Protecting a Physician’s Most Valuable Asset: Insurance Basics for Young Dermatologists: Part 2

The most valuable asset for almost all dermatologists is their ability to practice their profession, as the future stream of income from this asset is large and quantifiable. To protect this asset for themselves and the people who depend on it, dermatologists rely on disability insurance and life insurance as fundamental “asset protectors”. Young dermatologists should secure these tools early in their careers, and established physicians should regularly review existing insurance policies to ensure they maintain the necessary levels of protection.

We’ve covered disability insurance in Part 1 of this 2-part article (see the August issue of Dermatology time®), and now we’ll focus on the basics doctors need to know about life insurance in Part 2.

Term life insurance

A term life insurance policy pays a specific lump sum to your named beneficiary upon your death. As such, it plays an important role in providing temporary income protection to your family (or your practice/partners under a buy-sell agreement).

Given its affordability, the term is the most common type of life insurance policy. The premium for a term policy is low compared to other types of life insurance policies because the term policy has no cash value and provides protection for a limited period of time (called term; typically 5, 10, 15 or 20 years). ). Term insurance policies simply work – you pay a premium each year, usually, and the policy reimburses you if you die during the policy period. Otherwise, there is no payout or accrued value. The vast majority of term policies never pay out because the insured lives past the end of the term.

Permanent life insurance

The permanent life insurance category includes products that, unlike term policies, have cash values ​​as well as death benefits and can last for the life of the insured, up to 100, 115 years. or beyond. (Of course, these products are only “permanent” so long as the required premiums are paid on time.) Since there are several different products within the general category of permanent insurance and they are more complex than term policies, we will cover them in more depth.

A significant benefit of all permanent policies is that they have tax-free growth in cash value and, if properly managed, tax-free access to cash value. These tax benefits, along with asset protection in many states, are what attract many dermatologists to permanent insurance.

Although there are more than 5 major categories of permanent life insurance, we only have space here to describe 2 of them. For more details on this subject, see the “special offers” at the end of this article request or download our free book.

1: Whole life insurance

Whole life (WL) insurance pays a death benefit to the beneficiary you name and provides you with a cash value account with tax-deferred cash accumulation.

Advantages: WL insurance has a savings element (surrender value) which is tax-deferred. The cash value increases based on the payment by the life insurance company of a dividend. This dividend is determined by the life insurance company, is not guaranteed and is subject to change annually. Due to low interest rates over the past 15 years, participation rates for WL policies have declined.

You can borrow from this account without income tax or, if properly structured, you can cash out the policy while you are alive. It has a fixed premium that cannot increase during your lifetime (as long as you pay the expected amount), and your premium is invested for you for the long term. Because it has the cash accumulation component, WL insurance can provide benefits such as tax reduction, wealth accumulation, asset protection, estate planning and tax class diversification. ‘assets.

The inconvenients: WL insurance does not allow you to invest in separate accounts (eg money market funds, stocks and bonds). So your policy returns will be tied to the life insurance company’s dividend credit based on that company’s underlying investments. It also doesn’t allow you to split your money between different accounts or move your money between accounts, and it doesn’t allow for premium flexibility or face amount flexibility (the death benefit amount).

2: Equity-indexed universal life insurance

Equity-indexed universal life (EIUL) is a universal life insurance policy (which offers more premium and policy flexibility than a WL product) that lets you choose from a list of stock market indices to increase your cash value. If the investments fail, a guaranteed minimum death benefit is paid to your beneficiary upon your death.

EIUL insurance offers you more advantages than a traditional universal life insurance policy, because the insurance company contractually commits to crediting the cash value of the policy with the same return as the stock market index chosen by the policyholder (usually the S&P 500, but could be the Dow, NASDAQ, or others) over the same period, subject to a cap and a floor. Thus, the policy owner has the upside of the indices (to the ceiling) but the risk of the same indices (but only to the floor). Typical floors for an annual return start near 0% (no capital loss), with highs around 10%.

Advantages: EIUL insurance allows you to potentially get more benefits in cash value accounts than WL, but also gives you downside protection.

The inconvenients: The products are relatively complex, with many choices of indices, participation rates, floors and ceilings, and they vary considerably from one insurance company to another. It is essential to work with a professional who can help you make good decisions about policy placement and annual management.

Is permanent life insurance a “good” investment?

When thinking about permanent life insurance, many dermatologists want to understand whether it’s a “good” or a “bad” investment. But how can permanent life insurance be a “good” or a “bad” investment when the choices for permanent products are so wide and deep? In other words, the structure of a permanent life insurance policy allows for an almost unlimited number of underlying investments within the structure, and those investments will provide the returns of the policy.

As we explained, WL insurance offers a bond-based dividend-like yield. Is it good or bad? It depends on what the rest of the market is doing, right? In 2008-2009, an asset with such a yield would probably have been the best performing asset class on a physician’s balance sheet. For EIUL insurance, policy performance is based on the owner’s choice of clues, which may or may not work out very well.

The fact is that a permanent life insurance policy can be a fantastic, excellent, good, fair or poor investment, because it is not an investment in itself; rather, it is a structure that houses investments whose choices are almost endless.

Conclusion: Protect your most valuable asset throughout your career

All physicians, including dermatologists, should regularly review their disability and life insurance policies throughout their careers to ensure they maintain adequate coverage for the most cost-effective premiums.

An experienced insurance advisor can help you evaluate your options and select policies that meet your needs and long-term financial goals. The authors welcome your questions.


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