Money Matters - NPX Newsletter Fall 2018

Using Insurance to Bolster Your Financial Plan
By Eric Croak, CFP

Insurance tends to be the elephant in your financial room. Do we need it? Do we want it? We usually all know we need it, but it’s hard to justify paying for something that you hopefully won’t use. On top of that, it can be confusing to understand, and you might have parents, friends, or other pharmacists in your ear about what works best and what doesn’t.

Let’s simplify. A new pharmacist will want to grab two new insurance policies: Life Insurance and Disability Income Insurance. My rule of thumb is you should be spending somewhere between 2-3% of your total income per year on these products combined. If you’re spending more or less, you might want to reassess what you have.

Admittedly, there’s no one size fits all approach to your financial well-being. Some people need more coverage, some less. You can think about it like fire insurance – is your house made out of wood, metal or brick? The answer, obviously, changes your need for that type of insurance. Personal situations can be a huge determining factor on what you might need.

One thing, however, is clear: While Insurance should bolster your financial plan, it shouldn’t be your financial plan.

Most pharmacists will want the bare necessities while they build up their savings and investments. This typically includes a term life insurance policy and a disability income insurance policy. Contrary to popular belief, term life insurance is usually inexpensive and easy to apply for. This type of policy covers you for a certain amount of time and gives you a death benefit when you need it. I prefer my clients to get this type of insurance at a young age because it locks in your health rating at an time where most of us are healthiest.

Permanent life insurance is also an option. This type of policy will be significantly costlier, but it also has benefits that term life insurance doesn’t have. It has the potential to last forever and build up cash value in the meantime. Most insurance companies will pay a dividend on the cash value so you could be making some return on the money as well. However, often those dividends don’t make up for the hefty expenses hidden without the policy which makes this product hard to use and even harder to understand.  Permanent insurance can be great idea for a small percentage of pharmacists, but it has to be structured in a very specific way and you should know exactly what you’re getting into. This is where personal research can come into play by understanding what you truly need. In the meantime, sticking with a term policy is always a good choice.

Secondly, a Disability Income Insurance policy will cover you if an accident happens and you can no longer work. It pays a monthly benefit while you aren’t working which can last all the way until retirement. According to the Social Security Administration, 25% of today’s 20-year old’s will become disabled at some point in their life. As a pharmacist making $100,000 per year, you would rack up $4,000,000 in total income before retirement. That could all be changed in an instant by one small accident. This policy is also fairly inexpensive and will provide you the peace of mind that your income can be covered if anything should happen.

Consider this scenario – you walk into your first job interview and your new employer gives you two compensation options from which to choose from:

Option 1: $100,000 base salary, but if you stop working due to health reasons you get $0.

Option 2: $98,000 base salary, but if you stop working due to health reasons you will continue to make $98,000 per year. Added bonus: if anything worse should happen, your family will receive a $1,000,000 check…

If you chose option two then it’s time to get your insurance program in place. One conversation can ensure a good level of protection while giving you plenty of cash flow to fund your other investments and savings opportunities as well.

Trust me, no one likes talking about what bad things could happen to them. Choosing a plan first will eliminate the need for worry and give you a head start towards the life you and your family have always dreamed of living.

Eric Croak, CFP

Securities and investment advisory services offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. AIC and Creative Financial Partners are not affiliated. Additional products and services may be available through Eric T Croak or Creative Financial Partners that are not offered by AIC. Representatives of AIC do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation.