Disclosure: I have no financial relationship with the authors of Doctors Eyes Only or with their financial advisory firm. But I was sent a free copy of the book.
Doctor's Eyes Only is a 9 inch, 217 page book written by Tom Martin, Paul Larson, and Jeffrey Larson. Paul is the CEO of Larson Financial, which bills itself as the nation's largest financial advisory firm exclusively for physicians. The firm has offices located in 11 states, including mine. The book is set up as the “Finance Course You Never Got In Med School.” My review of the book is pretty critical, but only because I hold this book to a particularly high standard since it is aimed squarely at physicians and written entirely by advisors who state they exclusively serve physicians. I really do think the positives of the book far outweigh the negatives, and it is worth your time and money. ($21.56 on Amazon right now.) In fact, I confess I learned a half dozen things I didn't know prior to reading the book, and plan to do some posts about them in the future. One thing about reading financial and investing books is that the first few are high-yield, but the law of diminishing returns kicks in pretty fast.
Too Much Advertising
A financial advisor writing a finance/investing book faces a very serious temptation to set the book up as an extended advertisement for their services. Many well-known advisors turned authors such as Ferri, Swedroe, Bernstein, and Schultheiss do a remarkably good job of minimizing this effect and writing for the do-it-yourself audience (the main readers of finance books). The authors of this book, however, did not resist this temptation very well. In fact, you can skip the introduction and the entire last chapter, since they're basically just an ad for Larson Financial. Oh sure, they mention it's possible to invest on your own, but then make it sound not only immensely time-consuming, but almost immoral to waste your time doing such things instead of practicing medicine or spending time with your family. Just about every chapter contains at least one admonition to hire Larson Financial to advise you, which gets old pretty quickly.
The Finance Course You Never Had In Med School
Between the introduction and the chapter about how to find a good advisor, the book follows the outline I'd follow in designing an introductory course on personal finance and investing aimed at physicians.
- Cash Flow
- Debt Management
- Risk Management
- Investing
- Education Planning
- Tax Management
- Estate Planning
- Asset Protection
- Practice Management
- Employee Benefit Plans
So far, so good. Unfortunately, the first 3 1/2 chapters aren't particularly good and contain a few pieces of what I consider erroneous advice, so many readers may mistakenly stop reading before getting to the much better final 6 1/2 chapters.
The Bad Chapters
The Cash Flow chapter begins with the unsupported statement that a typical doctor wastes $3 Million due to bad financial decisions (I wouldn't be surprised if that were true.) Then the authors launch into a strange discussion of the “three phases of your financial life”. The first one is the “lean years.” I think we've all been there. Phase 2 begins “once the high-interest debt is paid back.” I guess I skipped the lean years after all if that's definition of leaving them. But I do agree with the authors that there is a critical stage in the first couple of years out of training where you set yourself up for failure or success based on how you handle your new found income. Phase 3 magically begins at the arbitrary net worth of $1 Million. The rest of the chapter is a good discussion of spending your money on that which will bring you the most happiness. I had a beef with one chart in the chapter, which indicates you need to save 36% of your income for 20 years in order to comfortably retire for 30 years. There was no discussion at all of the assumptions taken to arrive at those numbers, which are all important in any financial projection. I suppose the idea is that doctors can't do that kind of math so they should hire a planner to figure it out. Showing how a physician can make a chart like that for himself would have been a much better use of the space in this chapter.
The next chapter on debt management contains a decent overview of student loans, although I was disappointed to see no mention of the IBR or PSLF programs, which I considered a pretty significant oversight. It also discusses mortgages. I was rolling on the floor reading the example where the doctor has a $450K mortgage, a $200K home equity loan, a $600K mortgage on the lake home, a $200K home equity line on the lake home, and a $250K mortgage on the Florida home. Look…if you owe $1.7 Million in mortgages, the least of your worries should be how to deduct your home equity interest. Imagine trying to service $1.7 Million on the average physician income of $200K at the ~6% rates used in the example. The interest alone would be approaching 2/3rds of your net income! This chapter could have really benefited from a rule of thumb suggesting you don't take out mortgages that are more than 2X your annual gross income.
The risk management chapter covers insurance basics and has a nice section on risk retention groups and captive insurance companies. Unfortunately, at the end of the book it delves into the “benefits” of using permanent life insurance as an investment vehicle. It even goes so far as to suggest that residents should buy term insurance that can later be converted to permanent insurance.
Chapter 4 is a long discussion on investing. I didn't like a chart that seemed to equate cash value life insurance with a Roth IRA as an investing account. Nor did I think they treated pre-tax investing accounts fairly. The suggestion was that you'd pay the taxes you skipped up front later, which is probably not true for most doctors as your effective tax rate in retirement is almost surely going to be less than your marginal tax rate during your career (especially given the relatively small amounts most docs I know are actually saving). The authors didn't seem to have a firm grasp of this concept throughout the chapter. I also didn't like the suggestion that variable life insurance is better for doctors than a taxable investing account. At least they discussed ways to make the insurance policy less bad.
The Good Chapters
At this point in the book, I was really disappointed and not looking forward to writing this review at all. In fact, I put the thing down for a couple of weeks. When I picked it back, I was either in a much less critical mood, or more likely, the book really started to improve. The last half of the investing chapter is a great explanation of the importance of investing passively, and discusses the problems with real estate investing, hedge funds, private equity, and physician specific investments like surgical centers and labs. The chapter even talks about the backdoor Roth IRA, which is understood far too rarely by physicians. This part of the chapter alone is probably worth the price of admission.
