Protection planning is not the most riveting of topics, but a necessary one nonetheless. Insurance helps protect you and your assets from unexpected events, such as accidents, loss of income, or loss of spouse to name a few.
There are a multitude of insurance coverages you need, and even more variations of each type of insurance. Needless to say this can be quite a confusing topic and sometimes this confusion leads to inaction which puts you, your family, and everything you’ve worked hard for at risk.
Property & Casualty Insurance
Property & Casualty insurance typically consists of the following coverages:
- Homeowners or Renters
- Automobile Insurance
- Umbrella Policy
While not necessary, most property & casualty insurance agents & brokers can combine these coverages, known as bundling, to reduce the overall cost of premiums. Discuss with your insurance agent about bundling.
Homeowners Insurance, as the name implies, is only needed if you are a homeowner. And most likely you already have this coverage in place as it is a requirement by your mortgage lender when purchasing a home (they are trying to protect themselves as well!). But outside of being required, you’ll want this coverage too as it protects your home & other structures from wind, hail, fire, natural disasters, and vandalism. It can also protect belongings inside the home, such as paintings, appliances, furniture, jewelry, etc. Unfortunately, you may encounter a scenario where you are involved in lawsuit against you for an injury that occurred at your home, like a slip on a deck or roofer falling off a ladder. Homeowners policies may (and should) have liability coverage to protect you from these events.
What to Consider with Your Homeowners Policy
To begin, there are 8 (!) different types of homeowners insurance. I have included an article from Policy Genius which can help provide more detail about each type.
Your deductible states how much you will be responsible with each claim before insurance will pay any benefits. The minimum amount is usually around $500, but you can increase this amount which will also lower your premium. Maintaining a proper emergency cash reserve can allow for you to increase your deductible.
Replacement cost is the cost to rebuild your property. This should be reviewed with your property & casualty agent and should only consider the structure itself, not the land the home is built on. By including the value of the land this will increase the replacement cost, thus increasing your premium.
Other Structures/Extended Dwelling
If you have a detached garage or ‘she-shed’ you’ll want to ensure these are adequately covered in your policy as well.
As mentioned above liability coverage will protect from accidents that happen on your property. This should be reviewed diligently and also should be supplemented with an umbrella policy, discussed later.
Including jewelry, rare coins, collectibles, furniture, etc. this coverage can help monetarily replace any items lost or damaged.
If you live in an area prone to natural disasters (flood, hurricane, etc.) it may be wise to purchase supplemental insurance to cover these events, or discuss if they are included in your basic policy. Also, review coverage for what occurs if there is water damage, and who would be responsible.
Not a homeowner yet? You need renters insurance. Renters insurance is quite inexpensive for what it covers, and even if you have a roommate or landlord who has their own insurance, you still need a policy to cover your personal belongings.
Another requirement if you plan to drive a vehicle, auto insurance is a coverage where you don’t want to have the bare minimum. There are 3 components of auto insurance
Each state has different coverage requirements for liability insurance, but by electing the bare minimum this could put you at high risk. Liability coverage covers property damage and bodily injury in the event your a at-fault in an car accident and if you only have $25,000 in liability coverage but cause $250,000 in damage & injury, guess who is responsible for the remaining $225,000. Most umbrella policies, which are discussed later, will require a minimum amount of liability usually around $250,000 per person and $500,000 per accident.
Comprehensive coverage covers any repairs to your vehicle that is not the result of an accident, such as a tree limb falling on your car in the driveway. If your car’s value maybe does not warrant comprehensive coverage it may make sense to maintain a minimal level of coverage or exclude altogether which can help lower your premiums.
Collision coverage is needed when you are in an accident, and can help cover repairs to your vehicle.
In my opinion, the biggest no-brainer insurance to carry is umbrella insurance. Umbrella insurance, also referred to as personal liability insurance, helps to cover gaps between your homeowners and auto policies. For example, assume you are hosting a party. A guest slips and falls and sues your for $600,000. Your homeowners liability only covers $400,000 in liability. Without an umbrella policy you could be on the hook for the remaining $200,000.
Umbrella policies come in increments of $1M and ideally you’d want to cover above your net worth (for example, if your net worth is $1.4M, you’d want $2M in coverage). For what umbrella policies cover, the cost of insurance is pretty cheap (around $200-$400 per year).
