Why Doctors Shouldn’t Buy Insurance Without a Plan
Within the financial service industry, there is no higher form of achievement than sales to medical practitioners during and after their years in residency. The insurance and financial industry have understood for years that graduates from medical school, regardless of their chosen field of expertise, have a potential for significant income over their lifetime.
The starting point for any decision regarding the purchase of financial products by anyone, not just medical professionals, should begin with a written financial plan and analysis of personal cash flow.
Why Insurance Agents and Brokers Want Doctors as Clients
In today’s environment, a more general form of medical expertise is as a hospitalist. The going rate for a hospitalist, at least in rural areas, begins at about $200,000 in base compensation. This number may not even include signing bonuses and other forms of deferred compensation that might be available to the medical practitioner.
With these entry-level salaries, insurance and brokerage companies attempt to make deep inroads into these practitioners, before their big earning years begin. This typically takes place during residency. More specifically, these doctors are approached during their years in residency, when they are making in the range of $45,000 to $50,000 annually, and may be offered 100% financing by banks in the form of mortgages and access to insurance products that most people could not qualify for.
The goal in many cases is to bring products, which the agents know will be required at some future point, to the client for the protection of the practitioners and their families. In and of itself, this is not necessarily a terrible thing. It is a fact that younger people are typically in better health and may qualify for preferred rates that may not be available as they get older. There are many optional benefits that can be obtained today with future options that may truly be worth their weight in gold.
Buying Financial Products Without a Plan
Unfortunately, in many cases, the financial products are being sold to medical practitioners without a long-term written plan, and they not only benefit the practitioner, but benefit the salesman in the form of commissions. The question is, who is benefiting the most from these sales? Doctors will need life insurance, disability insurance and long-term care insurance during their lifetime. However, the remaining issue is how much they will need at various points during their careers and thereafter.
Doctors are coming out of medical school with significant levels of loans to repay during their working years. Loans in the amount of $50,000 to $400,000 are not uncommon and will take years to pay off. While these loans are outstanding, it makes sense to carry life insurance and disability insurance in the event of a personal catastrophe. Not only will loans need to be repaid, but lifestyles that have been developed may be covered through adequate disability income policies. It would not be unusual and fairly easy to justify a life insurance purchase of $1,000,000 to $2,500,000 early in their careers.
Lack of Financial Knowledge
Unfortunately, young doctors were never taught the fundamentals of cash management.
This lack of financial literacy is extremely common among medical practitioners. While completing their residency requirements comes with an increase in income, it does not necessarily come with a plan. New cars, homes, vacations and other expenses appear to be something they are entitled to, especially after the sacrifices they have made and the number of years of education completed to obtain the title of doctor. (For related reading, see: Why Doctors Can’t Manage Money.)
The majority of sales professional are extremely honest and trustworthy. The way you find this type of individual is most often through referrals, not from phonebooks or advertisements that may skew your view of their expertise and their credentials. It’s hard to place a value on experience, but I can assure you, this is one area where paying a fee to complete a written financial plan is in your best interest before various products are purchased.
Any insurance agent, lawyer, accountant and financial advisor can throw numbers around, but numbers should be based on facts and not guesswork. It is not necessarily a challenging task to calculate the need for life insurance or disability insurance and common sense says these items are going to be needed early in life to cover any number of unforeseen circumstances that may arise in one’s career. (For related reading, see: 5 Insurance Policies Everyone Should Have.)
How Insurance Can Help
This is where life insurance plays a key role, when there is a shortage of capital, as it takes investment capital to generate income. Also, disability insurance plays a role where there is a loss of income and bills that need to be paid. In every case that we’ve outlined, the center point is cash flow.
With positive cash flow, we can pay our bills and save for the future. This provides a very pleasant environment in which to live and raise a family. With negative cash flow, creditors will take your house, your car. Although this may sound a little dramatic, we’re dealing with reality where creditors have little faith in promises and only respond to payments.
If the deceased or disabled parent is the breadwinner, then insurance is critical. It has the potential to replace financial losses and hopefully assist in dealing with some of the psychological issues following the death of a family member, but nothing should be purchased without a written financial plan.
(For more from this author, see: Estate Planning for Beginners, Part One.)