Self-preservation is perhaps the most basic human instinct – we are hard-wired to protect ourselves. We require no list of instructions telling us to stay away from steep cliffs, raging fires, wild animals with sharp teeth and other things or activities that threaten our physical safety. But in today’s world, we also need to protect ourselves against threats to our financial wellbeing, and for this, we probably do need some guidance. Of course, protecting your assets is not as important as shielding yourself and your family from physical harm, but failing to protect those assets can lead to financial and emotional hardship and extreme stress that can ultimately affect your health.
In this article, we discuss ways to mitigate financial risks, including some risks you might not realize you are facing. Some are specific to physicians, but many apply to anyone with the desire to protect and preserve assets, for personal enjoyment and to pass along to future generations.
Malpractice – Insurance and Other Protections
Malpractice Insurance – We start off with this most obvious form of asset protection for doctors. Physicians are usually well informed about the need for malpractice insurance, but how much is enough?
If you are in the early stage of your career you may not have accumulated much wealth, especially if you are paying down student loan debt, or just recently bought a house with a small down payment and a sizable mortgage. In this situation, a doctor might think, “I don’t need a lot of malpractice insurance. Even if I’m sued, there’s not much to take.” Although you may not yet have assets of significant value, you would need to cover expensive legal fees. Also, in some cases, a malpractice suit can result in a claim on your future earnings. For these reasons, you might want coverage that exceeds the value of what you currently own.
If you own a private practice, you are the “captain of the ship”. You not only need malpractice insurance to cover your own actions, you also need protection for anything your employees (nurses, PAs, etc.) do that results in a lawsuit. If you are part of a group practice, you may also be exposed to the mistakes and/or negligence of your partners.
The Retirement Savings Shield – Did you know that assets in an “ERISA-qualified” retirement plan, such as a 401(k) or 403(b) are usually protected without limitation in the event of a malpractice suit or other legal judgment? Money in IRAs (both Traditional and Roth) is protected up to the total bankruptcy-protected limit of $1,283,025. Another reason to contribute the maximum amount to these accounts, for yourself and your spouse.
Reduce Incentives – Don’t make yourself an easy target. Implement risk management processes in your medical practice that reduce the risk of being sued. Stay within your level of expertise and competence. Document thoroughly and carefully and be sure to employ competent personnel. Develop "bulletproof standard operating procedures" so that follow-ups and red flags don't fall through the cracks. Communicate clearly with your patients.
If you have considerable equity in your home, consider an “equity stripping” strategy such as a home equity line of credit. Even unfunded (in other words, you haven’t actually used the credit line to borrow money), this can be an effective way to protect yourself in a legal proceeding. Note: this must be in place long before any creditor attempts to make a claim on your property. Also, be sure to title your home properly. The Homestead Exemption allows you to protect a percentage of the value of the equity in your primary residence from creditors. The amount varies by state, ranging from 100% to 0%, and some states allow married couples to double their exemption.
Life’s Sharp Corners and Jagged Edges
Doctors know they need malpractice insurance but may overlook other risks that call for insurance or other protective measures. This applies to many people, not just doctors, especially as you accumulate wealth:
▪ Employer Risks – As a business owner, which includes physicians in private practice, you can be sued for sexual harassment in the workplace, for sexual discrimination and for wrongful termination of an employee. Not all of these risks can be fully addressed through insurance. Consider formal training to educate your employees about behaviors that violate your standards or are illegal and can put their employment and the entire business at risk.
▪ Disability Risk – This is an under-recognized risk, especially for physicians. Anyone can become disabled, temporarily or permanently. If you were unable to work for some number of months (or longer), disability insurance that covers you in the event you are unable to continue working as a physician would provide you and your family with most or all the income you would otherwise have earned.
There are many nuances in disability insurance beyond the scope of this brief discussion. For example, how much to carry, specialty-specific vs general disability, when to decrease or cancel your disability altogether, and tax considerations of disability premiums and payouts. Your Gold Medal Waters advisor can help with the decision-making process.
