Life insurance: a vital debt management and asset protection tool for young doctors
August 21, 2014 by Ike Devji
A case in a recent headline once again illustrates the importance of basic financial and estate planning for doctors, as a young medical professional’s untimely death led to her family inheriting six figures in debt.
Like most medical professionals, Lisa Mason took out loans to finance the cost of her medical education; in her case, about $100,000 to finance a nursing degree. Obtaining that loan required a co-signer, and in her case it was her parents. When Mason died, everything worked like it was supposed to, and the co-signer became responsible for her debt. This shift in primary responsibility to the co-signer caused substantial hardship on the parents, who were now faced with both the cost of Mason’s debt, and the extra expenses of raising her three young children.
As these loans were private loans (as opposed to government loans that may have qualified for discharge or financial assistance), the lenders were not required to reduce the principal or discharge the debt. Further, the nature of a student loan debt according to reports is a type of debt not typically discharged in bankruptcy.
I wish I could say that the results in this case were unusual or unpredictable, but they weren’t. There is no bogeyman to blame, and the system worked as it was supposed to. Someone took out a loan with an expectation of repayment from the borrower, and that loan required an additional guarantor to ensure that if the borrower didn’t repay the loan, the guarantor would.
So let’s look at this as a lesson and examine what could have been done better, with the right advice.
Life insurance for young and single doctors — and other professionals with debt and family? Yes. I continually talk to both young and older doctors who have an irrational resistance to life insurance, typically because of a fear of being taken advantage of in the purchase transaction and/or because of the perceived high costs to buy coverage. Assuming the doctor we are talking about does not have any medical conditions that make pricing unrealistic, I’ll tell you this is not a valid excuse. No one is going to the Bahamas by selling you a basic million-dollar term policy that, for a healthy 27-year-old, could cost as little as $300 per year.
I’ve examined estate planning, life insurance and a more comprehensive list of essential financial planning for doctors on multiple occasions and repeatedly stressed the importance of both disability and long-term care insurance for physicians. Remember, the same result would likely have occurred if the issue had been the borrower’s disability rather than death. The results would have been even more onerous for a guarantor who was either himself disabled and no longer working, or dealing with his own health care costs without the same coverage in place.
Borrowers need to carefully consider both their own debt and family obligations, and make sure they can adequately provide for unexpected exposures if they can’t pay the debt as planned, as well as providing financial support for any dependent minors. In this case, Mason left behind three children under the age of 10. Guarantors should strongly consider insuring their children (or whoever the guaranteed borrower is), and have a contingency plan in place in the event that person dies, becomes disabled or just plain defaults on the loan because they felt like it (I call this the liability of entitlement). This plan should also cover the guarantor’s own death or incapacity in some form, and should probably include some basic asset protection planning to limit their exposure to specific threats to assets and income. Even with those measures in place, you must keep in mind that as a guarantor, you will eventually have to pay something back.
How would an extra six-figure hit to your finances affect your retirement plans? I note cost here, as my experience with doctors all over the country has been that their total medical school debt typically is two to three times more than the $100,000 debt that Mason incurred for nursing school. This means that this same scenario, with medical school debt, could have cost the guarantor more than half a million dollars with interest and penalties.