You can save on property & casualty coverage a few ways. First, get multiple quotes and consider working with a broker vs. an agent. An agent, like a State Farm agent, only offers insurance through State Farm. A broker is able to shop around for the best coverages offered by multiple insurers. Another way, as mentioned above, is to bundle. By carrying your home, auto, and umbrella policy with the same insurer this can save you hundreds in annual premiums.
For a skilled professionals like veterinarians, disability insurance is a must. Disability insurance can be either short-term or long-term. Many people refer to disability insurance as a necessary evil, in that the premiums are costly and you may not every need it. But with disability insurance you are protecting your greatest assets, which is your ability to earn an income.
Short term disability provides for income replacement in the vent of a temporary disability. Some examples include pregnancy, surgery rehab, or severe illness. Many employers offer short-term disability as an employee benefit and covers disabilities that last 3, 6, or sometimes 12 months. If not offered by your employer or practice, solid financial management to have available funds to cover a short-term disability can reduce the need for private short-term disability policies.
Much more prevalent for veterinarians is long-term disability. Many veterinarians bypass long-term disability due to the cost, which can be high, but disability insurance protects your income from loss due to medical issues, mental illness, burnout, anxiety, in addition to injuries.
Long-term refers to disabilities that last longer than 90 days (which is when most short-term policies stop payments). Unlike short-term disability where the payments can begin almost immediately, long-term disability has what is referred to as an elimination period, essentially the period of time that must elapse before benefits are paid. A 90 day elimination period is common, but you can extend this out to 360 days and the more you extend the elimination period, the lower your premiums.
Why Do I Need Long-Term Disability?
Again, your ability to earn an income as a veterinarian is your greatest asset. Much like how we protect our car and our home, we should adequately protect our earning power. It is estimated that 20% of people living in the US will experience a disability lasting more than one year before the age of 65, with 90% of claims due to illness rather than injury.
Group policies available through employers are a great benefit, but typically these are inadequate in providing the coverage veterinarians need. Group policies are notorious for being difficult to claim, and many of the features are designed to try and payout as little as possible (see the difference between own-occupation and any-occupation below). This is why additional supplemental policies purchased outside of your employer need to be considered, and these can be used in conjunction.
What Should Veterinarians Look for in a Long-term Disability Policy
As mentioned previously, you may be covered by a group policy through your hospital, and while that is a great start, typically these policies only cover up to 60% of your income. By purchasing a supplemental policy, either through an individual or group policy (such as through AVMA Life), you may be able to get coverage for up to 80% of your income. In addition to higher income replacement, these supplemental policies are also portable, meaning if you decide to leave your current employer, venture into relief work, or purchase your own practice, this policy will follow with you. Supplemental group policies are typically cheaper than purchasing through a broker or other insurance carrier, but with lower premiums you also get lower customization. It may seem tedious, but getting multiple quotes and options will afford you the opportunity to select the best policy for you.
Some of the more popular features or riders to consider with your disability coverage are:
- Own Occupation– An own-occupation policy will pay benefits if you are unable to perform the duties of your role today, regardless if you are able to gain employment in another role. For example, if your role involves surgery and you develop carpal tunnel and are unable to perform surgery anymore, an own-occupation policy would pay benefits whereas a policy without own-occupation may state you are still able to perform work in a different role or industry. This is referred to as any-occupation and most group policies use this definition of disability, which is why a personal policy is needed.
- Non-Cancellable– A non-cancellable policy states the insurance company cannot raise rates as long as the premiums are paid. This also guarantees the policy cannot be cancelled if the premiums are paid.
- Guaranteed Renewable– Similar to non-cancellable, a guaranteed renewable policy ensures that the policy cannot be cancelled if the premiums are paid, but premiums may be increased by raising the rate on the entire risk class.
- Future Purchase Option– In theory, your income as a veterinarian will continue to increase. The ability to purchase additional coverage to keep up with your rising income is known as future purchase option. With this rider you will be able to increase your benefit amount without having to go through underwriting.
- Automatic Increase Benefit– Raises your benefit automatically for the first few years of the policy
- Partial or Residual Rider– You can receive a benefit payout if you are still able to work but need to take reduced hours. For example, someone who needs to take time off for cancer treatment & recovery but works 20 hours a week could receive partial benefits based on the time missed for medical.
- Cost of Living Adjustment (COLA)- A COLA will provide for your benefits to increase annually based on a percentage increase, presumably to keep up with inflation. For younger veterinarians this can be an expensive rider and one that should be discussed with your insurance agent.
