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 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.
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.
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 firstname.lastname@example.org.
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.