Chapter 5 is a short, but sweet discussion of education planning (for your children) and approaches that doctors often take toward this process. Chapter 6, on tax planning, is pretty good and offers a lot of good suggestions, but feels too much like an ad for MedTax, Larson's tax planning arm. Even the subtitle “Stop giving the IRS 60% of your income” is kind of a scare tactic. If you're paying 60% of your income in taxes, not only do you not do any tax planning, but you can't even do math. Even if you included state and payroll taxes, no American physician is paying 60% of their income in taxes. I can't even think of a way to get your marginal rate to 60%, but I suppose it could be possible due to phase-outs.
The estate planning chapter is well-done, but shouldn't contain much new information for regular readers of this blog. Chapter 8 was one of my favorite chapters- Asset protection. There's a great chart about which states to avoid for malpractice reasons and a discussion of the pros and cons of the common, as well as some of the not-so-common, asset protection strategies including family limited partnerships, equity-stripping, and using multiple jurisdictions. This is not a chapter you're going to find in a typical finance or investing book.
The practice management chapter discusses hiring, firing, communication, and leadership. There is also a link to a free “bonus chapter” on contract negotiation (Unfortunately, you have to provide your personal information to Larson Financial to receive this 2 page worksheet of questions to ask at your employment interview). I learned the most from the chapter on employee benefit plans. This is a wonderful discussion of ways to structure your business to benefit you most and retain your employees. It also talks about how you're probably liable to a lawsuit if the 401K you offer your employees offers actively managed mutual funds. The chapter has a beneficial section on using Health Reimbursement Accounts (not a Health Savings Account) and group disability and life insurance plans to your advantage. As mentioned earlier, the book finishes, like most of this type, with a short chapter on how to choose a great financial advisor (i.e. call the authors' firm.)
All in all, Doctor's Eyes Only is worth your time and money. It's definitely not the book I would have written, but if you can look past a few instances of what I consider bad advice (all mentioned above), as well as numerous instances of blatant advertising, you're likely to learn a great deal about issues that should matter a lot to you, all in a quick, easy to read format. There are very few finance and investing books out there aimed directly at physicians, and despite its problems, this could be the best one so far.
I clicked through for a kindle edition.
I find all of these for doctor ideas still push inappropriate insurance products.
I guess these folks can’t help themselves.
I think we need to warn fellow docs about these insurance products used as investments. I have done the math and they really don’t work. Maybe someone could compare a whole life product over the last 30 years and compare it to investing and paying taxes on a bond or indexed mutual fund to see who is really on top.
Without reading the book I cannot comment, but I do want to say that asset protection for doctors is very important. I spoke with an asset attorney once who told me that the goal of asset protection should be to throw up enough road blocks that the individual would rather settle for an insurance settlement than go after your other holdings. One strategy he used was to have his husband and wife clients opt out of community property designation (for those who live in community property states). It apparently has to be filed with the county you live in, but couples can opt to go 50/50 “sole and separate.”
His example went like this: Say someone wins a multi-million dollar lawsuit against your wife. In a community property state, that person could potentially take your home even though your wife did something wrong and you didn’t. When you take the designation sole and separate, you own half the house and other assets and your wife owns half. In the above case, they could win a settlement against your wife, but you still own 50% of the house. They have no right to evict you or your wife who is your guest. Now that the other person owns half of the house, they have the responsibility to pay half of the property tax owed each year…..They don’t get their 50% proceeds from the sale of your house until or unless you decide to sell….However, they do get that yearly tax bill. Faced with this scenario most people would opt for the insurance settlement.
I’m not a lawyer, but its a strategy that I thought I’d share…..It feels a bit unsavory, but its something to think about.
Joe
Those type of calculations can be done but it always requires estimates. To begin with, nobody, actually knows the return on whole life until after you die. Dividends are not guaranteed and always change. Currently dividends have been falling for decades. WL returned 5-6% when bonds/treasuries returned over 8.
Additionally if you are investing on a 50 year horizon, you probably don’t want to invest solely in bonds/treasuries.
This doesn’t even include lack of liquidity, that it costs money to access the cash value before death, that the majority of the benefit is the death benefit, that most people fail to keep a policy in force until death, step up basis for stocks at death, tax loss harvesting or favorable capital gains tax rate.
Okay, so our colleague reviewed a book marketed to us. We all need to form our own opinions for our specific financial needs. Some of us want to be hands on with our finances, but most of us don’t. That isn’t why I spent decades in school. I think the reviewer makes a mistake by saying “this is bad or this is good”. Last time I checked, you don’t know my financial situation and I don’t know yours. So to say one product is good one is bad, isn’t fair. It is a general opinion. Some clarity should be given: understand what you are purchasing and agreeing to do. I’d much rather keep money in an insurance product than a product I can lose in a law suit. It isn’t a matter of “if you get sued” it is a matter of “WHEN”. It happens. It seems like Larson may have a better understanding of our world than 99% of financial guys out there, so that is worth something.
My point is, just like if you asked 20 different doctors their opinion on how to treat a certain patient’s symptoms, we’d likely give 20 different opinions. Just like this book describes, it is one of several opinions out there from financial investment advisers. The fact they just work with physicians means they understand our financial world better than most do.
