When it comes to managing your personal finances, we recommend focusing on what you can control and planning around the things you can’t control. One way to navigate the things you can’t control is by purchasing insurance to protect against them. This protection comes at a cost, in the form of insurance premiums, so you must decide whether the risk is large enough to justify the cost.
For certain events out of your control, the plan might simply be to deal with the risk when it comes, or to “self-insure.” An example of this would be declining to buy insurance on your iPhone. You may be fine with this because the worst-case outcome of having to buy a new phone isn’t a financial disaster. However, for other events out of your control, such as premature death or disability, the worst-case outcome could have a much more dramatic impact on you or your loved ones.
With so many insurance products out there, it can be tough to understand what you actually need. This is especially true for physicians, who have unique insurance needs. This post is meant to boil things down to the basic types of insurance we advocate purchasing, as well as to provide some context for what purpose they serve. Follow up posts will dive into the specifics of each area in more detail and discuss how to think about them as well as general recommendations for how to determine the amount of coverage to obtain.
At its core, our approach to insurance is to protect against the risks that could move the needle financially and self-insure against all others. The types of insurance we advocate can be classified into a few categories: protect your dependents, protect your income, protect yourself, protect your possessions, and protect against health risks.
Protect Your Dependents (Life Insurance)
Many people have others who depend on their income, whether to cover a family’s living expenses, pay the mortgage, or save for retirement. While nobody likes to think about the risk of premature death, it can have a profound impact on a family unit’s well-being. Life insurance protects against this risk.
Protect Your Income (Disability Insurance)
Regardless of whether others depend on your income, you depend on it. If you experience an injury or health event resulting in your inability to perform your job, it may be difficult to cover your expenses while also saving for things like retirement. The risk is magnified if you have dependents. Disability insurance mitigates this risk.
Protect Yourself (Personal Liability Umbrella Insurance and Malpractice Insurance)
Unfortunately, as high-income professionals, physicians are often the victims of liability lawsuits, both personal and professional. Personal liability umbrella insurance protects against personal risk while medical malpractice protects against professional risk.
Protect Your Possessions (Property and Casualty Insurance)
Damage or theft to your house, car, or other key possessions can have a material financial impact, should you be forced to cover the cost of repairs or replacement out of pocket. Property and casualty insurance alleviates this risk.
Protect Against Health Risks (Health Insurance)
It’s no secret how expensive medical care is, particularly for events such as surgical procedures or hospitalizations. Health insurance protects against the risk of a health event. And in situations where there is concern about a prolonged health issue or extensive care being required later in life, long-term care insurance can provide further protection against health risks.
Insurance should be viewed as a necessary expense in your financial life, one that is incurred to sidestep the risk of a much larger expense. Think about it in a similar way as periodic maintenance for your vehicle. You make smaller payments over time, for things like oil changes, to protect against the risk of getting hit with a very large, one-off expense if your vehicle breaks down or requires a significant repair. For the insurance you need, shop around for coverage and go to an independent agent who offers products from many different companies. You are more likely to get a good price, and the person selling the product should be more objective than someone who works for a specific company and only sells its products. Remember, your goal is to protect your dependents, your income, yourself, your possessions, and protect against health risks.
About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.