One common financial disaster that can result in a significant loss of assets is a civil lawsuit. Lessons #5 and #6 will offer almost two dozen specific solutions to help mitigate litigation risks. Though malpractice lawsuits are a significant risk for physicians in today’s society, they do not pose the most significant risk to one’s wealth if proper insurance is in place.
This Lesson will explore those additional—and more devastating—financial disasters that must be addressed if you wish to achieve and maintain wealth. These risks include both health-related and financial events. More specifically, this section of the book will teach you how to:
· Protect your family from an unexpected death
· Keep paying your bills even if you can’t work due to disability
· Handle long-term care expenses before they arise
· Make sure you don’t run out of money in retirement
· Avoid healthcare and insurance threats
· Avoid employment threats
· Obtain insurance to protect against business and personal risks
Protecting Your Family From an Unexpected Death
The emotional distress caused by the premature death of a loved one cannot be exaggerated. Long before the psychological scars begin to heal, financial devastation for surviving family members may begin. If proper planning is not undertaken, the value of the medical practice, which could be a saleable asset to help the family, may be lost.
There are various obstacles to successful financial planning in the case of unforeseen death simply because none of us knows when our time will come. The 2003 National Safety Council’s study on deaths (http://www.nsc.org/lrs/statinfo/odds.htm) and the 1999 US Census Bureau’s Statistical Abstract of the United States, which surveyed the year 1997, reported the following statistics in regard to unforeseen death types:
· There is a 1 in 24 chance (4.17%) that you will ultimately die from a stroke
· There is a 4% chance you will die from an accident or the adverse effects of one
When you add these two risks together, you can see that approximately 1 in 12 people will die from an unforeseen risk. In addition, a number of people will find out they are terminally ill and their families will not be able to purchase personal life insurance to help them manage the financial burden created when they pass away.
Another obstacle to successful financial planning in the case of unforeseen death is that most people don’t enjoy contemplating, let alone discussing, the death of a family member. As a result, few families are financially or emotionally prepared for this traumatic event.
In this chapter, we will discuss two financial losses that can occur at the time of death:
· Loss of income
· Loss of an estate (via estate taxes and probate costs)
Physicians and their families can use particular insurance planning strategies to efficiently manage the risks which often result from the premature death of a family member. In addition, proper legal documentation must be created to allow for efficient handling of financial matters at death—including offering the executor of the estate the legal power to effectuate a transfer prior to the estate going through probate. If there are unnecessary delays in this process, the patients will seek another practitioner, thus diminishing the value of the practice further. This chapter aims to teach you how to protect wealth from the death of a patriarch or matriarch. Let’s explore how this can be done.
A key to successful planning is an ability to put one’s fear of death aside and focus on the financial impact a death may have on a family. The first financial impact of death, especially for younger families, is the lost income. Once a father or mother has passed away, they obviously will not earn any more income. If the family hasn’t met all of its saving goals (most don’t until they are well into their fifties), there will be a significant financial strain from the death. The key to maintaining wealth is making sure that no financial catastrophe wipes out the family. To show you how significant this loss of income can be, consider the following.
The present value of twenty years of lost income for the Average American family (with $45,000 of annual income) is approximately $636,000. That means that, at the time of death, the family would be in the same financial situation if they had 20 years of income OR had a lump sum of $636,000.
For the family of a physician who earns $300,000 per year, the present value of twenty years of lost income is over $4,200,000. For the family of a very successful specialist who earns $1,000,000 per year, the present value of 20 years of lost income is $14 million. The simple estimate implies that a family needs approximately 14 times the annual income of the breadwinner to replace twenty years of lost income. If you have a younger breadwinner or a breadwinner who just intends to work 30 more years, the multiple used to approximate the present value of future income is 18 times one year’s income.
What these examples illustrate is that a family needs life insurance in the amount of at least 14 times the annual income of each wage earner just to keep them on track to meet their financial goals (assuming that their current earnings were keeping them on track before the death). Also, this estimate assumes no adjustment for inflation. Over twenty to twenty five years, the value of a dollar is reduced by 50%. For that reason, you could estimate that a family needs between 14 and 28 times one year’s after-tax salary to replace twenty years of income. Do you have enough life insurance to protect your family and leave them in a position to meet their goals if you were to die?
In addition to lost income, the practice asset will be lost if proper estate planning doesn’t establish a trustee with a power of sale. This is the best possible option since More