Risky Business: Your No-BS Guide to Malpractice and Life Insurance
Don’t bother to read this post if you are omnipotent and infallible (but then, of course, you’ll already know that). For the mere mortal, however, we can all benefit from a better understanding of strategic risk management—and by taking steps that can help stack the odds in our favor for our best future.
While we have only one past, we face all kinds of possible futures—and nobody knows which they’ll get. We may not be able to predict the future, but we can prepare for it by controlling the range of outcomes. To that end, we have three key levers at our disposal: saving diligently, holding down financial costs and managing risk. Over the course of the next several posts (see here, here, and here), I’ll delve into the subject of managing risk through insurance.
Do you need insurance? The answer is YES! But you may not need every kind of insurance available.
Without knowing you, I can predict that you need to have health insurance, and if you drive a car you need auto insurance. If you are a resident, fellow, or young practicing radiologist, you should have disability insurance. No matter where you are in your career, if you have family members who rely on you for financial support, you should have life insurance (unless you have enough money to self-insure, which is the goal in retirement). If you are a practicing radiologist, you need malpractice insurance. If you own a home, you need homeowners insurance.
It seems we’re more diligent about protecting our possessions than protecting ourselves. Homeowners almost always have homeowner’s insurance, in large part because the mortgage company insists. Similarly, most car owners have auto insurance, because state laws require it. Other types of insurance? We’re not as diligent.
Do you need insurance for that new TV you just bought? The salesperson who sold you the TV offered you an extended warranty, right? Should you buy such coverage when you purchase an iPhone, washing machine, automobile, snowblower, or lawn mower?
To answer these questions and to know what kind of insurance to buy and when, you first need to understand the definition of insurance and its purpose.
What is insurance?
Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. The payment to the insurance company is called a “premium.” When you buy insurance you toss your premium dollars into a risk pool, along with the premium payments from all the other people who bought insurance. When your house burns down or you total your car, you submit a “claim” to the insurance company. The money you receive comes from the “risk pool.”
People have a tendency to think that if they paid insurance premiums but never had to file a claim, that their money was wasted. In fact, they got exactly what they paid for, which is that they didn’t have to worry about a catastrophic event wiping them out financially. AND they didn’t have an untimely death, lawsuit, car crash, or a burned-down house. You should hope never to collect!
You can buy insurance for just about anything. But you don’t need to. In this and the next three posts I will tell you what you need to know about the following types of insurance 1) life and malpractice, 2) disability, 3) health and long-term care, and 4) home, auto, umbrella, and extended warranties.
Below, I’ll guide you through some of the essentials on the different types of life insurance and malpractice insurance (spiced with some personal anecdotes), to help you determine the coverage options that may be the best fit for you and your individual circumstances.
Who needs it? If anyone depends on your income besides you, such as a spouse, children, parents, or other relatives, then you do. Otherwise, you don’t. How much do you need? The answer depends on the financial goals of those left behind after you die. If you already have a financial plan (i.e., a plan outlining your income, debts, how you will pay off those debts, how you will invest, and how you will pay for present and future expenses), buy enough insurance that allows your dependents to live just as they would with you alive. I highly recommend you develop a financial plan if you don’t have one. The White Coat Investor offers a practical guide to get you started.
If you are a typical radiologist right out of training, you have little or no savings and a lot of debt. Let’s say you have a spouse and one child. If you die, then your federal student loans will be discharged. Private student loan debt may or may not be. Do you want to leave your spouse with a nest egg that will last her the rest of her life without having to work? At what standard of living? Do you want to leave enough money to pay for your child’s college education? To pay off the mortgage? The answers to these questions will determine the amount of life insurance you will need. Most radiologists will carry between $1M to $5M in life insurance. Since life circumstances change (e.g., you have more children, you pay off your mortgage, you save enough for your child’s education, you get divorced, or your child or spouse dies), you may need to increase or decrease the amount of life insurance coverage over time.
Among households with children under age 18, one out of five has no life insurance. That number would likely be far higher without employer-provided coverage. Indeed, today, more families have group life insurance—often through their employer—than individual coverage.
Some married medical students and radiology residents with children choose to purchase life insurance as a student/resident and others wait until they finish training, when they can more easily afford the premiums. Those who wait are gambling with their spouse’s and children’s financial future. Another good reason to purchase life insurance early is that you will pay lower premiums (as you will be younger at the time of insurance purchase), and you lock in the insurance rates while you are still healthy. If you wait, and get ill or disabled as a student/resident, your premiums could rise significantly, and you may even become uninsurable.
Most residents are offered life insurance through their employer. A 2016 survey showed that residents were offered life insurance that was fully paid (77.1%), cost shared (15.9%), available but not paid by the institutions (5.5%), or not offered (1.6%).
Still not convinced? Here’s a real-life story of how tragedy hit a young medical student and his family:
Ryan Folsom was a revered football player at Brigham and Young University. He went on to be a medical student. In 2018, he was driving on I-5 south to attend one of several residency interviews. A car driving in the wrong direction of traffic struck his car, killing him and leaving his wife, who was pregnant with their 3rd child, a widow. He did not have life insurance.
There are two basic types of life insurance: term and permanent.
Term life insurance provides a predetermined death benefit and covers you for a predetermined number of years, usually five to 30. You can buy more than one policy, each having a different term (i.e., one at 10 years and one at 20 years). The idea behind doing this is that after a period of time you will have saved more money and require less life insurance. The annual premiums are fixed and are based on your health and life expectancy at the time you apply for the policy.
Permanent life insurance combines a death benefit with a savings or investment account. There are several varieties, including whole life, variable life, and numerous variations of universal life insurance. The policy covers you for as long as you’re alive. The premiums can be fixed or not, depending on the policy you purchase. Like term life insurance, the premiums are based on your health and medical history.
Permanent life insurance is NOT the best choice for most people. It’s several times as expensive as term life insurance for the same amount of coverage. While your policy does accumulate some cash value through its savings or investment component, which a term policy doesn’t have, you pay a hefty premium for this feature and for having a policy that will definitely pay out one day. A term policy will hopefully expire before you do.
Nearly every radiologist will receive a pitch at some point in their career to buy permanent life insurance. Often, the medical school or radiology department will bring someone in to “advise” residents on buying life insurance, and that person’s goal is often to sell as much expensive insurance as she can. Residents, and often well-intended departments, may not recognize that the “advisor” is a sales person that does not have the best interests of her clients in mind. Naive radiology residents and practicing radiologists being “sold” permanent life insurance is one of my top financial pet peeves.
Our chances of dying are 100%. Thus, the insurance component of permanent life insurance, which is intended to be held until death, will invariably be costlier than that of term life insurance, which provides coverage for maybe 20 or 30 years. In fact, the premiums on permanent insurance are so high that even after paying thousands of dollars in premium and commission costs, many people let their policies lapse. Let me say that again. After paying thousands of dollars in premium and commission costs, many people let their policies lapse!!! Among physicians that purchase whole life insurance, 3/4 of them regret their decision. Even among the general population, over 80% of whole life insurance policies, a product designed to be held until death, are surrendered prior to death.
For a period of years after purchase, the cash value of a whole life policy, which is based on earnings from the “investment” portion, will be less than the total of premiums paid. Thus, it may take up to 15 years after purchase before you “break even.”
In general, I don’t recommend mixing insurance with investing. There’s almost never a reason to do it. I won’t go into the tiny minority of people who might benefit from a whole life insurance policy but chances are you’re not one of them. Why do I nix policies that mix insurance and investing? Because you can almost always do better investing outside of an insurance policy.
As a personal aside, I was a school teacher before going to medical school. This was back in the early 1980’s. My annual salary was around $20,000. The school brought in a “financial advisor” (an insurance agent, really) to meet with the teachers. This advisor recommended to me that I buy a whole life insurance policy, which I did. I had every confidence that my boss wouldn’t have arranged for someone to meet with me unless that person was selling something I needed. I was young, married to a graduate student, and had no kids. We had no debt. We didn’t even need life insurance! I paid about $35 a month in premiums for that policy, which “conveniently” came out of my salary before I even saw it. To put this into perspective, $35 in 1980 is equivalent to $110 today. After a couple years I realized that I was paying for something I didn’t need and dropped the policy. So yeah, been there, done that.
Way too many of my radiologist colleagues have suffered “buyer’s remorse” from having bought whole life insurance.
How much does life insurance cost?
A healthy 45-year-old non-smoking man could get a 20-year, $500,000 term life policy for about $615 a year. In contrast, he’d have to pay $2,900 to $3,400 per year for a permanent universal life policy with a guaranteed $500,000 death benefit. Invested over those same two decades, the difference in premiums could yield more than $130,000 in savings.
Most radiologists will want at least twice if not ten times that amount of coverage. It would not be unusual for a radiologist to be paying $20,000 to $40,000 a year in premiums for permanent life insurance. The agent selling the policy may receive $40,000 as a commission. Imagine how you will feel if in 5 years you discover that a term policy is all you need and is a lot cheaper, so you buy a term policy and let your whole life policy lapse. You’ve paid well over $100,000 in premiums and fees for a policy that has little or no cash value. By the way, if you are or have been in this position, you are not alone. Way too many of my radiologist colleagues have suffered “buyer’s remorse” from having bought whole life insurance. They were sold something they didn’t need by a person who didn’t have their client’s best interest in mind when the radiologist was naive and vulnerable. I think that meets the definition of “predatory.”
Another thing I don’t like about whole life insurance is that the premiums are not only much higher than term life premiums, but they are high forever. With a whole life policy, you are locked into a high fixed expense. I personally don’t like to have high fixed expenses, especially those that are costly to extricate from, because it affords me less flexibility. Your life will change. What if you want to work part-time, transition to a lower paying profession because you got burnt out from reading a volume of radiologic exams at the 90th percentile for 15 years, or take a break from working to raise a child? With low fixed expenses you have more flexibility to make those changes. And as I’ve already pointed out, your life insurance needs will likely change over time. If you win the lottery, you might not need life insurance! You need a lot of life insurance for 25 to 40 years, but not much after that—which is what term policies are designed for. Why would you want to be tied down to an expensive policy that provides more coverage than you now need?