- Student Loan Protection Rider– Student Loans are a reality for most veterinarians, and a student loan protection rider can specifically set aside a certain amount to go to your student lender. This can allow you to continue making payments even when you are unable to work.
When Should I Purchase Coverage?
Ideally, while you are still in school. Yes, income is tight and you may not have much room in your budget, but obtaining a policy now while you are your healthiest will lock in low rates and combined with some of the features mentioned above can allow for the policy to grow as your income grows. You will also be able to purchase another policy down the road if needed.
Dealing with mortality is a stressful topic for many, but if the unthinkable were to occur wouldn’t you want to know your family is provided for? This is where life insurance makes sense.
Life insurance protects you and your loved ones from an untimely death by paying out a death benefit to your beneficiaries, which can relieve financial pressure in an already difficult time. Life insurance is designed to protect against a loss, such as a loss in income. Life insurance comes in two forms, term life and permanent life.
Term Life Insurance
Term life insurance is a policy that pays out a death benefit to your beneficiaries during a specified term, which typically are 10, 20, or 30 years. For example, if you obtain a 30-year term policy with a $1M death benefit and you were to unexpectedly pass away within this 30 year period, your named beneficiary would receive the $1M benefit tax-free (tax-free because you are paying premiums with after-tax money, in most cases). As long as you continue to make premium payments the benefit will be paid. If, however, you pass away 31 years later, at this point the policy term has ended and no benefit would be paid.
Who Needs Term Life Insurance?
Anyone who has people that depend on their income, including children, spouses, and dependents should consider term life insurance. Even someone who may not work outside of the home may need life insurance if they provide care for others that would need to be replaced, such as childcare or elderly care.
If you are single with no dependents, no one who depends on your income, and with no large outstanding debts that would need to be paid at your passing, life insurance is probably not a necessity right now.
Why Should You Purchase Term Life?
As stated above, life insurance should be used primarily to protect against a loss. Proceeds from a life insurance policy can be used to support minor children, pay for higher education, help with mortgage payments, and any other situation that can be affected by a loss.
Veterinarians, given their unique skills and education, often are the primary earners or a significant contributor to household income, thus a term life insurance policy should be a consideration.
Because life insurance is designed to protect against a loss, term insurance is the better option vs. a permanent life policy (discussed later). Term insurance is much less expensive, actually downright affordable, and provides the protection when you need it most. For example, assume a 30 year old veterinarian with a spouse, mortgage, and children. By purchasing a 30-year term policy, this will provide protection long enough for the children to move away, for the mortgage to be paid off, and for retirement to be funded. After this 30-year period, life insurance may no longer be needed as no one is dependent on their income anymore and there are no outstanding large debts.
Of course, as income rises you may need to purchase more term life insurance, referred to as laddering, to make sure your income is adequately insured, but rarely does paying more for a permanent policy make sense.
How Much Do I Need and How Much Does it Cost?
There are two trains of thought when it comes to how much life insurance you need.
The Human Life Value approach aims to replace about 7-10x your annual gross income. The thought here is to replace lifetime earnings, as the proceeds could be reinvested and in theory could replace the income lost. Of course as your income increases you may need to purchase more. 7-10x earning is not the only factor involved, but is good benchmark when determining how much insurance you need.
Another approach is the needs-based approach. Essentially you determine future upcoming needs you are trying to replace (mortgage, childcare, college, etc.) and purchase enough insurance to cover your needs. If you are your household’s primary earner or a significant contributor, the human life value may be the better method for determining insurance coverage.
For cost, term life is best increments of $250,000 as this is typically where there are breakpoints. Cost will be based on family health history, current health status, smoker/non-smoker, age, weight, and gender. It is advised to get a few quotes as different carriers will weigh factors differently, and if you know a trusted insurance broker who can walk you through your options that would help as well. Be truthful in the underwriting process, as by not disclosing pertinent information can cause your policy to be cancelled and may result in benefits not being paid to your beneficiaries, which would be catastrophic.
How to Purchase a Life Insurance Policy
If working with an insurance broker, they should be able to walk you through the process and provide quotes from multiple carriers. If you intend to DIY, research companies and check their financial strength, essentially their ability to pay out benefits.
Also, think about the length of time you may need insurance. In the example above, the 30-year old veterinarian was assumed to have no dependents and no mortgage by age 60, thus not needing life insurance. Your situation may be different so try and coordinate your term policies to be in existence for as long as you anticipate having an insurance need.
Types of Term Life Insurance
The most common type of term policy is level term. Level term simply means the death benefit and premium will remain the same for the length of term selected.
