1 month ago
9 
Tail Coverage
I got an email that was titled “American Physician Partners: Tail Coverage Debacle.” And the emailer said,
“I don't know if you already did, but I didn't see it and was wondering if maybe you could re-comment, as a lot of us used to work for American Physician Partners before they let us all go without much to do at the end of July 2023. Have you ever done a discussion on insurance coverage, specifically tail coverage, when the company just disappears and you're left without because they didn't pay it, because they folded or some variant of that?”
It's interesting because at about the same time, we got this Speak Pipe from Mohamed.
“Hey, Dr. Dahle, this is Mohamed from the Midwest. I have a question. I'm a surgeon. My wife is an OB-GYN. She practices both OB and gynecology, and we had a question. She is debating to take a slight leave from work. She's less than 55 years old, and we're trying to understand the implications of that in terms of tail coverage and needing to pay for tail coverage and the cost associated with that. Any advice on that would be great.”
OK, let's talk about tail coverage. What exactly are we talking about here? We're talking about malpractice insurance. And for most of you listening to this, you have a malpractice insurance policy of some kind. It is one of two types. The first type is occurrence. You buy a policy for this year, and anything that happens during this calendar year, if there's a claim resulting from it, it's paid for by that occurrence policy. No matter when the claim is made, if the claim is not made for six months or a year or two years or 19 years, that occurrence policy covers the defense of that claim. It covers any settlements offered. It pays any judgments that come out of that claim, at least up to policy limits. That's kind of the gold standard for insurance coverage.
This kind of insurance has been around for a long time, but I feel like it's becoming a little bit more common these days. In the olden days, people bought coverage that was basically claims made coverage. That means if something occurred during 2025, it covers any claims made during 2025. That works fine as long as you keep working and keep buying claims made policies. But what happens if you stop working? What happens if you retire? What if there's a claim next year for something you did this year? Now, you don't have any coverage. The solution to that is a type of policy called tail coverage. That means it's the end part of your coverage, the end of your career; it's the tail, get it? The idea was when you quit practicing, you bought tail coverage and that covered anything that happened prior to then if a claim was later made.
How long do you need tail coverage? The statute of limitations on malpractice in most states is something like two years. But it's often two years from discovery of the problem or two years from the time that minor turns 18. So, it can be a lot of years. It could potentially be decades. It's important coverage to have. The last thing you want to do is retire; have some claim come up that you don't have coverage for; and, all of a sudden, now you're out the couple million dollars you were planning to live on in retirement. It's a real problem. You have to do something about that if you're in a situation where you find out or you knew ahead of time that you had claims made coverage. You've got to know about the tail.
Let me tell you a story. When I joined my current emergency medicine group in 2010, we had claims made coverage. And I asked, “Well, what happens if you fire me or I quit and move on to another job?” “Well, then you'd have to get a tail coverage,” they told me. I asked how much that would cost, and the managing partner of my group did not know the answer. He had to go to the insurance company and ask. What we discovered is that the amount was the equivalent of two and a half years of malpractice coverage.
I think at that time my malpractice coverage was like $16,000 or $18,000 a year. Thankfully, it's gone down for emergency docs in Utah since 2010. It's a lot cheaper now for me, especially now that I'm only working part-time. But that's what it was. For a year of claims made coverage, it was $16,000 or $18,000 a year. When we got the quote for the tail, it was about $50,000. It was not insignificant. What does that work out to be? Two and a half, three years of coverage. I don't know that that's some sort of a rule of thumb, but it's not cheap is the bottom line. It's going to cost you more than a year of your regular coverage. This is not something you can ignore. When you're negotiating a contract, you need to know what kind of coverage you're getting. And if it's claims made coverage, who's going to pay for the tail under what circumstances?
What I ended up doing as I negotiated this pre-partner position with my group is I negotiated that if I left, I'd pay for the tail. If they fired me, they'd pay for the tail. It all worked out fine. Obviously, I'm still in the group 15 years later, and we've subsequently swapped to an occurrence policy. This was never an issue for me. But for these two people—the one sending in the email where the company just went kibosh, and the other one who wants to take some time off but has claims made coverage—you don't have a lot of choices here. You can either buy the tail yourself, and, like I said, it's probably not that cheap. You can roll the dice and just hope a claim doesn't come in. Or there is a third option. This is one I recommend in most cases. It might not work for the person taking a few months off or whatever. In that case, I would just try to keep your malpractice coverage going, even if you have to pay the premiums yourself.