While I covered the subject of malpractice insurance in a previous post, here I will expand on the importance of tail coverage.
There are two types of malpractice coverage: Occurrence policies and claims-made policies.
Occurrence policies cover radiologists for events that happened during employment, even after they have left the facility and are no longer paying premiums. This is the Cadillac of malpractice insurance.
However, most malpractice policies (as many as 85%) are claims-made because they are significantly less expensive than occurrence policies. A claims-made policy covers events and claims filed only while the radiologist is employed and paying premiums. The down side of this type of policy is that coverage must be continued indefinitely to assure coverage for claims filed in the future for actions that occurred in the past. Essentially, once the policy has lapsed the radiologist no longer has coverage. In this case the radiologist can purchase “tail” insurance to protect her from the past.
If you have trouble remembering which is which, think of when the coverage is triggered: occurrence-based coverage triggers when the incident occurred, and claims-based coverage triggers when the claim is made against you. Or, you can remember that “claim is lame” (at least from the perspective of requiring tail insurance).
Physicians in all stages of their career may need tail coverage when they leave a job, change malpractice carriers, or retire. In training, malpractice coverage is not a problem, because it’s provided by the sponsoring institution. Accreditation standards require that teaching hospitals buy coverage, including tail coverage, when residents leave. Hundreds of residents and fellows (including radiology trainees) lost their jobs, and with it, their malpractice coverage, when Hahnemann University Hospital in Philadelphia went out of business. Because of the impending liability of not having tail coverage when they went to a new program, and the fact that many hospitals and insurers require tail coverage for privileges, trainees started looking into the cost of purchasing tail coverage. They received individual quotes of between $25,000 to $50,000. Eventually, and fortunately, the bankrupt parent of the former Hahnemann University Hospital agreed to buy tail insurance for the trainees (pending approval by the bankruptcy judge at the time of this writing), eliminating the possibility of residents’ losing their licenses by not having the insurance.
More than half of new physicians leave their first job within 5 years, and of those, more than half leave after only 1 or 2 years. The prospect of having to pay for tail insurance may result in a radiologist feeling forced to stay with a job she doesn’t like.
Many newly graduated radiologists never ask about tail coverage when negotiating a contract. They aren’t aware of the nuances of malpractice insurance and chances are, their training didn’t include education in the importance and art of negotiation. Large employers—systems, hospitals, and large practices—are much more likely to cover the tail than small and medium-sized practices.
Ideally, a radiologist’s employment contract will state that in the event of a claims-made policy, the employer is responsible. This is because tail coverage is very expensive. And the expense is why many employers are reluctant or unwilling to cover tail insurance. Also, the employer may feel that providing tail insurance would make it easier for the employee to leave, but that doesn’t mean it can’t be negotiated.
For example, the employer may be willing to assume part of tail coverage cost based on the length of service (e.g., a portion of the cost per year of service). Another compromise that would allay the employer’s concerns of the employee leaving is for the employee to pay two-thirds of the tail in the first year, but then the employer would pay two-thirds in the second year and the full premium in the third year and beyond.
It is also advantageous if the contract states that in the event of a malpractice suit, the employee has a right to the patient’s medical records without a subpoena, even when no longer employed. It’s important to know whether the practice will provide indemnification (i.e., cover the radiologist if the malpractice verdict or settlement is in excess of the malpractice insurance limits). A contract lawyer can be particularly helpful in explaining the malpractice coverage offered by a group.
Tail coverage premium costs are often waived for older radiologists heading into retirement, if they’ve been with the carrier for at least 5 years and are age 55 or older. This is very important to confirm because without tail insurance, you are at risk for a lawsuit for many years to come. Even in so-called frivolous suits, radiologists still have to cover the legal expenses of defending a case, which can cost upwards of $250,000. The statute of limitations varies by state, but is typically between 2-6 years. However, some states make exceptions to the statute of limitations, such that the clock doesn’t start ticking until the mistake is discovered, or in the case of children, when they reach adulthood. This means that without a tail, you are always at risk.
Speaking from personal experience
When I was a practicing radiologist at the University of Wisconsin-Madison, I was covered under the State of Wisconsin Self-Funded Liability Program for any lawsuit brought against me while I was acting within the scope of my employment. UW radiologists are covered by the State of Wisconsin medical malpractice policy under statute. The liability coverage provided by the State is occurrence based, meaning that I was covered by the State for any claims arising out of any acts or omissions during my employment, regardless of when a claim was made. This was true even if the claim was made after my employment with the University ended, meaning I didn’t have to purchase expensive tail insurance when I moved to a different job.
After reading all that, I hope you now know whether you need life insurance, and if the answer is yes, that you will get it as soon as possible (if you don’t have it already). I also hope that you will always ask about the type of malpractice coverage provided by a group that you’re contracting with, and make sure that the terms are clearly stated in the contract. Don’t feel bad about paying a contract lawyer with experience in radiology contracts in your area to review the contract.
You don’t want to miss my next post, which is about another very important type of insurance that you MUST know about—disability insurance. Cue suspense music.