You’re Doing Your Insurance Wrong. Here’s What You Need!
How do I know you’re doing your insurance wrong?
The truth is I don’t know for sure that you’re doing your insurance wrong, but it’s an educated guess. I can tell you that when I first started building my financial plan, I didn’t have the first clue about all the kinds of insurance I needed and what I should avoid. Through my financial coaching ministry, I have observed that very few families have all of the right kinds of insurance, including the right amount of coverage.
Insurance is the thing we all need that we hate to pay for and hope we never use. The other parts of your financial plan such as your retirement savings, college savings, and debt elimination strategy are all about offense.
Insurance is about defense. Insurance is how you prevent your financial plan from being destroyed by a single catastrophic event.
So, what kinds of insurance do you need? Let’s take a look at the top 10 types that all medical families need.
1. Emergency fund
Ok, this isn’t technically a type of insurance in the traditional sense, but you HAVE to think of it that way if you want your financial plan to succeed. Lack of an emergency fund is a sure sign that you’re doing your insurance wrong.
If you are saving up for a long-term purchase or working on debt elimination, a $5,000 unexpected event like a car repair or a sudden need for a family plane ride to a relative’s funeral can send you backwards. You NEED an emergency fund!
2. Term life
Whole life or any other type of cash value life insurance that offers a savings account inside the insurance plan is a bad deal. It costs many times more per month and the rate of return of the so-called “savings account” is horrible.
Buy term life insurance for 20-30 years of level premiums. At that point, you should have eliminated all debt (including your mortgage) and have your retirement nest egg built. In that case, you’ll be self-insured, and your need for life insurance will go away.
Health care costs are rising in the U.S., and physicians know this better than anyone. You WILL eventually come to a point in your life where you need significant health care. Those hospital bills can rack up into the six-figure range very quickly, so you need health care coverage.
If you have high annual health care costs or minimal to no significant health care costs, consider a health savings account (HSA). This is a high deductible plan that will pay 100% of your costs after you pay out the deductible. If you don’t use it, it just continues to grow tax-free. In that sense, it functions like a Roth IRA for health care savings.
You can invest it in a variety of options such as stocks, bonds, and mutual funds. Plans differ, so make sure you know what all the numbers are before you choose this option.
Avoid gimmick insurance plans like cancer insurance or accidental death riders.
4. Long-term care
If you’re younger than 60, your chance of eventually needing nursing home care is less than 1%. If you are 60 or older, your chances of needing a nursing home (or home health care) increases. Such facilities are $50,000-$100,000 or more annually. If you end up in a nursing home for an extended period of time, you can burn through your next egg pretty quickly and leave your spouse with nothing.
There are not nearly as many companies doing this now compared to the early 2000s, so it may take some searching, but it’s totally worth it.
When you buy long-term care insurance, try to get a policy that covers home nursing care or home health care.
If your parents are over 60 years old, you need to make sure they get it. You might even offer to pay it as a hedge that YOU won’t be paying their nursing home bills someday. It can be an awkward conversation, but you may just need to tell Mom and Dad, “You’re doing your insurance wrong.”
A major car accident can run expenses into the hundreds of thousands of dollars, and that’s not even counting someone suing you. Most auto insurance policies report coverage like this: 100/300/100 or 250/500/250. The numbers change, but the formatting is the same. Let’s break that down:
- First number: Amount of personal injury coverage per person. This is the maximum amount per person that the company will pay for.
- Second number: Maximum amount of total personal injury coverage per accident. If you have a 100/300/100 plan, the company will pay only $100,000 max per person, but $300,000 for the whole accident. So, if six people have injuries totaling $100,000 each, the company only pays $300,000 total, not $600,000.
- Third number: Total amount of property damage covered.
You need at minimum a 100/300/100 plan. If you get in a wreck with a lot of people or with an expensive car like a Tesla, that may not even be enough. Ask your insurance company for the cost difference between each plan. If you get an extra $100,000-$200,000 of coverage for just a few dollars more per month, it’s probably worth it.
