Disability and Life Insurance during Residency

[rad86]

What types and how much of disability and life insurance do people usually buy before/for residency? And where did you get yours?

[cheech10]

Most provinces have disability insurance included in your benefits package. It's up to you if you want to get more, although your income during residency is low so it's probably not worth it. When you start practising, your income goes up significantly and you lose your LTD benefit from residency, so you will probably want insurance at that point. I purchased a plan with 10K monthly benefit, but you will want to look at your overhead and living expenses to see how much of a benefit you need (another reason to wait until after residency since you will have a better idea of these expenses).

 

Life insurance is a different matter. Are you married? Any children or other dependents? If not, why would you need life insurance (who will be the beneficiary)?

 

If you need life insurance, I would look at term life insurance for ~20 years. It's a short enough term that will have a very affordable premium at your age, and by the end of the term, you should have no debt and enough assets accumulated to provide for your dependents if you die (assuming 5 year residency and 15 years of medical practice). Add up all your current debts (LOC, mortgage, etc) and add annual expenses that you would like to provide for your family after your death multiplied by the number of years you want to provide for. That's the amount of your life insurance "need". Adjust the term longer or shorter based on how long you think it will take to accumulate enough assets and pay down debt so your "need" is zero.

 

Eg. I am married with no kids, 30 years old, just starting practice, with a $300,000 mortgage. To provide 20K for my wife per year for 35 years (she also has an income) and pay off the mortgage, I need a 1 million dollar policy. I expect to have no debt and $1 million in assets in 20 years, so term 20 is about right. Going rate for a term 20 $1 million policy for a 30 year old male non-smoker is $65 to $80 a month.

[future_doc]

Good analysis cheech. As a med student, I require no such insurance.

[rad86]

Thanks for your input, Cheech10. I agree we probably don't need as much insurance coverage now, but we will in the future and it'll be cheaper to buy now (also not needing medical) vs. later (since we'll be older, and will likely need a medical). The key question is whether the future savings will be worth the early payments. I've been reading about insurance and incorporation, and here's what I've gathered:

 

For disability insurance:

 

I was told that it can only be held by the person, not the corporation. Priviate plans such as the one from RBC now requires no medical and is an individul contract as opposed to the OMA's, which is a group policy that can be changed freely by the insurance company. It also contains the own occupation rider, cost of living adjustment, future income option, and can be converted to long term care insurance at age 65 without needing medical again.

 

In residency, we're only allowed up to $4000/mo coverage in addition to the hospital coverage, and insurance agents (I know, this is the part I'm not sure about) recommend maxing out the private (e.g. RBC) disability coverage to the allowed $4000/mo during residency, since when we become staff we'll need more than $4000/mo and the cost for the first $4000 will be at least cheaper than buying it later.

 

For life insurance:

 

Permanent life insurance can be a useful tool for not only protecting our family but also for some tax-deferred investment growth in the future. It can be and is probably better owned by the corporation when incorporated. But getting a term life insurance now allows a cheaper rate to be locked in, which can be converted to whole life and transferred from the individual person to the corporation without cost (I'm suspicious about the without cost part, as there may be lawyer fees involved for introducing assets to the corporation).

 

As you can see, one important factor that determines what types and how much insurance to buy depends on if and how much we can save by buying now vs. later. I guess I'll need the insurance agents to provide a quote to get an idea at least...

 

 

In addition to these two, I'm not sure if it's necessary to get critical illness insurance - seems like we'll benefit only if we survive some serious disease, else we'd be covered by life or disability insurance...

[cheech10]

You are correct that disability insurance is better held by the individual (if the corporation pays for it it becomes a taxable benefit to you, so you're no better off). Your private plan has some good features, so keeping it and adding a further plan after residency is not a bad option. A couple of things:

- no medical exam - dunno if this is a big deal to you, it wasn't to me, but if it is, that would be a good reason to go with your plan

- own occupation rider - essential when you're practising, but as a resident, I'm pretty sure your occupation becomes "resident", meaning if you could still practise a non-physically demanding specialty (eg. psych) you would be forced to

- convert to LTC insurance at 65 - this would probably be very expensive insurance, so I'm not sure if I would even consider this as a benefit

 

Regarding life insurance, yes, this is better held by the corporation, since you can pay it from pre-tax dollars. Permanent life/whole life is rarely a good choice: buy term and invest the difference in premiums is the common saying. The difference in premium cost for term 20 between 30 and 35 years of age is negligible, so don't pay for it until you need it.

 

Critical illness insurance doesn't make a whole lot of sense to me. Most of the treatments are paid for by OHIP, and as an MD you'll be well equipped to navigate the system anyway, so probably won't need treatment in the US or anything like that. I'm still not sure what the point of it is.

[rad86]

For the own occupation rider, is that specific to your specialty or only the field of medicine generically? Do you mean that say if you're a surgery resident, then the own occupation rider does not cover you as a potential surgeon, but just as a resident like any other specialty? And once in practice, that it'll get more specific? I wonder if there're costs associated with the further specificity. An insurance agent made it sound like it's only to medicine generically even in practice...

 

Regarding life insurance, insurance companies usually quote from their stats at least 6-7% annual return, and up to 9%. It's difficult to achieve that with stocks etc. these days, which also have much greater variance from year to year. Also, the potential insurance payout is tax-free and can be borrowed against a loan for lower tax rate than other investments.

 

I definitely need to learn more about the details, but it seems that for high-income earners it's important to have at least some whole life insurance. While we don't want to put most of our money into that, since it's no great investment, but it's more like a GIC for a portion of our money, along with some protection benefit.

[future_doc]

Insurance companies put the money into mortgages which don't earn anywhere near 6%, so their historical figures on returns are meaningless or worse, misleading.