By Dr. James M. Dahle, WCI Founder
Insurance is the practice of sharing risk. The classic example is fire insurance. Everybody in town pays a little so that the one person whose house burns down receives a sum of money to replace it. There is always a cost to insurance. Since an insurance company has expenses, including profit, the amount an insurance company pays out in benefits can never equal, much less exceed, the sum of the premiums an insurance company collects.
What Kind of Insurance Does a Doctor Need?
For a typical doctor or other high-income professional, the financial catastrophes worth insuring against include disability, personal and professional lawsuits, death of a breadwinner, illness and injury, and loss of expensive property.
Physicians can insure against these risk with:
- Disability Insurance
- Malpractice Insurance
- Term Life Insurance
- Health Insurance
- Homeowner’s Insurance
Physician Disability Insurance
Disability insurance gives you an income to live on if you become so disabled that you can no longer work. Nearly every high-income professional in their first decade or two out of school should own a policy. For the one out of seven doctors who will actually use their disability insurance, buying it is the most important financial step they will ever take. Your most valuable asset is your ability to work. So if you do not own a disability insurance policy, you need to go get one, now.
How Much Disability Insurance Do Doctors Need?
As a general rule, insurance companies will allow you to buy enough insurance to replace 60% of your gross income, up to about $20,000 a month. So how much disability insurance do physicians need? Since most high-income professionals are paying 15%-35% of their income toward taxes, that is usually MORE than enough income on which to live. Remember that disability insurance benefits, unless the premiums were paid for by your employer, are completely tax-free to you.
Liability Protection for Doctors
The best asset protection plans are simple and relatively inexpensive. Your first line of defense is liability insurance. This includes professional malpractice insurance (going bare is usually a mistake) as well as the dramatically cheaper personal liability insurance. Your auto, homeowner’s, and renter’s insurance policies generally contain liability insurance that will cover all kinds of non-professional liabilities.
Malpractice Insurance for Physicians
Professional liability insurance, or medical malpractice insurance, protects physicians and dentists against the financial catastrophe of losing a lawsuit or having to settle a lawsuit due to committing medical malpractice. This is likely the most expensive insurance policy they will ever buy, and physicians in some locations and specialties have spent over $100,000 a year on malpractice premiums alone.
How Much Malpractice Insurance Do Doctors Need?
The true answer is “enough.” You need to have enough of a benefit to pay for the costs of the defense, the cost of any settlement, and the cost of any final judgment. Since there is no way to know exactly what a future judgment could be, there is no way to know exactly how much insurance you need.
The usual recommendation on how much medical malpractice to buy is to carry the same amount as other doctors of the same specialty in your geographic area. That usually varies anywhere from a few hundred thousand to a couple of million dollars. Policies are usually described as $1M/$3M, where the first number applies to the amount per case and the second number is the total amount the insurance company will pay out per year.
Umbrella Insurance for Doctors
Unfortunately, too many people, including high-income professionals, are carrying liability limits that are way too low. Your state may only require you to carry $50,000 in auto liability insurance, but that’s not even enough to replace the Tesla you could hit, much less the cost of medical treatment and disability for the occupants. This is where umbrella insurance comes in for additional protection.
How Much Umbrella Insurance Do Doctors Need?
Raise those limits into the hundreds of thousands and then stack an “umbrella” policy (excess personal liability) on top of them. Doctors need a liability limit of $1 million to $5 million. The good news is that an umbrella policy costs less than 5% as much as a comparable malpractice policy. For example, my $1 million malpractice policy runs something like $16,000 a year. But my $2 million umbrella policy only costs about $300 a year.
Term Life Insurance
Just like disability insurance does not reverse your disability, life insurance does not bring you back from the dead. Its purpose is to eliminate the financial consequences of your death. In order to figure out how much insurance you should buy, you will need to determine what the financial plan will be if you died tomorrow. Then, buy enough insurance so that, financially speaking, the consequences are the same whether you live or die.
There is only a limited period of our life where we will need life insurance. So the least expensive way to pay for that need is to buy what is called “term” insurance, that is, insurance that will only pay out if one dies during a specific term. There are other types of insurance, collectively called “permanent” or “cash value” insurance, that will pay out whenever the insured dies, whether that is at age 30 or age 90. They are appropriate only for a tiny percentage of doctors, and when I poll physicians who have actually purchased a policy, approximately 75% of them regret the purchase.
How Much Term Life Insurance Do Doctors Need?
Deciding how much life insurance to buy requires you to do some rudimentary math. However, if you are like most doctors, the number you end up with will be between $1 million and $5 million.
- Monthly expenses x 12 months x 25
- Remaining mortgage amount
- Estimated college costs
- Large ticket items
- Non-forgiven private student loans
- Current nest egg
- Current college savings
- Then round up to nearest million
Is the number between $1 million and $5 million? Good. Don’t worry about buying a little too much term life insurance. This stuff is cheap, and it is better to have a little too much (especially when future inflation comes into play) than too little. Remember that life insurance proceeds are tax-free, so don’t worry about having to buy enough to cover a tax bill too.
Insurance is a losing proposition. On average, you will lose money buying insurance. However, in some aspects of your financial life having a bad event occur, even a rare one, is so terrible that it is worth paying a price to avoid it.