I’ve been a surgeon for 12 years and hope to retire in another 13. I would agree that the first 3 chapters are pretty basic finances. Caution needs to be given to any of us who finishes fellowship and immediately increases their income 6-8x more. It is easy to get in trouble quickly.
Personally, I don’t think a whole life insurance is great place for physicians to store our “wealth” in this day and age. However, I think things like Variable Universal Life Insurance do have a place in our worlds. It is important to know the difference and more importantly, what is important and applicable to you. Be warned though VULs are very complicated, but they can help you save for a wonderful retirement while protecting it from law suits. You have to invest long-term for them to make sense – normally a good 15-20 years. You need to understand that going into one. We started one pretty early on and I’m glad we did. It took awhile to understand why it was good for our situation though. Same goes for all the other investments we’ve done.
As for term insurance for residents….you are an idiot if you have a family and don’t have term insurance or some other form of life insurance. It is cheapest when we are young.
Here is something to think about with a taxable investing account that the reviewer obviously doesn’t understand future tax implications or isn’t aware of the historical data to support them. That is the point of chapter 6. The reviewer of this book has missed a crucial point that we ALL need to understand and that is: What are taxes going to be when you retire? “Stop Giving the IRS 60% Of Your Income” isn’t a scare tactic, in my opinion. That is actually pretty accurate. True, we aren’t 60% today – but what will taxes be in 13 years when I retire or 20 when you do? (your tax bracket in 10, 20, or 30 years, Obama’s Health Care Plan, state taxes, etc – they all add up and pretty close to 60% today). The book is actually right on this if you look at historical tax brackets. For over 50 years the tax rates were higher than 70%!!! Only in the last 20-25 years have they been less than 40%. We are all idiots if we believe this will never happen again. It is just a matter of time (http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213).
I think I’ll talk to someone who is qualified to plan my finances versus a colleague who isn’t. Just my two cents. Glad to know there is a book out there and a company with a niche versus our local bankers and “Edwards Jones guys” that work with everyone.
Jared-
Thank you for your detailed comments. A few words by way of response:
1) It should be noted that this is not a review of Larson Financial, just the book. I agree that many doctors, perhaps even most doctors, do need a good advisor. I’m still amazed at some of the dumb things doctors do. There are many doctors who aren’t even taking advantage of their 401K. Finding a good advisor is pretty tricky unfortunately, but hopefully the advice on this site can help you evaluate your advisor and help you decide if you’re getting your money’s worth.
2) Insurance-based investing products do have a certain asset protection benefit. If it is more important to you to protect your assets than to earn a decent return, then you may prefer “investing” in a cash value life insurance product rather than a taxable account. You should, however, max out your tax-protected retirement accounts such as a 401K and backdoor Roth IRA first since they not only can offer solid returns, but also great asset protection in most states.
3) I politely, but strongly, disagree with your assertion that a VUL policy is a good place for a physician to invest. I have yet to see a policy that didn’t combine bad insurance with bad investments and they are often sold by bad advisors. I’ve written about it here. I suppose a product could come out in the future with reasonable insurance costs and reasonable investment options, but I haven’t seen it yet. Feel free to link to your particular policy and perhaps we could do a Pro/Con guest post about it.
4) I think your tax argument reflects the same lack of understanding that I feel the book does- primarily that marginal tax rates are not effective tax rates. Even if the top marginal tax rate were 60% (it isn’t), your effective tax rate wouldn’t be 60%. I’ve blogged about this many times. It basically comes down to the fact that:
A) You have to fill the lower brackets first, lowering your effective tax rate
B) You’ll almost surely have less income in retirement than during your career, so even if tax rates go up, you’ll still likely be in a lower tax bracket
C) You can tax diversify with tax-free and taxable accounts, so much of your income isn’t taxed at all and some of it is only taxed at lower capital gains/dividend rates.
Avoiding tax deferred accounts or avoiding using a taxable account for fear of tax rates going up in the future is irrational in my humble opinion.
Think of it this way-
I think I could retire quite well on $100K a year in today’s dollars. If say $25K of that comes from social security, $15K from Roth IRAs, $10K in dividends and long-term capital gains and $50K from a traditional IRA, and you take the standard deduction of $11,900 and two exemptions at $3800 each, then your federal tax bill looks like this:
SS – 85% of it is taxed, so 0.15*$25K= $3700 tax free
Roth IRA= $15K tax free
Standard deduction and exemptions = $19500 tax free
Total tax free income = $38200
Your dividends/long term capital gains are taxed at 15%, so that’s $1500 in tax
Then you have $51800 in taxable income. The first $17,400 is taxed at 10% ($1740 in tax), and the rest ($34,400) is taxed at 15% ($5160.) Add up the tax of $1500+1740+5160= $8400 in tax for $100K in income, or 8.4% effective tax rate. Even if you just look at the traditional IRA money, all taxed at 15%, that’s a huge tax savings compared to the 28-35% most docs would pay on it if they didn’t defer the taxes.
5) Just because you get sued doesn’t mean you lose assets and all assets outside of life insurance aren’t reachable in most states. I suspect it is actually quite rare for a doc to get sued for more than the limits of either his malpractice policy (if work-related) or his large umbrella policy (if not work-related.) Sure, we’ll all be sued, but few of us will ever lose personal assets in a lawsuit. Truth be told, we’re far more likely to lose it in divorce.