Note: Find out if your employer provides disability insurance. Perhaps you bought your own disability policy early in your career but are now an employee with employer-provided disability insurance. You may now be over-insured.
▪ Business Continuity Risk – If you have a private practice or own a business, you are likely to have expenses that would continue even if you became disabled. For example, an ophthalmologist who devotes office space to selling eyewear will still incur the expenses of company payroll, benefits, and office space costs. Business continuity insurance will address this.
▪ Risk of Ownership – This catch-all phrase refers to bad things that can happen when someone uses or occupies something you own, such as real estate, including your primary residence, vacation home, and investment properties, or maybe a boat or jet ski.
If someone slips and falls on your property – home or business, making this particularly important for doctors with elderly patients, or those who live in a place where sidewalks get icy in the winter – you’re at risk. If a worker is on your property for a remodeling project and falls off the scaffolding, you are at risk if the general contractor does not carry adequate workers compensation insurance. This isn’t just for doctors; it applies to anyone with significant assets.
An umbrella policy, which generally has a relatively small annual premium, will cover most of these risks. How much is enough? There are many factors to consider but you should probably have at least enough to cover your net worth. Consider these risks before you buy that ATV or motorcycle. Sometimes owning dangerous assets just isn’t worth it.
▪ Vicarious Liability – You probably know about vicarious pleasure. This is the opposite. This is the risk to which you are exposed through the bad behavior of others with whom you are closely associated, including business partners and employees. It can also arise from serving as a member of a board of directors, or on a physician’s review board that is sued by a physician who received a negative judgment. Errors of Omission insurance protects against these kinds of risks.
Overlooked and Underappreciated
The most overlooked and underappreciated form of insurance is arguably the most important type: Life Insurance. What would happen to your family if the worst happened? In the early years of your career, you are probably not saving much. How would your mortgage payment be met? How would your children’s college savings accounts be funded? What if your spouse does not work outside the home or has an income far below what you expected to earn? Life insurance is critically important – talk to your financial advisor about how to meet your specific needs.
A piece of personal advice: if you are married, stay married if at all possible. Divorce is often financially devastating. If you are already divorced, protect yourself financially if you choose to remarry, especially if you have children from your prior marriage. To borrow a phrase from well-known author Jared Diamond, “practice constructive paranoia”.
Bring in Your Financial Quarterback
As the “quarterback” of your financial team, your Gold Medal Waters advisor can bring in a trusted expert on malpractice and other types of insurance to help evaluate your current needs. Finally, after reviewing all of these unpleasant possibilities, remember that while protecting your financial assets definitely deserves your attention, your most important assets are your health, your family, your relationships and your ability to enjoy life. If you have any questions, please don’t hesitate to reach out to us.
About the Authors David Bright, M.D., AAMS®
Of Counsel
David Bright M.D. is a Senior Financial Advisor for Gold Medal Waters, Inc. He currently holds his Series 65 registration and the AAMS® (Accredited Asset Management Specialist™) designation from the College for Financial Planning. In 2007, David became a licensed Investment Adviser Representative in Colorado. David is responsible for helping to guide the strategy for the firm's medical professional clients. He blends his experience as a physician with his current expertise as a financial advisor to offer a truly unique perspective.
Wealth Manager
David joined Gold Medal Waters after a 23-year career as CFO of four prestigious independent schools in Massachusetts, Colorado, New York, and Rhode Island. He managed their endowments, ranging from $12 to $40 million and developed individual investment policies for each school. David developed and/or refined the 403(b), 401(k), and 457(b) retirement plans for these institutions, guided employees and CEOs on their retirement and investment strategies, as well as development of CEO compensation packages. David focuses on managing individual client relationships, overseeing the firm's investment strategy and driving the firm's 401(k) offering.