Medical residents often ask us what’s the best thing they can do to help get ahead financially when they are starting a practice. The answer? Live like a resident. At Tall Oak Private Wealth, we are an independent firm that takes pride in working with medical residents, especially as they transition to practice.
So, how do you “live like a resident”? We’ve got everything you need to know (from the finance side of things) in our Live Like a Resident blog series. In one of our earlier blogs, we discussed cashflow and how our 5-Year Wealth Plan is centered around evolving cashflow. But what if that cashflow suddenly stops?
In this blog we’ll focus on insurance considerations that all medical professionals should think about when it comes to sustaining cash – especially in times where your cashflow could halt, like a temporary or long-term injury or illness, or premature death. Any sudden, unexpected change can impact our lives drastically, so how do you prepare and ensure your cashflow continues?
Protect Your Cashflow
The first step when protecting your wealth is to ensure you have the proper disability plan in place to keep your cashflow flowing. As residents transition to practice, most will see a drastic increase in their billings. In the 5-Year Wealth Plan, this cashflow is allocated to certain expenses: paying off debt: lines of credit and mortgage, allocation to retirement: RRSP, corporate investment account, lifestyle expenses and so on. The great thing about being a physician is that income is quite predictable. We can quite accurately predict what your cashflow will be based on specialty, hours worked, expenses and taxes. What we can’t predict is your “ability” to earn that income. Your ability to work drives income, income drives cashflow, cashflow drives lifestyle. If that ability stops temporarily or permanently, the plan stops … thus the need for disability insurance.
Things to consider when looking at disability insurance:
- Find an option that is simple to qualify for, both medically and financially, when you transition from a resident
- Look for lifetime discounts (25% discount today and into the future if you need additional coverage)
- Plans aren’t all created equally. Consider your options, and pick the coverage that is right for you. (Just because one plan was right for your colleague, doesn’t mean it’s the right one for you.)
- Ask yourself: How much income do you need today? How will that change as time goes by?
Take Care of Those Important to You
A permanent life insurance policy can be key when it comes to estate and tax planning and transferring wealth to further generations. However, it requires the right policy and the right timing to be done effectively. When working with physicians, our 5-Year Wealth Plan balances lifestyle, retirement planning and paying down debt, based on your personal comfort. We ask: “If you were to pass away, is there anyone financially dependent on you and do you care?” Quite often the answer is yes. Whether it is a partner, children, or parents, someone is relying on your continued income. When you start practice, term life insurance can be a low-cost solution to cover your needs so the people you care about are taken care of if the unexpected happens. The way to think about term insurance when you start practice is as a placeholder for your insurance. The younger you are the easier it is to qualify for insurance and the lower the price will be. As you age and get further into practice, some physicians will consider converting their term policy into a permanent life insurance policy.
Things to consider when looking at life insurance:
- Consider if you have anyone who is financially reliant on you or will be in the near future
- Think about which type of life policy your cashflow can support
- Find a policy that will adapt to your changing needs as your wealth accumulates
Prepare for Emergency Cash Needs
Although disability insurance will protect cashflow in the short term, there is often a waiting period until that monthly benefit will start (typically 3-4 months). For some, that time may be quite challenging to navigate without cashflow. In this situation, considering critical illness insurance is highly recommended. Critical illness insurance is a lump sum payout in the event of one of 25 critical illnesses (cancer, stroke and heart attack are some of the common ones on the list). This lump sum can be used for anything you want or need: replace income, pay off debts, keep the practice running, or seek out medical treatment not covered by OHIP. Some plans will even offer to return your premiums if you do not use the coverage.
Things to consider when looking at critical illness insurance:
- Determine how long you could go without income
- Have an idea of additional costs that could occur in the event of an illness
- Identify any financial impact that could result if your spouse was unable to work or take care of the household
There is much to consider as a physician transitioning from residency to practice. Insurance is just one element and, although it can be complicated, it shouldn’t be avoided. It comes down to mitigating risk in the short term and planning for wealth in the long term. As a resident, it’s never too early to start your plan. If you’re ready to learn more about the options available and determine what’s right for you, Tall Oak Private Wealth is here to help you feel informed and confident in your decision.
This material is provided for general information and is subject to change without notice. Although every effort has been made to compile this material from reliable sources; no warranty can be made as to its accuracy or completeness, and we assume no responsibility for any reliance upon it. Before acting on any of the above, please contact Tall Oak Private Wealth of Raymond James Ltd., for individual financial advice based on your personal circumstances. Raymond James Ltd. – Member – Canadian Investor Protection Fund. Insurance offered through Raymond James Financial Planning Ltd., not a member – Canadian Investor Protection Fund.