6) You link to the TOP tax rates in the past, but very few taxpayers ever actually paid at those high rates. In fact, most doctors aren’t even in the top tax bracket. I’ll likely never be in the top tax bracket, even if I didn’t defer a bunch of income into tax-deferred vehicles, and I’ll make quite a bit more than the average doc.
Jared, you might want to consider getting a tax-strategist. Sounds like you are paying too much in taxes. Remember that the tax code is one giant stimulus package for people who do what the government wants them to do. You can significantly lower and sometimes even eliminate your tax burden if you do what the government wants you to do. Whether it is green energy, business, farming, gas and oil drilling, real estate investing, etc. etc. Taxes usually are our biggest expense and the more you can avoid (not evade), the faster you will get to your financial goals.
Consider picking up some of Diane Kennedy’s books or Tom Wheelwright’s book “Tax-Free Wealth” from Amazon. Its your money, you should keep as much of it as you can.
A VUL has to be one of the worst ideas possible for most physicians. Besides the misunderstanding of the tax code and the costs involved with a VUL, ill just talk for a second about using any permanent insurance policy as a method to protect against lawsuits.
If you have a lawsuit against you in the early years of the contract that wipes you out then you wont have money to pay the on going premiums and it will crash. If you want to take money out of the plan later on then that money is no longer protected once it leaves the insurance contract. Bottom line is be sure to have good mal practice and umbrella insurance. Both of those are worth purchasing and provide far superior protection.
I read the book last week and its way to strong on being a sales pitch for their services for my taste. If you are the kind of doctor that thinks that you dont need to be involved with the finances bc you went to medical school then expect your office manager and your financial advisor to rip you off. One can not ignore these topics and treating these people like experts as though they are a specialist in medicine is a huge mistake in my book. They are primarily experts in selling most of the time. Just like coding, this stuff is important and you can only delegate so much. You are ultimately responsible just like with coding.
As one of the authors of Doctor’s Eyes Only I want to start by thanking you for your candid review. We wrote the book at the request of our clients who told us there just isn’t enough good information out there for doctors. There needs to be more public dialogue like this so we really admire what you’re up to at The White Coat Investor.
That said, I hope you’ll allow my retort to your “bad advice / bad chapter” comments to be posted so that your readers can have a more balanced perspective.
You are right that we do give readers a way to get in touch with us if they desire and we do tell our story about how we came into existence by accident one referral at a time. Embedded in the introduction and final chapters are a host of good things physicians should be thinking about though. We never say they should work with an advisor – or our firm for that matter – just that they need to make a very important decision about where they are spending their time. For those physicians who really enjoy this stuff, I’d be the first to encourage them to attempt it on their own. That decision requires an ongoing commitment to stay educated though. (for example, I have the entire day blocked out each Thursday just to stay up to speed on changing tax, estate, investment, insurance developments) For many readers of your blog, I suspect they’ve made that call and from what I read, they are looking at a great source of information to stay educated. The reality is that physicians are more than bright enough to manage most of this stuff on their own if, and only if, they are willing to put in the time required to stay up to speed on everything. Our experience is that most doctors would really prefer not to put in the time required. For the few that are, we encourage them and give them additional tools in the book to help make it happen. That’s the message we’re trying to convey and I hope it isn’t glossed over by sharing our story and link to our website.
CASH FLOW CHAPTER:
This isn’t what you would have written, but don’t let your readers miss the main point that is so critical for physicians. Having a plan allows us to make deliberate decisions about how our income is spent. That’s a fair statement for sure and if that doesn’t come through, then this chapter legitimately needs a re-write. The chart you referenced is clearly documented as coming from the Journal of Financial Planning and I’d be happy to forward the article your way to share with your readers if you can get journal approval for posting. This too addresses a critical point – that doctors often hear they only need to save 10% of their income when this will lead to disaster if they want to be financially independent within 20-30 years of beginning their practice as that’s not nearly enough.
DEBT MANAGEMENT CHAPTER:
Your review neglected the balanced, well-thought, new-to-the-market approach we take when it comes to the decision of paying off the home early or not. When most advisors say the economics don’t make sense, we take it beyond the economics to bigger issues of asset protection and peace of mind. I like your 2x rule of thumb – we actually had it in the chapter at one point – but our average client has an $800,000 income so to post a 2x rule of thumb would cause that client to buy a larger home than they would if we didn’t give the rule of thumb to begin with. It was a risk-reward understanding that caused us to take it out in favor of the more theoretical discussion we provide that should lead the reader to the same conclusion. The debt example was from an actual client case and unfortunately, is not a rare situation for the age 50-60 physician landscape. This is one of the tax items we see overlooked the most for that demographic (improper deductions on primary vs. secondary residences). Totally agree that most doctors should never be in that position to begin with though.