To learn more about the other types of term life and available riders check out this article from The Balance.
Permanent Life Insurance
Permanent life insurance, as the name implies, is a type of insurance that remains in place for as long you own the policy and pay the premiums. Unlike a term policy that lasts for a specified time period, permanent insurance will last until you pass away. There are different types of permanent policies, such as whole life, universal life, indexed universal life, and others. I won’t go into the details of these policies here, because I don’t recommend them.
Permanent policies have an investment component attached to them along with the insurance component. Usually permanent policies are sold by focusing on their investment capabilities, but insurance is designed to do one thing which is to replace a loss. Insurance should not be used as an investment vehicle. Permanent policies come with a cash value that is in addition to your death benefit. This cash value can be invested and used for tax-free loans as well. The issue comes with the fees associated with your investments are often exorbitant and the premiums for permanent policies are significantly higher than term policies.
Why Veterinarians Should Avoid Permanent Policies
Life insurance is designed to protect against a loss. In my opinion, insurance should not be used as an investment vehicle. Veterinarians struggle with high debt-to-income and cash flow should be utilized efficiently to maximize the ability to pay off debt and build wealth. By using term policies to secure your family’s future, you can redirect the excess premiums you would be paying toward a permanent policy to pay off debt, contribute to your 401k or Roth IRA, or begin saving for a practice purchase. Unfortunately, financial education is not a component of a veterinarian’s education and many insurance salespeople seize on this opportunity to sell a permanent policy to veterinarians, even though it may not be in their best interest. By the time you reach retirement, you may not have a need for insurance anymore, so why pay high premiums for many years and earn lackluster investment returns for a need you no longer have? When in doubt, it is recommended to speak with a fiduciary, fee-only financial planner who is sworn to act in your best interest and who receives no commission or compensation from any products they recommend.
When A Permanent Policy Makes Sense
There are a few instances where a permanent policy can make sense.
Dependent with Special Needs
If you have a dependent with special needs and you want to ensure their care for when you pass, a permanent policy can make sense. It is advised to speak with a qualified estate attorney who can work with you to have the proceeds go for the care of the dependent without disqualifying them for government benefits
In 2021, the current estate exemption is $11.7M per person, and $23.4M per couple. If you anticipate your estate exceeding this amount, a permanent policy can help with providing liquidity at death to help pay for estate taxes, which can exceed 40%. This is popularized the Irrevocable Life Insurance Trust (ILIT) and you should consult a qualified estate attorney when considering this option. The estate exemption is also subject to fluctuation (it was only $5.45M/person in 2017) so it would be wise to continually re-evaluate your need for estate liquidity.
If you own a business with other partners, a buy/sell agreement funded with permanent insurance can help ensure the transfer of assets in the event of the passing of a partner and assist with business continuity.
Loss of Pension
Pensions are no longer as common as they once were, but many retirees still rely on pension income to fund their retirement. If a pension does not offer survivor benefits, when the pension holder were to pass away so does the guaranteed income stream. This can affect the surviving spouses retirement, and thus a permanent policy can help mitigate this loss.
Maxed Out Other Accounts
If you are able to max out your employer retirement plan, IRA or Roth IRA, fully fund your emergency reserves, college savings, and future goals (home down payment, practice purchase, etc.), then considering a permanent policy could help add an additional investment vehicle for you. This would need to be factored into your overall financial plan.
Long-Term Care Insurance
Long-term care insurance helps provide financial assistance for those who are deemed by a medical professional to be unable to perform 2 of 6 activities of daily living.
The cost of long-term care continues to increase, as insurers are paying out more and more in benefits. There is kind of a sweet spot for purchasing this insurance, between the ages of 50-55. Also, for those with assets below $1M it may be cost prohibitive to purchase an individual long-term care policy, and for those with assets over $3M it may be best to self-insure. These are of course guidelines and vary depending on each situation.
If you’re within that age range of 50-55 and thinking of purchasing a long-term care policy, speak with a fee-only financial planner who would be able to assess your need.
Veterinarians have unique insurance needs due to their unique skills and education. By being properly and adequately insured, you are protecting what you have worked so hard to achieve. Revisit your insurance needs annually to keep you protected and keep your mind at ease.
Andrew Langdon is a CERTIFIED FINANCIAL PLANNER™ and the founder of VetWorth, a fiduciary fee-only financial planning firm dedicated to serving the unique needs of veterinarians and their families.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.