The three phases of insurance planning – who needs
what and when? by Trey Fairman, J.D., LL.M. - September 3, 2015
Expert Interview: Long Term Care Insurance
November 10, 2020
As a physician, it may be helpful to think of your need for insurance protection as having three
distinct phases. As you move from one phase to the next, your need for insurance may change
or disappear altogether. As needs change, the appropriate solution may also change. It is
important to understand this evolution and to regularly review your coverage to make sure it
still serves its intended purpose. Finally, as a physician, you can secure insurance protection by
leveraging the national buying power of all U.S. Physicians through special programs offered by
the AMA Insurance Agency, Inc.
Age Based Planning – what phase are you in?
Phase One: typically under age 40
In this phase, physicians are typically younger and building their wealth. They may have
children, a mortgage, tuition debts, and are often an important source of income for their
family. If they were to die or become disabled, their family would have peace of mind,
knowing that they have an inflow of cash to maintain their lifestyle. Life insurance and
disability income insurance acquired in this phase serve as the foundation to any well-
‐constructed financial plan.
Simply put, life insurance protects those that depend on the insured’s paycheck. If you have a
spouse or dependents that would require a cash inflow upon your death, life insurance is a
must. A good rule of thumb is to have at least 8 times annual income. Many financial plans
will calculate a need as high as 10-‐15 times annual income for physicians in this phase. You
should be insured until your youngest child is “on their own.” Consider this common example.
A female physician, who is the sole wage earner with a husband and a 2-‐year-
‐old son, earns $100,000 per year. She should have $1,000,000 ($100,000 x 10)
to $1,500,000 ($100,000 x 15) of death benefit for 20-‐25 years. This assumes
they will have no more children and their son will be “on his own” in his early
twenties. It may be prudent to secure a little more coverage than needed andfor a little longer than anticipated. Term Insurance is an inexpensive product
that allows you to obtain more coverage for less premium, and the benefit
would terminate as the kids become adults.Disability Income Insurance
Until you can afford to retire, you should consider disability income protection. A 40 year old
making $100,000 a year planning to retire at 65, means they need to insure $100,000 x 25
years = $2,500,000 worth of earnings. This coverage protects you and those who depend upon
your income for financial security.
Disability income insurance pays monthly cash benefits to replace lost income when you are
unable to work due to an extended illness or injury. Many assume disability will occur due to
an unexpected accident or injury when in fact, illnesses are the most common cause of
disability. 1 Neurological problems, back pain, arthritis, and cardiac issues are more common
than injuries when it comes to disability claims. 2 This can be is especially true for physicians
that balance long hours and a physically demanding occupation.
A good rule of thumb is to have two-‐thirds of pre-‐tax income covered by disability
insurance. Insurance carriers want to encourage you to return to work so a disability income
policy will not replace 100% of your income. Make sure you understand how the “definition
of disability” works in any policy you are considering. This is a crucial provision of the contract.
Phase Two: commonly ages 40 -‐ 65
In this phase, you have a much stronger financial foundation but have not yet retired.
Distinctly different needs exist on the personal planning side and on the business planning
On the personal planning side, physicians in this phase may have paid off their mortgage and
sent children through college. As they accumulate their retirement assets, it is important to
annually review existing life insurance coverage to make sure it is still appropriate for your
needs. Money being spent on life insurance may be better utilized to fund for retirement or
long-‐term care insurance to protect those retirement funds. You should also review your
disability coverage regularly to make sure it is adequate given your current income.
On the business planning side, physicians in this stage are often contemplating business
succession issues or refocusing on growing their businesses. Term, Disability and BusinessOverhead Expense insurance may be acquired in this phase to fund buy-‐sell agreements,
guarantee business loans or monetize illiquid business assets in the case of early death.
Finally, you should begin to examine and consider long-‐term care insurance at this time.
Many think long-‐term care is only an elderly concern, however The Family Caregiver Alliance
estimates that 40% of the 13 million people receiving long-‐term care services are between
the ages of 18 and 64. Long-‐term care policies may be funded with personal funds or with
business funds on a pre-‐income tax basis.
Phase Three: after retirement
Upon reaching retirement, disability income insurance is no longer needed, and income
replacement life insurance becomes unnecessary.
Long-‐term care becomes a primary concern in this phase. Wealthier physicians may be self-
‐insured for long-‐term care, however several factors should be considered before making
this decision. For example, you’ll need to determine the cost of care and estimate the length
of care required. In the end, you may choose to retain the entire risk or transfer only a
portion of the risk to an insurance company. This doesn't need to be an all-‐insurance or no-
If long-‐term care is a concern, then consider replacing old cash value life insurance policies
with newer “linked-‐benefit” policies that allow you to access the death benefits to pay for
long-‐term care. These policies provide more premium stability than traditional pay-‐as-‐you-
‐go long-‐term care policies and can be structured to provide a refund of premiums paid or a
death benefit if never needed for long-‐term care.
Special attention should be paid to pension plans and individual retirement accounts (IRAs)
and how they may be subject to double taxation at death. Through proper planning, a
“stretch IRA” can be an effective tool to increase wealth that passes to your beneficiaries.
If your net worth is subject to estate taxes, insurance is often used in this phase as a tool to
transfer wealth efficiently or to provide liquidity for estate taxes. Survivorship life insurance,
which insures the lives of both spouses on a single policy, can be an economical way to
discount the impact of estate taxes or to build wealth for future generations.
ConclusionThis paper examined the three phases of insurance planning and what the major points are to
consider in each phase. As you age and your needs change in each phase, the appropriate
solution may also change. For example, it is common in phase one to secure insurance to
replace lost income while in phase three, insurance is often used to protect against long-term
care expenses or to meet estate planning goals.