RISK MANAGEMENT CHAPTER:
After all the great nuggets on disability insurance, malpractice insurance, auto and home owner’s insurance, I’m disappointed that you chose to focus on our brief discussion of making sure you treat insurance properly as an investment if you’re using it as an investment. Our point is to do that analysis that Joe and Rex are discussing in their comments posted above. 99 times out of 100 we see life insurance products inappropriately used as investments. Advisors sell life insurance to maximize commissions (130% of first year premiums in some instances), not to structure it for their clients well-being. That’s not right! We can all agree on that point. The unfortunate bi-product is that those advisors who do it wrong create a public bias that hasn’t done the work to substantiate the claim that it is a bad idea if done correctly (minimize commissions, minimizes expenses, minimize taxes). The CFA Institute and other academic sources are clear that if life insurance is used properly – for someone at the right age, and right health rating – it should far outshine a taxable account if tax rates remain similar (with a good 10% buffer available to allow long-term capital gains tax rates to decrease while still providing a reasonable alternative). Keep in mind it requires a product that will allow similar investment choices you would make in the non-qualified account (this is the first place most investors mess up). If it is done right – often through private placement vehicles not available to the general public – then the long-term insurance and administrative expenses should eat up no more than 1% off of the rate of return. This is far less than any of us should expect from taxes or normal investment management fees. For many physicians, getting their arms around this – learning how to use private placement products that minimize commissions – and funding to IRS MEC limits, could shave off 2 years of unnecessary work by minimizing taxes owed on non-qualified/taxable accounts. That’s nothing to sneeze about. If you take the time to do research into the private placement space I believe your readers would thank you for it. Also, keep in mind our strong advice to make sure you’re maximizing your other tax shelters prior to funding insurance as an investment. And note that our clients maintain non-qualified accounts in addition to using variable life insurance as an investment. Bottom line, there is no one size fits all approach and that’s our main point to our readers.
Additionally, note that we are not fans of whole life insurance. Whole life is a joke sold by jokers. No disagreements with Rex on that front. He’s just missing the understanding that we’re dealing with private placement or MEC’ed out variable options that minimize commissions, expenses, liquidity concerns, etc. His whole comment was irrelevant to these tools.
When we say term insurance should be convertible there are other reasons beyond just the potential of using insurance as an investment as described above. I have a client right now in year 19.5 of a 20 year term insurance policy. He just got diagnosed with stage 4 cancer and his second opinion doctor just gave him approx. 6 months to live. You better believe he’s glad we made sure his term insurance was convertible. His wife and family have $3mm headed their way that they might be out of had we not made sure the coverage was convertible. Additionally, one of the cheapest ways to cover estate taxes for a wealthy family is through secondary guarantee coverage (think of it as term insurance until death). Conversion from normal term insurance is required to make this work. Most 35 year olds don’t want to protect against estate taxes but many 65 year olds do (especially if we go back to the $1mm limit). Convertibility provides options later on if needed for estate planning or health purposes by allowing the client to convert with no further health questions. Just throwing this out to say, we don’t touch term insurance that’s not convertible because the few extra dollars it costs could come into play in a lot of ways beyond just investment options.
INVESTMENT CHAPTER:
Keep in mind the average income of our clients when we’re discussing the tax issues of pre-tax investments vs. tax-free investments. I would agree that a physician earning $200,000 today will probably be in a lower tax bracket when he or she retires (although Congress will have more to do with that than the math will). For that physician I’d probably recommend maximizing out pre-tax options – including the cash balance option posted about today. I don’t think that’s true for a physician earning $800,000 or over $1mm as many of our clients do though. None of those doctors I’ve talked with are counting on being in a lower tax bracket at any point in the future. I think we’d all agree that would then make Roth funding more advantageous than Traditional funding – which is our key point.
INCOME TAXES:
Don’t forget sales tax, property tax, vehicle registration tax, capital gains, double payment on 401k loan taxes, gas tax, (now Coke tax in NY) etc. That’ll get you closer to that 60% range – we weren’t just discussing income taxes in that section.
I love what you’re up to and I know your readers are better educated about finances than many physicians are. “Bad advice” is a strong statement though and I felt compelled to put it in better perspective. Everything else in your review is greatly appreciated! With my background as a professor, I’ve been through most of the academic lit in the personal finance world coming out over the past decade and I’m happy to make my library accessible for your blog as desired. Lots of good stuff out there from people who actually take the time to study it instead of recommending it out of ignorance.
Thanks White Coat!
I understand your review is of the book and not of Larson. I haven’t met anyone from there. At the very least, I know there is someone out there that speaks in my financial world day in and day out. Most financial people I’ve ever met are very generalized – they work with the couple that makes 50k/year and give them the same advice to the client that makes 250k a year. I’m a general surgeon, but you don’t come to me when you need neurosurgery. Same idea with my finances. The book seems to speak very elementary in finances – to you and I, sure. However, 90% of most docs have never had a finance class. So to them, it is all new.
Let me clarify something to everyone, please. We all make WAY more than the average American couple. Our needs are way different financially than most people. Our incomes are way different, our taxes are way different, etc. Sure, we can manage our own money. That isn’t what most of us want to do part time or full time though. We make stupid decisions financially because of emotion. I pay someone else to make those decisions for me…because I TRUST them and have a RELATIONSHIP with them. Just like I don’t diagnose myself with diseases, I don’t try and figure out my own financial situations for one reason – personal emotion. I’ve lived with buying stocks when they are too high and not buying when they start to drop.
No offense, but I read your post on variable insurance. *yawn*. If you can honestly explain the pros & cons on insurance that quickly and to EVERYONE who reads your posts you aren’t servicing anyone by posting it. Insurance products are 1) useful – if applicable to the individual, if done correctly, but 2) very complicated outside of term insurance, 3) in general very poor investments if you need the cash in less than 15 years, 4) but very good investments if you hang on to them for 15+ years, 5) you need to think of them like a 401k (money I don’t need today, but will be there when I retire), 6) but if an emergency arises, I can get access to cash I’ve put into it, unlike my 401k (in general, not including a loan) without penalties. I’m sure I missed something, but I’ve already said more than your basic, vague post on insurance – please don’t take offense.