But what I would do in most cases, if you're changing jobs and you need tail coverage, is I would talk to the new employer, the new insurance carrier that's going to be covering you afterward, into giving you nose coverage. Get it? Tail coverage is at the end and nose coverage is at the beginning. Essentially you're buying your tail coverage from your new insurance company. And that's what I'd recommend you try to negotiate because this is not something you can ignore. Fifty thousand dollars is still a lot of money to most doctors. And I'm sure if you're an OB-GYN, it's probably more expensive than that. But when I got a quote for it for emergency medicine back in 2010, that's what it was. It was a little over $50,000 to buy that tail coverage. I suspect it's a little bit cheaper now for emergency medicine. It's probably a lot cheaper for a lot of other specialties, but this is something that definitely needs to be on your mind when you're negotiating any sort of a contract that involves insurance coverage.
More information here:
4 Malpractice Insurance Pitfalls to Avoid
What to Negotiate for in a Physician Contract
Can Whole Life Insurance Be a Good Tax Strategy?
“Hello, my name is Jamil. I am a physician. My CPA who is also my tax planner recommends me to purchase whole life insurance as a part of a tax strategy to save income tax. I am now 45 years old. I already have two term life insurances, so I do not need a death benefit. The whole life insurance is only to save tax. The annual premium is $100,000 a year. I have 92% cash value every year for 15 years against my death benefits, which I don't really need. Would you recommend me to go ahead?”
We are not big fans of whole life insurance here at The White Coat Investor. I don't have anywhere near enough information about you or your situation to decide if this is a good idea for you or a bad idea for you. Most likely, it's a bad idea for you because it almost always is a bad idea to buy whole life insurance. There are a few niche uses for it. Lowering your tax bill this year is not really one of those. If you really don't want a permanent death benefit, you've almost surely not bought something that you should have bought.
Whole life insurance is a lifelong insurance policy. No matter when you die, whether you die at 35 or 65 or 95, it's going to pay that death benefit to your heirs, to your estate, whatever. That's the main purpose to buy it. You're buying a policy that's going to pay out no matter when you die. If you buy a term life policy at age 35 and it's a 30-year term and you make payments on it until you're 65, then it's done. Most of the people who buy it aren't going to die before 65. They're going to die after 65, and there's not going to be a payout to their heirs or their estate or whatever. Because of that, it's much cheaper to buy whole life insurance. The truth is most of us don't have a permanent need for a death benefit. We have a temporary need for a death benefit. We need it for 15, 20, 25, 30 years, something like that. After that time period's up, we're financially independent. We have plenty of money. If we died, our loved ones could live off what we were planning to live on for the rest of our lives.
Buying insurance for a period of time in which you don't need insurance is a good way to waste money. That's the main problem with whole life insurance. If you don't need a permanent death benefit, don't buy a policy that offers a permanent death benefit. Sometimes people get talked into buying whole life insurance as some sort of a retirement account. And mostly it's because people don't realize you can always invest more in your taxable account. Just because you maxed out your Backdoor Roth IRA or just because you maxed out your 401(k) or your 403(b) and your 457(b) or whatever, you feel like you can't save any more for retirement. That's a bunch of crap. You can always save more in your taxable account. It's probably going to get you better returns doing that, especially if you invest relatively tax efficiently and you're investing in relatively aggressive investments like stock index funds or real estate or something like that. You're probably going to come out ahead versus investing in whole life insurance.
A big problem for doctors is they come out of residency and they get their first tax bill after that first year. They gasp when they realize they're paying more in taxes than they used to make as a resident or a fellow. And that's really hard for them. They feel like they need to do something about that tax bill. But I've got news for you. This is the way our progressive tax system works. Mitt Romney got much maligned for it back when he was running against Barack Obama for the presidency. But he correctly pointed out that something like 47% of taxpayers don't pay income tax. That is a true fact. They pay payroll taxes, they pay sales taxes, property taxes, those sorts of things. But they don't actually pay income taxes. It's a progressive system. A whole bunch of people have a negative income tax or pay nothing in income tax. The people who pay all the income tax are those who earn a fair amount of money. And as a physician, if you're doing this right, you're making a fair amount of money. You're making $200,000, $300,000, $400,000, $600,000, $800,000 a year. Maybe your spouse is also earning some money. When you're earning that sort of money, your tax bill is not insignificant. It's usually some sort of a six-figure amount. So, you start thinking, “I have to do something to reduce this.”
The truth is that you reduce your tax bill mostly by living your financial life differently—not by filing your taxes in some sort of unique way, not by coming up with some sort of trick with your taxes, like buying whole life insurance. You live your financial life differently. You save more for retirement. You make tax-deferred contributions instead of Roth contributions. You give more money to charity. You get married, you have kids, you buy a house, and now you can all of a sudden deduct your mortgage interest. You move to a different state with a lower state income tax. These are the sorts of things that really make a dent when it comes to lowering your tax bill. When it comes to investment-related taxes, you try to do some tax-loss harvesting. You try not to buy and sell willy-nilly and pay a bunch of capital gains taxes. You try to invest in tax-efficient investments inside your taxable account. You use depreciation to shelter your real estate income. You try to learn how to be tax-efficient when it comes to your investments.
