During an ER shift a few weeks ago, EMS called in a “full arrest.”  No big deal, it happens all the time.  I’ve run hundreds of codes in my twenty years of practice, which has become routine—almost boring.  I put on some gloves and took my position at the head of the bed to assess the patient’s airway.  The pt had been intubated in the field, and as he was being moved from stretcher to bed, something hit me.  This wasn’t going to be ordinary or routine.  I recognized this man.  He was a local doctor who I’ve known for 18 years. 

I’m rarely affected by what I have encountered over my 21 years in the ER, but death and mortality have been on my mind lately.  Maybe it’s because I’ll turn 50 next year, and my father and sister both died before reaching this milestone.  Perhaps it’s because I have two family friends, both in their mid-40s, who were diagnosed with cancer within the last two years.  

Either way, it seems I now regularly see patients younger than me with terminal diseases – a seeming epidemic of cancer, heart disease, and trauma in forty-somethings.  I’m sure these patients were always there, but now they jump out at me.  Besides the existential questions this stirs, I also wonder about their finances – are they financially prepared for their illness and death?  How will their families be affected?

Morbidity, Mortality, & Your Family’s Finances

There are two ways that injury, illness, and death affect your finances.  The first is the cost of medical care.  If you develop cancer or another prolonged illness, the treatment costs can be astronomical.  The second concern is the loss of income.  As physicians are high-income earners, a temporary or permanent loss of income dramatically alters your family’s already delayed financial trajectory.

While physicians earn an above-average income, they get a late start when it comes to saving and investing.  The average physician does not graduate residency until just before 30 years of age.  It can be even later for those who didn’t go straight through or took on a longer residency program.  This delay in earning an attending salary negatively affects the FI journey of physicians.  

Many physicians begin to build their families during their first decade in practice, often accompanied by increased expenses.  Children, private schools, after-school activities, new family-friendly cars, and a bigger home all tend to decrease a physician’s savings rate.  Due to the power of compound interest, a high savings rate during the first ten years of practice could set most physicians up for financial independence.  Saving and investing more than $100,000 a year turns into a lot of money over a decade.  Unfortunately, this first decade often coincides with the most expensive time in physician’s lives.

Difficult Conversations

If the increased threat of terminal disease and incapacitating illness starts to occur in the mid-40s, this doesn’t give the average physician a lot of time to secure their family’s future should they be unlucky enough to be affected.  

No one thinks they will die young.  It’s natural for us to put this out of our minds.  We’d go crazy if we went around thinking about all the bad things that could happen all the time.  However, the possibility exists. 

About a year ago, a family friend in his late 40’s started feeling a pain in his thigh.  After a few months, he had it checked out and discovered he had an aggressive osteosarcoma.  First, he lost his leg, then about nine months later, his life.  

While nine months may be enough time to put a plan in place for your surviving spouse, sometimes it isn’t.  You can’t buy medical, disability, or life insurance after your diagnosis.  You can’t go back in time and save/invest more money for your family’s future. 

A conversation with your spouse, or even yourself, about illness and death can be difficult.  No one wants to face their own mortality.  However, to be truly prepared, we must allow ourselves to think about unpleasant possibilities.  Once we have completed the work of preparing our financial lives, we can return to the sweet land of denial.   

Preparing for the Unexpected 

How do you prepare financially for an unexpected injury, illness, or death?  

Assess Your Family Situation

As always, personal finance is personal.  Are you married?  Do you have children, or do you plan on having them?  Does your spouse work?  Do you homeschool your children?  What kind of education and/or income does your spouse have?  To what kind of lifestyle are you accustomed?  Is your house paid off?  How much savings do you currently have?

The answer to these questions and many more will affect your need to be prepared.  If you have a two-physician income and never plan on having children, this blog post is likely not for you.  The odds of both of you having an accident or illness that would prevent you from working are pretty low.  And, if you both die at the same time in a car crash, you don’t have any dependents for which to provide.

Conversely, if your spouse does not work and stays home with multiple children, your need to be prepared is significantly higher.  This is especially true if your spouse does not have the educational requirements or work background to obtain a high-paying job.

You will need to assess your own unique set of circumstances and desires for the future.  If it was important for you for your spouse to stay home with your children throughout their lives, does this desire change if the primary breadwinner dies?  Once you know what you want, you can develop a plan that will allow you to work toward that goal.

Medical Insurance 

Health insurance is ridiculously expensive yet utterly necessary to protect your family’s finances.  Medical debt is a leading cause of personal bankruptcy.  One of the few benefits of the current trend of physicians being employees is that you should have medical insurance provided as part of your compensation package.  If you own your practice or work as an independent contractor, you must have at least a catastrophic health insurance policy.

Trying to skate by uninsured in order to increase your spending, or even to increase your saving/investing is dangerous.  One accident or illness could cost your family hundreds of thousands of dollars.  And if it’s fatal, you won’t be able to work your way out of the hole you have created.   