EVERY insurance product is situational for everyone. My point is don’t tell everyone to dismiss everything out there to everyone that seeks advice here – we aren’t licensed for that – as your other blogs talk about. EXTREME CAUTION should be used when dealing with any one adviser, insurance agent, etc. My point is, build a relationship with them. Ask questions. If you don’t like it, tell them. ASK THEM WHAT THEY MAKE OFF IT. Legally, they have to disclose this to you. Just like in medicine, different advisers have different ways of doing things – just like we do in treating someone with high blood pressure…let alone a fork they’ve swallowed and is stuck in their intestinal track. My point is don’t bash everything you see and read and encourage everyone else to do the same when their financial situation is, likely, VERY different from yours.
A VUL isn’t for everyone, sure. I wouldn’t be so quick to dismiss it either. If walk into your local state farm agent’s office, I can assure you they don’t know how to utilize one properly either. You need an expert ON VULs to have it done correctly. They are often done in a piss-poor manner, but they can be done correctly as well. You can invest in the same types of funds in a VUL, 401k, 529, Roth IRA etc. You make it seem as if you can’t. That was my understanding of it anyway.
Your point is well taken on retiring with 100k/year in retirement, if that works for you. Your numbers would make sense then. Taxes are WAY different for someone taking home 100k/year versus those of us who make more or want more in retirement. I am planning on living on 300k/year in retirement, so my math will be different than yours just as will be my taxes. New residents coming out shouldn’t bank on social security either at retirement. That is dumb to include in your “plan above” if you are under 40 or maybe even 45.
Anyway, I am not here to argue with anyone. I have tax help, so thanks for the suggestion. I have financial help and fortunately work with a pretty stellar team. The point of this was to review a book, not argue. I’ll stop here and leave it at that. Everyone’s needs are different. I would encourage everyone to go the same thing we tell patients: get a 2nd or even 3rd opinion.
No offense but your post added zero reasons to purchase a VUL and isnt entirely correct although that is a minor point. If one wants an article that reviews VULs that is as neutral as it gets then i suggest:
http://www.consumerfed.org/elements/www.consumerfed.org/file/finance/VariableUniversalLife2007ReportPackage.pdf
Its funny when i see doctors believe they are can sniff out the bad apples by talking to them. Its mostly funny to me bc i thought the same thing once but now i know better. You cant treat these individuals like they are doctors with a subspecialty in finances. You need to understand the product for yourself. Its no different then coding. Its a pain, you dont want to do it, you may have received little training on how to do it, but its an important part of your life unless you want to have less money.
Financial advisors are not required by law to tell you how much they make off a product. The items that can be purchased within a VUL vary from one VUL to another but i have yet to see one where the costs are near what you would purchase outside on your own when you look at all factors. Ive only looked at about 5 i believe.
Why dont you list the VUL you own and it can be reviewed. Id personally like to see one that isnt horrible.
Im not a big fan of the book primarily bc of its constant push to their organization. If they took that out, while i disagree with their ideas on permanent insurance (which they dont provide real evidence for) then id like it more.
I always like it when someone is happy with their purchase. Glad you are. It would be great if you could provide some credible evidence why others should consider one.
For what it is worth, I am not a fan of Variable Universal Life Inurance either.
Here is a link to an article that I wrote several years ago for General Surgery News magazine called “Variable Universal Life: Buyer Beware”. It points out some of the flaws with this type of insurance, some of which have been mentioned earlier.
http://www.generalsurgerynews.com/ViewArticle.aspx?d=Finance%2BUpdate&d_id=68&i=June%2B2006&i_id=110&a_id=4098
I read the article posted by Mr. Keller’s advertisement, I mean post – nice plug by the way. I think he would be the first to agree, all of our situations are different, but I am sure he has his own philosophy for how to handle doctors. If there was a “this is THE way to do it” everyone else would be copying it.
My VUL was shown to me with an illustration of 7%, not 10% as the article mentions. That works for me though and I am in CA. So I need a yield of 11.87 from a taxable investment to balance these out (I am factoring in my tax bracket + state tax rate). I haven’t met anyone that can promise me a taxable 10% return, let alone almost the 12% needed. Now, if my illustration is 10%, then I need a taxable return of 16.96. Does someone have Bernie’s number?!
I assume you realize that the 7% isn’t guaranteed?
There is nothing magical that insurance policies can invest in.
Thus why are you asking for a 10% promise?
Illustrations are always wrong. This isn’t always a bad thing.
7% dividends on a life insurance policy are not the equivalent of a 7% return on another investment as the 7% is only applied to the cash value, and your entire premium payment does not go to the cash value, unlike a typical investment. Returns are generally negative for the first 5-10 years, which is as long as most policies are kept. Kept for 30+ years the overall return is usually acceptable, although not outstanding.
Tom-
Thanks for the detailed comment (as well as the comments in the email you sent me.) Sorry about the difficulty posting it as it was blocked by the spam filter. That occasionally happens to lengthy comments and comments with lots of links. Unfortunately, I don’t dare take the filter off as I get dozens of spam comments a day and don’t have time to sort through them. We just have to deal with its imperfections.
I agree with your assertion that a cash value insurance policy COULD be a good thing. I just have never seen one. If it could combine the rock-bottom insurance costs available through many term life insurance companies with a very low-expense policy and very low-expense investments, I can see why it might be useful. Why not submit a detailed guest post about this “private placement” policy you offer to your clients? I think readers would be interested.
