Today, we're delving into a crucial topic as part five of our series on healthcare professionals – protecting your assets and your family.
Amy explains that protection isn't just about insurance, although that's a significant part of it. It encompasses various forms of insurance like life insurance, disability insurance, long-term care insurance, and more. For healthcare professionals, malpractice insurance is also a critical component.
Amy then explains the different types of accounts where your money is held, and the varying levels of protection they offer. Amy emphasizes that under the Employee Retirement Income Security Act (ERISA), employer-sponsored retirement plans, such as 401(k)s, enjoy robust protection against creditors, even in bankruptcy situations. State rules come into play for IRAs, and their protection can differ significantly, so understanding your state's regulations is vital.
The discussion then touches on IRAs, and Amy explains that while they have some federal bankruptcy protection, there's a cap on this protection, which can vary depending on factors like inflation adjustments. If you're transferring assets from a 401(k) to an IRA, the key is not to commingle rollover assets with contributions, maintaining the federal protection.
The conversation shifts to traditional insurance types like life insurance and disability insurance. Amy distinguishes between term and permanent life insurance, highlighting that term insurance is cost-effective for temporary needs, while permanent insurance is more expensive and intended to last a lifetime.
On the topic of disability insurance, Amy stresses the importance for healthcare professionals, as the risk of disabilities affecting their ability to work is substantial. She also points out that disability insurance can become more expensive with age, and it's statistically more expensive for women.
Really, employees in any field (even podcast production) can face financial challenges if they become unable to work, emphasizing the need for disability insurance.
Protecting your assets also involves considering long-term care insurance, ideally by age 60. Planning early is key, given the time required to assess care needs and preferences. Amy advises evaluating other assets that could cover these expenses and whether competing interests, like leaving assets to family members, affect your choices.
We finish up with malpractice insurance, which is crucial for healthcare professionals, and the significance of umbrella insurance to protect against potential liability claims, especially for high-income individuals.
For more, reach Thimbleberry Financial 503-610-6510 or at https://thimbleberryfinancial.com/
Jag Gay: Welcome back into ThimbleberryU, I am Jag "JAG" Gay, I'm joined again by Amy Walls from Thimbleberry Financial. Amy, always a pleasure to be with you.
Amy Walls: JAG, it is always great to be talking to you.
Jag: This is a really important topic today, I'm glad we're covering this. It's part five of six for our series on healthcare professionals. Protect yourself and your family. Amy, as a financial advisor, when you refer to protecting assets, what specifically do you mean by that?
Amy: Well, it can definitely be insurance, which is what I think most people think of when it comes to protection. Simple forms that come to mind are life insurance, disability insurance, long-term care insurance, umbrella auto home, those types of coverages. Also with health professionals, we might be remiss to not throw a malpractice insurance in there also.
Jag: Sure.
Amy: Less expectantly, it can also be about what account your money sits in. That's an important part of protecting assets and making sure that others can't get to those assets.
Jag: Right. We're right into your wheelhouse now talking about where people's money sit. I'm curious about how the kind of account money sits in can protect someone differently. Can you expand on that a little bit?
Amy: Absolutely. For doctors, for example, and really any high-liability professional, understanding this difference is critical, so it's great you asked that question. First of all, it's important to note that under something called ERISA, the Employee Retirement Income Security Act, and hopefully, you know and our listeners know, I try to stay away from the jargon. Basically, what ERISA says is that 401(k) plans and other protected plans under ERISA, so 403(b), are protected from the claims of creditors even in the case of bankruptcy.
Of course, nobody wants to go through bankruptcy, but if the worst happens under federal law, money in that employer-sponsored retirement plan, not all of them, but 401(k)s definitely are in there, are protected. That protection is robust and it's uniform across the country. That's the first thing to know.
Jag: In the federal protection, you're not going to tell me it depends.
Amy: I am not going to tell you it depends.
Jag: You're not using your favorite phrase there. Okay, got it.
Amy: No, but now let's talk about the states. [laughter].
Jag: You got me. All right. [laughs]
Amy: JAG, it depends. [laughter] Outside of bankruptcy, protection for IRAs is governed by state law. We know there's a big difference in how different states operate. That's going to play a role here. Some states offer really robust protection similar to federal government, and some offer no protection or very limited protection. It's important to know what your state rules are.
Jag: Amy, you talked about 401(k)s, 403(b)s. How does this apply to IRAs?
Amy: IRAs can have some federal bankruptcy protection, and this is thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Jag: See, that's five times fast.
Amy: I know there's going to be a quiz on this later.
Jag: Kidding.
