacks, strokes, cancer, and the other items on the nightmare list.
Since our actual need for this type of insurance is so brief and fleeting, insurance companies have looked at ways to make it more palatable. For example, if you have not used it after a certain time period, then you will be refunded your premiums. That sounds like a no-lose situation. However, you should consider how much money you would have at that future point if you had used those premiums to pay off debt and invest instead.
Life Insurance For Your Kids
Fear sells and most parents are terrified at the prospect of a child getting sick or dying. So, this may be a target for insurance policies. We are not dependent on our kids for income. However, you may lose some income while trying to cope with tragedy. Again, there are alternative ways to build that financial safety-net more broadly.
This insurance is relatively cheap, but the odds of an insurable event are fortunately also extremely low. Remember that the insurance company knows the odds, sets the price, and makes the rules to make a profit. Unfortunately, our kids are also sometimes used to lever us into even more expensive insurance products from which we should likely run from.
Know when to run.
The main insurance product that I would run away from is permanent life insurance being sold for the wrong reasons. Fast, before I get snared by a slick presentation and wake up married in Vegas with a major hangover. If you Google whole life insurance, it is hard to find anything that is not an advertisement. It is very heavily marketed and profitable to sell. That does not mean it is automatically bad. However, the articles that come up on finance blogs about whole life insurance are generally about how evil it is. That sentiment is because it is like a marriage.
Okay, I had better clarify that statement before my wife triggers my disability and life insurance policies. Permanent life insurance (particularly whole life) is a long-term commitment and expensive to exit from. So, you had better be sure before you commit.
Unlike dating, it is a bit more of a “sure thing”, with a relatively safe but low expected return in the long run. Still, while young, it is likely better to just date.
Most of the reasonable uses for permanent life insurance are not a consideration until mid-career. Further, there are many alternative fish in the sea to choose from instead.
Don’t get married to whole life insurance by accident.
By its nature, whole life insurance is insuring you for life. Even after you don’t really need life insurance. Remember, regardless of your age and how they spin the benefits, the insurance company knows the odds. They win. There can be some uses for whole life-insurance. For example, if you are likely to die with illiquid assets (like a family business or real estate) or as a way to hold a fixed-income-like asset in a corporation. However, there are also alternatives that are simpler, more flexible, and with fewer hidden fees. The article linked to above discusses many of those alternative options and we will also explore it further in future posts.
This blog post is the best and most concise information on “insurance strategy”.
As a new immigrant, I got sold expensive term life (from a MLM firm) and universal life policies. Fortunately, I didn’t have a lot of money at the time so didn’t buy much.
For the last 2 years, I was thinking on and off about canceling my disability insurance policy. This blog post helped me make the decision in a jiffy!
As for the universal life insurance policy that was bought when I was young, I think it is now a sure bet to keep it as I am in my late fifties.
Thanks PD. I got sold a whole life policy early in my career also and fortunately I kept it small. Most of the cost is front loaded. So, if not hindering and basically paid for then keeping it likely makes sense. Ironically, many people cancel those policies late in life and paid for it without ever getting the eventual benefit! Expensive, like a divorce. I thought about my disability for a while before cancelling to make sure I had buffer. That gestation time also made me more resilient to stick to my guns when I did and not feel nervous when my broker was flabbergasted about it.
Another brilliant post ! A great review for everyone. The part that caught my eye was the layered term insurance approach, makes a lot of sense and significantly cheaper than a single long dated policy !
I would love to say I knew about that laddered approach when I started, but I didn’t! They say the main profits from blogging come from all the tips your learn through writing. I sat down at the insurance table 20-25 years ago with no idea of how to play. I got term 20 that wrapped up a couple of years ago and I didn’t renew. I had gotten a second term 20 about 12 years ago when we built our giant house and took on a large mortgage (the other side of the coin is to get more if you need it). I cancelled it when we downsized a couple years ago since I no longer needed it. With a do-over, I probably would have just gotten term 10 for the second policy and had more than enough. The monthly payments always seem kind of piddly, but over longer terms add up.
Excellent work on another great post. Like you, I was late to the party when learning about investing and insurance strategies. I was too busy getting my feet under me as a newly minted physician, fully trusting my advisor who sold me overpriced mutual funds in addition to a $50K/year (between the wife and myself) whole life policy. It was framed as a no-brainer investment, that “many of my lawyer and physician colleagues ask me to set up for them”. The purported upsides included the usual suspects: 1) being able to borrow against the policy in retirement to supplement income all while the pay-out value grows, 2) extract proceeds from the Corp tax-free through the CDA upon death, 3) having a source of emergency cash, 4) treating it as a stable bond-like investment in addition to a stock portfolio. I’m now about halfway through my 20-year pay and at this point feel pot-committed. That said, we are fortunate enough to also have maxed out RSPs / TFSAs / RESPs / a corporate stock:bond portfolio, and no mortgage.
Bottom line: I don’t think I would do it (WL) again knowing what I know now, but I also don’t think it will be a huge regret once I’m 65 (I’m now 40) and I have that extra asset bucket. I have yet to see whether the after-tax dollars in hand will be superior or not to the alternative of investing that cash in a 60:40 portfolio corporately, in particular on a risk-adjusted basis.
I would remind your readers that the White Coast Investor blog, while excellent, is from the US which may have some different tax implications than we do in Canada when it comes to WL policies (though the bottom line still probably applies).
Thanks Dan. I agree, WCI is a great resource, but we definitely face different issues in Canada and have a totally different tax code. Once far down the road on a whole life policy, then it often makes sense to finish the commitment. I think the key messages I have are: 1) Don’t jump into it without really knowing the alternatives. 2) If you are into it already, the exit is usually expensive. If keeping it, I would make sure to think of it as more bond-like and consider that when deciding on my asset allocation for the rest of my portfolio. I actually wrote about counting alternatives (like whole life) in my portfolio mix a bit in the optional asset meshing section my DIY investor hub and made a calculator to go with it.
Interesting, term4sale rate is close to oma group insurance quote…