6. Long-term disability
You can cover for short-term disabilities (6 months or less) with your emergency fund. For longer terms when you won’t be physically able to work and earn an income, your long-term disability coverage will be crucial.
If possible, try to get “own-occupation” or “own-occ” coverage. This means that the insurance company will cover you if you can’t work in your own profession.
Let’s say you’re an orthopedist and you break your hand in a way that permanently makes you unable to swing a hammer but you aren’t wheel-chair bound. If you don’t have “own-occ” coverage, the insurance company will tell you to get a job doing something other than orthopedics. If you have “own-occ” coverage, the company covers the loss of job income.
It may be difficult to get lifetime coverage, but try to get at least 2-3 years’ worth of coverage to give you enough time to recover from any injuries or retrain for a new job.
Pro tip: If you can get own occupation disability insurance during residency, do it! Lock in that rate while it’s low, and you’ll save thousands of dollars long-term.
7. Renter’s or homeowner’s
Renter’s Insurance: This insures your belongings in case of damage to your home. If your landlord has homeowner’s insurance, that does NOT cover your stuff. Make sure you carry enough coverage to replace all of your household items in case of a total loss, like a fire. If you have sufficient coverage, you don’t necessarily need a separate policy for high value items like art and jewelry, but such policies are available.
Homeowner’s Insurance: Shop around for this. You don’t necessarily have to use the same company that issued your mortgage. It’s more convenient in terms of accounting to use the same company, but make sure it’s worth the price.
Again, make sure you insure against a total loss. Inadequate coverage can be a hidden area where you’re doing your insurance wrong. Don’t cheap out on the premiums and underinsure your house. You don’t want a six-figure bill that the insurance company won’t cover in a loss of your home.
8. Identity theft
I only started getting this kind of insurance in the last few years, after a number of friends and family had this happen to them. While you’re not liable for any of the charges made fraudulently in your name, it’s a HUGE hassle to take care of all the administrative stuff that goes along with identity theft. Think about the number of banks, credit cards, insurance policies, social security numbers, etc. that you would have to address.
Identity theft insurance is cheap and worth it. Mine is less than $150 per year. Make sure you get coverage where the company will assign a case worker to take over the administrative tasks associated with fixing the identity theft issue. The 50-100 hours they will save you will be SO worth it.
Umbrella insurance is extra coverage over all of your other coverage. This is a really good buy, especially once you get out of training and have greater assets/income to protect.
An extra $1-2M of coverage is worth the small cost to protect all of your assets. Think about if you have a major car accident that exceeds your auto insurance maximums. Do you want the people in the accident to sue you and take your personal assets, or would you rather have the extra coverage to pay their bills for them?
Most hospitals and large health care organizations have a requirement that you have malpractice insurance, but even without that requirement you’d be a fool not to have it.
If you’re not a solo practitioner, you’ll probably get the best deal by going through the company that insures your partners. If you do practice solo, then I recommend asking friends in your specialty for recommendations.
When you leave a job, make sure you get “tail coverage.” This insures you for 2-3 years after you leave the job, which is long enough to cover any lawsuits that happen during the statute of limitations period after you quit practicing. This is an often missed area where you might be doing your insurance wrong. Make sure you get total coverage!
Insurance may feel like a waste of money. I hope it is!
That is, I hope you pay for it your whole life and never actually need it. Remember, insurance won’t make you money. It’s there to protect the investments that DO make you money. You need insurance coverage so you don’t have to incur massive debt or dip into your retirement savings to cover a huge bill in case of some tragedy.
A final warning: take the time to understand this stuff. Beware of insurance salesmen. They won’t all be scammers, but the industry is full of people who are NOT looking out for your best interests. Never buy something you don’t understand. If the insurance broker can’t teach you enough about what you’re buying so that you know what you’re getting, you need someone else. Don’t feel bad if you’re doing your insurance wrong. You’ve got the opportunity to fix it. Good luck!
Please leave a comment below. Even if you’re not doing your insurance wrong, what insurance questions can we answer for you?
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