Disability Insurance

Injury and illness often come with an extended period where you can’t work.  I have another family friend who was diagnosed with metastatic colon cancer in his mid-40s.  Unfortunately, he did not have disability insurance.  He needed surgery and chemotherapy that prevented him from working for an extended period, forcing his wife to have to return to work to cover their living expenses.  While he was eventually able to briefly return to his career, the illness’ progression has now again left him unable to work.  If he had proper own occupation disability insurance the last two years would have been easier from a financial perspective. 

I believe all medical professionals should acquire disability insurance during their training, if possible, and if not, as soon as they start working.  Your ability to generate income is your greatest asset as a medical professional and must be protected.  I previously wrote “Why Disability Insurance is Important for Medical Professionals” on this site.  

Life Insurance 

When you think about how to protect your family against your untimely death, life insurance is likely at the top of your list.  While I believe that having term life insurance is essential for every medical professional who has someone depending upon their income, the question becomes, is it enough?

A $1,000,000 life insurance policy sounds like a lot, but even with the proceeds being tax-free to the beneficiary, it may not be sufficient.  Using the 4% Rule, this equals $40,000 of annual income.  While this will keep your family off the streets, it may not keep them in the same house, depending on your mortgage.  

The White Coat Investor has an article titled “How Much Life Insurance Do I Need?” which concludes the average physician should carry between $1-$5 million.  If your policy is on the lower end of this spectrum, you will likely need to make up for it with other sources.    

Aggressively Pursue FI

If you really want to protect your family from the financial fallout of your early demise, aggressively pursue financial independence.  The FIRE movement focuses on keeping your expenses low to create a high savings rate so you can invest and retire early.  FIRE’s principles also cover you in the case of an early death or disability.  The same 4% rule that tells you when you can safely retire can also determine when your family’s future has been secured, even if you aren’t around to share it.    

A great introduction to personal finance, FI, and FIRE can be found in “Personal Financial Basics for Medical Professionals, Part I” or in Mr. Money Mustache’s “The Shockingly Simple Math Behind Early Retirement”.  

Do Some Advanced Paperwork

If you die suddenly, your spouse should not have to worry about cash flow.  It won’t be an issue if you have an emergency fund in a jointly held account.  However, if you keep separate finances, it can be complicated for your spouse to access your accounts unless you have taken appropriate steps beforehand.  Ensure you have your spouse named as a beneficiary or have a POD (payable on death) designation.  This will allow your spouse to collect the money almost immediately.  

State rules vary, but your spouse should inherit all your community property when you die.  Non-community property will go through probate and be decided by the court unless you have a last will and testament.  Dying without a will can make things more complicated for the surviving spouse, and if you both die in an accident, can be a nightmare for your heirs.  Strongly consider a will.    

You also need to have a beneficiary designation on all your retirement accounts and insurance documents.  If you set up these accounts before you married, or if you have changed spouses, you must update them to fit your current wishes.  

Spending a little time in advance to have all these designations in place will help your loved ones after you pass.  If you have a prolonged illness, you should have time to make these changes, but we never know how long we have.  It’s best to have this all done while you are healthy.  

How Much Money Do You Need to Leave Behind?

My wife quit her job when we got married and has stayed home with our kids since then.  While she could get another job, it is unlikely that she would be able to replace my physician’s salary, especially after a prolonged absence from the workforce.  Therefore, I have always felt a responsibility to take care of her and my children should I die young.  While not the only motive, it was always on the list.  But how much do I need to leave behind?

Warren Buffett famously stated that he wanted to leave enough money to his children so they could do anything they wanted, but not so much that they could do nothing.  Warren is in his mid-90s, though.  If I die before my kids are grown, I want to leave enough behind so that my wife can do nothing . . . nothing except care for our children.  

You can estimate your family’s financial needs as follows:  

Add together 

• 25x your annual expenses (aka the 4% rule) 
• The remaining mortgage amount (unless your family would want to downsize without you)
• The estimated education costs for your children (or your spouse if they need to go back to school in order to obtain a new job)
• Any non-forgiven private student loans, 
• An estimate for other large ticket items outside your annual budget (a new car every 7-10 years and home maintenance costs).  

Then subtract 

• Your current savings
• Your current securities investments
• Investment real estate 
• Retirement account balances 

Any positive number is the shortfall you will need to cover with life insurance.  As you save and invest on your way to FI, the amount of insurance you need will become less.  

Conclusion 

No one likes to think about their own morbidity or mortality, but denial won’t stop bad things from happening to good people.  Following the steps outlined above will give you a head start toward securing your family’s financial future, even if you’re not around to see it.  

These days, when I diagnose cancer or run a code on a 40-something, it hits closer to home.  I feel for the patient and their family and hope they are financially prepared for this dreadful day.  I think about my own family, and I take solace in the fact that they will be taken care of should I be on the other end of the stethoscope.