Amy: That protection amount is capped and might be subject to inflation adjustments. As of 2022, the cap was a little over $1 million. What that means is that assets within an IRA above $1 million might not be protected in the same way that the 401(k) is. Let's talk about when we leave an employer and we have assets in a 401(k) that was protected, and we want to move those to an IRA. I'm not going to say it depends, but I'm going to say if-
Jag: [laughs] Of course, you are.
Amy: -that IRA only contains the rollover assets and does not contain contributions to an IRA, then the ERISA protection, the federal government protection remains. It's important not to commingle a rollover with contributions if you're worried about having creditor protection.
Jag: Got it.
Amy: You can see, JAG, here with this information and the potential for malpractice suits in the medical field, doctors particularly can benefit by paying attention to where they're keeping their money-
Jag: Makes sense.
Amy: -prior to retirement.
Jag: These are the types of retirement accounts we've just covered. You did hint at this at the beginning, Amy, other types of insurance, more traditional things like life insurance, disability, long-term care, how do they play a role into overall protection?
Amy: This episode's about protecting yourself and protecting your family. Traditional life insurance, it's not there for you, it's there for the people you love and leave behind. There's really two main kinds of life insurance. There's term insurance and permanent insurance. Term insurance is inexpensive, it's there for a temporary need, and because of that, it's also low-cost comparatively. With permanent insurance, it's intended to be there for life, but because risk goes up as you age, it also gets more expensive as you get older.
Jag: Right.
Amy: As a result of that, the way the funding works is that it often takes a much larger contribution or annual contributions along the way to keep that insurance in force for life.
Jag: On disability, I've got to imagine this is a really key when it comes to a doctor that may have a specific skillset or anybody in the medical field, really. Right?
Amy: Yes. Anytime anyone's in a profession that takes a lot of education and a lot of specialized knowledge, you want to consider disability insurance. Let me throw this out. Now, this is not legal, I'm not suggesting this to our listeners.
Jag: Disclaimer, she's not an attorney.
Amy: I am sure the regulators would love this analogy, so the clear disclosure is important. If it was your job and it was legal to create money, and you had a special machine that did that in your basement, would you want to protect that? [laughter] Would you want to make sure that machine is going to be able to continue or you're going to be compensated when it breaks?
Jag: That is a great analogy, because that is, in theory, what your job is. Your job is a vehicle to create money for you and your family. That's perfect.
Amy: Yes, and the thing that when it comes to a family, a lot of times people don't recognize is that a disability often results in income going down and expenses going up. If we compared life and disability, unfortunately, a disability may be more financially devastating than someone dying when expenses just reduce.
Jag: Wow. That's powerful but true.
Amy: Disability insurance is important. The older you get, the more expensive it becomes, the more likely you are to have health issues that impact your ability to get that. Disability insurance is also interestingly, statistically more expensive for women than for men. Whereas life insurance is the opposite.
Jag: I wonder is that because statistically women live longer than men, or is that just--
Amy: Women living longer than men is the reason that life insurance is less expensive for women than for men because the risk to the insurance company is spread out over a longer period of time, and therefore, the premiums can be lower. For disability insurance, disabilities affect women more frequently, and a lot of that, as I understand it, is related to weaker cores.
Jag: Really?
Amy: Yes. I share all of that because I think those are important components for someone to think about if they are not sure that they want to be looking at this. You do want to look at it earlier and you need to know that some people are more susceptible in certain ways than others.
Jag: Wow.
Amy: Sometimes people say, I basically have to be in a coma to not be able to do my job, even when they're in a specialized field. We're talking to healthcare professionals, but there are different brain issues that can happen.
Jag: Oh my gosh. Yes.
Amy: That can keep someone from doing their job. We talk about surgeons; they have a tremor in their hands. They're not doing that job any longer.
Jag: Oh, geez. Yes.
Amy: Most of the healthcare professionals that we're talking to are employed, they aren't self-employed as their primary mode of income. With that, they have disability insurance, for example, through their employer, but often that is at most, 60% of their salary, and usually it's capped at a certain amount. In many cases with healthcare professionals, it might be 30% or 40% of their income that the employer-sponsored disability covers and is probably long-term based on a social security definition of disability. Looking at individual coverage can be a really good idea.
Jag: I know we're talking about medical professionals here, Amy, and this is a whole different podcast. I think about what I do, I produce podcasts full-time for a living. If I were to, God forbid, lose my hearing, I wouldn't be able to work. If I lost my ability to type and click, and edit. If it's for that reason that my wife and I are looking at disability, long-term care insurance for me even being self-employed because of the incredible loss to my income if something should happen to me. This is really hitting home for me personally.