I also agree that most docs and many of this blog’s readers do and should use an advisor. I’m not nearly as anti-advisor as most people seem to think. However, I am very anti-“bad advisor” and try to help my readers recognize them. You wouldn’t believe how many emails I get every week from docs who have been hosed by their advisors. Over and over and over. The same story. Docs pushed into an expensive cash value life insurance policy when they haven’t gotten anywhere near maxing out their retirement accounts. Docs being sold overly expensive, high load, poorly-performing, actively managed mutual funds inside an expensive wrap account. Docs being advised to take out home equity loans on their home and put the proceeds into high-risk investments etc. You may very well be one of the great advisors out there. But I hope you realize how rare that is.
I am amazed your average client has an income of $800K. The average physician income is something like $200K. The average spine surgeon (the highest paid specialty in the most recent survey I saw) was something around $500K. I don’t personally know any doctors who make $800K. I do know only 9 of the docs at the local university hospital make more than $800K. It appears that the docs you’re advising are a very small sliver of the general physician population. You are correct that someone making $800K has a lot of different issues to consider than one making $200K. Heck, that $1.7 Million in mortgages might not even be that unreasonable with income like that. Estate planning issues also obviously come much more into play, as do issues with not having enough tax-protected retirement account space. But the problem is most of society (and many docs) assumes most docs are making the income your clients make, which just isn’t the case. Most docs are solid middle class folks who will never have to worry about the estate tax (at least at current exemption limits) or being able to save more than they can stuff into their 401Ks, Roth IRAs, and cash balance plans. They certainly can’t afford $1 Million mortgages. Since your book is marketed at ALL physicians, I think you should have specifically pointed out that for most doctors pre-tax investment accounts are generally a good deal, even if future tax rates are higher.
Some good points on paying a little more for having the option to convert. One issue with converting a term policy is that it forces you to use that company’s permanent life insurance product. What’s the likelihood that one company actually is offering the best term insurance AND the best permanent policy for whatever your needs for it may be? Seems pretty low. So you’re stuck with an inferior option for at least one of the two, if not both. I certainly have zero concerns about carrying non-convertible term policies. If I die 6 months after my insurance policy expires my family will be just fine- since my portfolio will take care of them for the rest of their lives. That’s the point of a buy term and invest the rest approach. The term insurance doesn’t expire before you reach financial independence.
Regarding your comments on taxes:
Sales taxes, property taxes, vehicle taxes, gas taxes, and coke taxes shouldn’t influence any decision made based on your marginal tax rate. Yes, it sucks to pay taxes, but I don’t think you can do much tax planning that will allow you to avoid the gasoline tax. As I understand it, “double taxation” on 401K loans is a broadly propagated myth. The Finance Buff did a pretty good piece on it here. At any rate, if you’ve got an income of $800K you probably don’t need to take out a 401K loan, although I have seen one guy take them regularly due to a very high expense 401K. Also, capital gains taxes aren’t added on to income taxes, they’re in place of them, actually lowering your tax bill. I still think throwing out a number like 60% is misleading.
I look forward to seeing information about this “private placement” policy. Ill try to reserve judgement before i see it. I dont recall the book mentioning private placement policies but maybe i didnt take notice of those words.
The truth with permanent insurance is that it really should be only purchased if you need a permanent death benefit. If you want a permanent death benefit but dont need it then realize on average its going to cost you more than a routine well planned investment such as tax efficient vanguard index funds in a taxable account unless you die prematurely to your rated life expectancy.
Over fuding isnt unique to VUL. For the most part (except for no lapse gUL), it is typically best to over fund all permanent insurance policies up to the MEC limit. Problem is that 95% of agents dont present this on purpose. Its again another reason why you need to understand these products. Many agents dont consider the costs of accessing money within the policy. NWM is probably one of the biggest offenders/big names at this. Your policy looks like it has all this cash in that makes it a good deal until you realize the effects of direct recognition and 8% loans. With whole life you are getting the most guarantees and level payments. With ULs you get more flexibility but at the cost of increasing insurance costs over time. There are multiple different forms of UL. Never fall for the idea that indexed ones are market like performance which is the current craze. No lapse gUL is typically the cheapest cost for death when setup with little to no cash value. I have yet to see a VUL that offers good costs of insurance and good investments without all kinds of fees/costs and although its been mentioned several times here, no person pro VUL has named a product that others can investigate.
Hi Rex — while reading the asset protection book referenced in Doctor’s Eyes Only (Asset Protection for Florida Physicians) I came across something that may not line up fully with your assessment that once you take the money out of a cash value life insurance policy, it loses it’s protection/exemption (see link below). I am not an attorney, but if this is true, and if case law holds up, you could put money into a policy, take it out (after a time period) and invest it in its own account and the balance (but not growth) is protected. Crazy! Again, the author points out that Texas didn’t fall in line with the Florida courts, but it looks like its not cut-and-dry. I am starting to feel bad for doctors in other states; between the 100% homestead exemption and some non-retirement accounts protected (cash value life insurance, annuities, tenants by the entireties), Florida is a good place to practice.
I am on my iPad and can’t copy and paste the text, but here is a screen capture from the Kindle book: http://i.imgur.com/Y303K.jpg
thanks for the link.
ill have to see if i can research this further but i believe florida is an exception instead of the typical. These things arent easy to research. it also wouldnt help you early on in a policy but just later in your career. Early on, your policy would crash bc you couldnt continue to fund it. As a side bar there are rare even whole life policies like SBLI if you qualify for their top health profile that have even guaranteed values greater than premiums after 1 year. These policies however do not perform better over the long haul and tend to perform worse.
Fellas,
My big disappointment here is that this thread turned into an insurance discussion. The biggest problem by far is that doctors are not getting good training on the right questions to ask about any aspect of their financial lives. How about a solid discussion on how we can all work together to help physicians become more educated decision makers? I spent 6 years writing the book because of this one fundamental problem. Like the book, our links to our website, or hate it – that passion for good education is what this book was all about and that’s what this blog is all about. White Coat Investor, Rex, and Jared are all demonstrating a knowledge base that’s off the charts compared to what I encounter on a daily basis from most physicians that haven’t put in the time you three have.
What if we could dream up a way to provide such solid finance training for physicians that we really could make the financial advisor irrelevant? First we would have to navigate the educational challenge (I truly believe it’s possible – I dream about an iPhone app that has a built in decision tree – actually spent a month on this at one point and then dropped it because Congress changed the Roth rules and it screwed up my whole design).
Then the next step would be to figure out the economies of scale issue:
A critical and key component and value proposition that a “good” advisor provides is the ability to negotiate for economies of scale that the average investor/physician cannot (seems this was missing from the article on this blog about what advisors do) . For example, I spent 12 months negotiating with DFA and Vanguard on behalf of hundreds of millions of dollars for our clients. We’ve negotiated for 60% discounts for female physicians for disability insurance. These are huge value-add items that we can only do because we work with more than 4,000 specialists around the country.
I’m not sure how we’d solve this issue without an advisor in the equation but a possibility would be to get enough subscribers to the White Coat blog, that a legitimate association could be established to help push for these things with an internal advisor (White Coat Investor would have to get licensed…). Until then, the need for a company like Larson Financial Group is strong.
Just some thoughts but these are the things I’m constantly thinking about these days. If we can get rid of the need for me to be a constant negotiator and watch-dog (protecting clients from the slew of bad advisors and their own emotional responses to market movement and their tendency to overspend) for my clients then I’ll gladly cash in my chips and spend more time on the medical missions field. No joke there!
Let’s dream about these things and take some action together!
By the way, Rex, you have my firm commitment that my next book won’t advertise about us nearly as much. That’s solid constructive feedback that’s important for me to hear. This was my first book and this is all part of the learning curve. Your point is well-noted and you’ll see the results. I’m taking a week in September to dial in my next project. Any ideas that you guys would be thrilled to see?
My friend and asset protection attorney, Jay Adkisson states that:
The exemption for life insurance is complicated, and must always be researched as to the specific facts involved. There are three parties involved in a life insurance policy: The insured against whose life the policy is measured; the owner who has the rights to any cash value in the policy; and the beneficiary who will receive the policy proceeds upon the death of the insured. The insured and the owner are often the same person. The good states will protect the owner’s cash value against creditors of the owner. The bad states will not protect the life insurance at all, or will only protect proceeds that are paid to beneficiaries when the insured dies. A state that only protects the proceeds paid to beneficiaries does not protect the cash value of the owner, so if the owner has a creditor then the creditor can take out whatever cash value is in the life insurance policy thereby gutting it.
CAVEAT: Beware the conflict of laws issues! One of the biggest problems with the state exemptions is in knowing which state’s exemptions will apply. For instance, if a debtor living in a state that protects life insurance has their life insurance policy held in a state that does not protect life insurance, then the life insurance might not be protected. Because of these conflict of laws issues, exemption planning can be very difficult and is fraught with many landmines that might allow a creditor to collect in a situation where the debtor was believed to be protected. These issues must be specifically researched in referenced to the particular circumstances involved.
http://www.assetprotectionbook.com/ZLiZL/
Gentlemen,
Please accept apologies for my ranting and raging on a blog meant to be a helpful for a review of a book and not a debate on how insurance products should fit into our lives. I can only hope you accept this apology and I ask for your forgiveness, please.
To Tom’s point (and thanks for posting yourself), I am the one who turned this into a rant. Please forgive me. It is folks like you, the good ones anyway, that have the best of intentions and fight for discounts for folks like us. We all appreciate what you are doing. We also recognize that you and Mr. Keller are just trying to help a small group in society that in general, has no clue what we are doing with our assets.
To White Coat Investor – I appreciate what you are doing here as well. I probably didn’t give you the enough credit for your efforts you have made over the years – something most of us don’t do enough of and we should. Please forgive me as well. I felt upset at everyone for what felt like “dogging” something, that I personally believe in.
Please everyone, keep doing what you are doing and I will keep future posts much more professional.
Tom-
I don’t think running all advisors out of business is necessarily a goal of mine. I simply want physicians to have access to and be able to easily recognize good advisors who offer good value at a fair price. Most doctors can really benefit from a good advisor. You’re right that negotiating economies of scale can be part of that value added by an advisor. Most people don’t recognize this and think the value is in predicting the future, thereby generating market beating returns.
Here is a link to another article that I wrote for the AAD several years ago that describes the credentials that some financial advisors hold, what it takes to earn them and a few questions to ask when considering working with them.
Clearly, there are many other questions to ask, some of which have been addressed in this blog before.
http://www.physicianfinancialservices.com/files/7760/rr_fall_2007.pdf