But for the most part, buying a whole life insurance policy is not a great way to do this. I can't tell exactly what your setup is. Maybe this is being bought by your business or something, and so somehow it's qualifying as a business tax deduction. That's the only way I can think that buying a whole life insurance policy is going to save you any taxes this year.
Whole life insurance does have some tax benefits. As the money grows inside the policy, you don't pay taxes on the dividends because technically they're returns of premium. You paid too much in premium and it's being returned to you, and that's not taxable. It grows in sort of a tax-protected way. But if you surrender that policy and take your money out of it, assuming there's a gain (which there often isn't in the first 5-15 years or sometimes longer), you're going to pay taxes on it when you surrender that policy. You're going to pay those taxes not at long-term capital gains rates but at ordinary income tax rates. What a lot of people do that have whole life insurance policies, whether they meant to buy them or not, is they borrow against the policy. When you borrow against the value of your home, the value of your car, the value of your whole life policy, or the value of your investment or portfolio, that's tax-free. It's not interest-free, but it's tax-free.
A lot of people in the last few years of life, when they have highly appreciated shares of mutual funds or stocks in their portfolio, instead of selling them and paying a bunch of capital gains taxes, they just borrow against them and pay a little bit of interest in the last year or two of life. Then their heirs benefit from the step up in basis at death, and nobody ever pays those capital gains taxes. That's a conscious decision lots of elderly people make to try to pay a little bit of interest instead of a lot of capital gains taxes. The one real benefit of whole life insurance that's pretty unique is if you do a partial surrender of the policy. You surrender as much of the policy as will get you basically what you paid in premiums. The tax benefit here is that with that partial surrender—basically the premiums, the principal, the basis, whatever you want to call it—comes out first. You paid $300,000 toward this policy, and 30 years later, now it's worth $450,000 or something. If you only take $300,000 out as a partial surrender, that comes out tax-free. It's your principle.
That's the cool tax benefit of whole life insurance. The rest of it is just kind of the way the tax world works. But that part is cool. It's better tax treatment than you get with an annuity, for instance. Even when you sell something that's appreciated in your taxable account, some of it is going to be principal and some of it is going to be appreciation. You're going to pay capital gains on the appreciation portion of it, but you can't just pull out the principal like you can with the whole life insurance policy. That is a cool feature of whole life insurance.
The problem is this whole time you've got this investment, you're paying for insurance you don't need and you're getting a lousy return on the cash value portion of this policy. It's just one pot of money. The death benefit is the cash value. If you borrow a bunch of money against the policy, that is cash value you're taking out by borrowing against it. Let's say you've got a death benefit of $1 million and you borrowed out $800,000 to spend in retirement. When you die, it's not going to pay you another million dollars. It's only going to pay you $200,000. It's one pot of money there. That's the way those policies work.
A lot of people get sold these policies because they're products designed to be sold. They're sold to you by people who are paid very well to sell them. They get paid big commissions. A typical commission on selling these things is something like 50%-110% of that first year's premium. If you're buying a policy that's $100,000 a year, that guy who sold it to you is getting paid $50,000 or $100,000 to sell it to you. That's a serious conflict of interest. If you're taking financial advice from somebody who is financially benefiting from selling these things to you—whether they call themselves a CPA or a tax planner or a financial advisor—that's a real problem. Because they're selling you something that you probably don't want once you understand how it works. You almost certainly don't need it if you're in a situation like you are, and that person is selling you this product designed to be sold, not bought.
As they become more financially literate, a lot of white coat investors realize they own one of these things. I did, too. I owned a whole life policy for seven years. Thankfully, mine was not $100,000 a year premiums. Mine was pretty trivial. In fact, as I was calculating my net worth for 2004 for a talk I'm giving, I saw that in 2004, I had $540 in cash value in whole life. I didn't keep it very many years beyond that. Mine was a pretty tiny policy, but I dumped it anyway because you know what? I didn't need it. It was sold to me inappropriately. It made me angry every time I looked at it. Frankly, my overall return in those seven years I owned it was minus 33%. It was terrible. Lots of white coat investors that do this realize they've been conned essentially into buying something they don't want and they surrender it and walk away.