Amy: Well, good. [laughs] I'm glad I'm helping your advisor out here.
Jag: Amy, let me come back to the life insurance piece of it. This is really complicated stuff, but how does someone generally know how much life insurance they need. Please don't say it depends because I know it depends.
Amy: First is go to someone who knows how to calculate this.
Jag: Okay.
Amy: There's two methods of calculation. The first is needs-based calculation. If you pass away, JAG, how much money does Ellen need in order to still continue to reach her goals or whatever goals the two of you have agreed she should be able to meet in the event of your premature death?
Jag: Okay.
Amy: The second sounds really morbid. It's called human life value.
Jag: Geez.
Amy: Yes. Human life value basically says, "What is the net economic loss if you pass away?"
Jag: Geez. Okay.
Amy: Both are valid ways of calculating how much life insurance someone needs. I often like to take a look at both numbers and see how they play together to fit someone's situation.
Jag: Amy, I know we touched on the topic of long-term care insurance. Is there a general guideline for age in when someone should start thinking about long-term care insurance?
Amy: Yes. A lot of times people wait too long on this. They think, "I can get to that later." Ideally, it is in place by 60 and a plan is in place for how someone wants to deal with expenses related to medical issues, but earlier is better. It's better to have that plan in place by 50. A lot of times, people will think that's too early, but the reality is it takes time to figure out how you'd want care provided, where you'd want care provided, what kind of coverage you want.
Long-term care is, I think, a little more confusing in terms of the options and the costs, and figuring out what it would mean for consumers. It is a conversation. I find that takes longer than figuring out how much life insurance I want.
Jag: That's fair. I have friends that have older parents. A couple of them, there were long-term care policies taken out on those parents and their care is taken care of. It's understood what it's going to be and how it's going to be paid for. The friends of mine whose parents did not have long-term care, they're in a world of hurt trying to figure this out. Just like any insurance, some little advanced planning can go a long way.
Amy: Yes. I think before looking at long-term care insurance, you want to evaluate, "Do I have other assets that can cover this care?" In many cases people do and that's great, but do you also have competing interests in you want those assets to go to the kids? Maybe you have a vacation home, and the kids are going to need those other assets in order to maintain as a group that vacation home.
Jag: Yes.
Amy: There's definitely considerations that take some time to work through.
Jag: Got it. Amy, as we start to wrap up today, let me zoom back out a little bit and ask you what other considerations healthcare professionals should be thinking about as it comes to protecting themselves and their assets.
Amy: Great question. I think right now, two things come to mind. The first is malpractice insurance. I think for our healthcare professionals, this isn't going to be a surprise. In my industry, it's called errors and emissions insurance. Accidents happen. They do.
Jag: Yes.
Amy: It's just that insurance to protect ourselves as people with specialized knowledge that are trying to do good and hope to never do harm, and so making sure that that's adequate. It's not an area to skip.
Jag: No, no, not at all.
Amy: Then second, I think for our healthcare professionals, one of the things I regularly check in on is, "What is their umbrella coverage?" Umbrella insurance sits on top of auto or home insurance, both, so that if someone gets hurt at your property and the claims exceed what your homeowner's insurance would cover, an umbrella policy of 135, $10 million sits there to provide additional coverage. Now some people say that certain professions, especially those that are thought of as earning higher incomes or wealthier professions, puts a target on people's back.
Jag: "Oh, I tripped and fell at this doctor's house. He's got deep pockets, or she's got deep pockets. Let me see how much I can get out of him." There's that nefarious aspect to it.
Amy: Yes. We never want to think that the people we know are going to be acting that way, but it's there. If there is more risk, having more protection in place can be a good idea.
Jag: Got it. This is really useful stuff, especially for our healthcare professionals that's, I know in the area of expertise for you at the Thimbleberry Financial. Amy, if our listeners want to come talk to you at Thimbleberry, what are the best ways to reach you?
Amy: They can reach us at thimbleberryfinancial.com or by giving us a call at 503-610-6510.
Jag: Amy, I'll talk to you in a couple weeks for Episode 100.
Amy: That's awesome. Look forward to it.
[music]
Jag: Securities offered through registered representatives of Cambridge Investment Research, Inc. A broker dealer member of FINRA, SIPC advisory services through Cambridge Investment Research Advisors, Inc. A registered investment advisor. Cambridge and Thimble Berry Financial are not affiliated. Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research Inc, a broker, dealer member of FINRA, SIPC. Advisory Services through Cambridge Investment Research Advisors, Inc. A registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.