If you have a big loss, it can make sense to exchange it into a very low cost variable annuity, like those at Fidelity, and let it grow back inside that annuity to basis to the amount that you paid for those whole life insurance premiums. Then you surrender the annuity and walk away essentially with your money. What that gets you is a little bit of tax-free growth as it grows back to basis. But most people just kind of surrender it and walk away and count their losses as a stupid tax or whatever you want to call it. It's just the price you pay for making a mistake because you didn't know that much about how the financial world works.
But when I hear about a doctor buying a huge whole life policy, like $100,000 a year, the first question I ask them is, “How much money do you make? How wealthy are you? Do you really not have a better use for your money than dumping $30,000, $40,000, $50,000, $100,000 a year into whole life?” The answer is almost always that they have a better use for their money. They might have a mortgage they're paying 7% on. That's going to way outperform your whole life insurance policy as an investment. Maybe they need to save for their kid's college or maybe they're not putting enough away for retirement already. Maybe they need to buy a car or whatever. Everyone's almost always got a better use than funding some huge whole life insurance policy. I'll bet you do, too.
I've got a couple of blog posts on the website. If you go there and search “Dump,” these posts will come up. One is how to evaluate your own whole life insurance policy. That basically involves getting an in-force illustration calculating what your return is likely to be going forward. Sometimes even though you bought something you shouldn't have bought going forward, the return is acceptable to you. Maybe you'll make 5% going forward, and you're OK with that. Great, keep it. I don't care. I'm not getting money for you to dump your whole life insurance policy. You want to keep it, keep it.
The long-term returns on a whole life insurance policy are not awesome. Assuming you keep it to your life expectancy, like five decades, the returns are still not great. The guaranteed returns tend to be something like 2%. The projected returns tend to be something like 5%. And that's what you're going to get if you hold onto this thing for life. No matter what the dividend rate is, that's what the returns actually are on what you're paying in premiums. If that's OK because those crappy return years are heavily front-loaded, if you've had this thing for 10 or 15 or 20 years, you might just want to keep it. But probably not if you're having to pay out $100,000 a year toward it. You're probably not going to want to keep it.
The other blog post just explains to you how to dump it if you want to get rid of it. That's often just surrendering it. Sometimes it's exchanging it into an annuity. You can also exchange the cash value into a long-term care policy, if for some reason that's something you're interested in. I think most white coat investors are probably planning to self-insure that risk by retiring on a multimillion-dollar portfolio. But if you're one of the people that thinks a long-term care policy is really attractive to you, you might want to exchange it into that. I hope that's helpful to you. I'm sorry you're just discovering that the person you thought was a financial advisor is actually a salesperson and that you probably bought something you don't actually want to own—especially if you don't want the death benefit. That is the reason people buy these things.
Anybody who's got a whole life policy and you're thinking about getting rid of it, make sure you put the term life insurance coverage you need in place before dumping the whole life policy. The most important thing when it comes to insurance is having something in place in the event that you need that coverage. The nice thing about a whole life policy is that it does have a death benefit. So, if you died tomorrow, it would pay your heirs something.
More information here:
Is Whole Life Insurance a Scam?
Should You Buy an Annuity with a Tax-Deferred IRA?
“Hi, I have two questions. First is, where do I find the WCI recommended financial advisor list? Second question, I have about $300,000 in a tax-deferred IRA. My advisor suggested individual modified single premium fixed indexed annuity policy from SILAC Insurance Company. The product name is Teton. There's a 10-year with an Elevation Plus rider. Is it good advice?”
I get questions like this all the time from white coat investors, and questions like this bring a lot of people to The White Coat Investor and get people started on their journey toward financial literacy. I love these questions. Those of you who've been listening to this podcast for years or reading the blog or reading my books know how this answer is going to go. Lakshmi, you have made a common mistake, one I have made, one that maybe most white coat investors have made. You have mistaken a salesperson for a financial advisor. This is somebody who is selling you a product—in this case, some sort of indexed annuity. Just because it has the word index in it and index funds have the word index in them does not mean this is a good thing.
They are selling you a product, not giving you unbiased advice. Almost surely this is bad advice for you. I don't have all the details of your financial situation. I guess it's possible somehow that this is appropriate for you, but I doubt it. There's almost surely a better use for your money, for your saving strategy, for your investment strategy than buying some index-linked annuity like the one you're being sold by somebody who is pretending they're an unbiased financial advisor. What should you do? First of all, don't do anything right now. If you buy that annuity, you're going to end up with some sort of a surrender penalty when you try to get rid of it in six months, when you realize that you don't actually want this thing.
I would recommend you get a real financial advisor. If you're not educated enough yet, if you're not financially literate enough yet to function as your own financial advisor, or if you just want to have somebody there to help you, I would recommend you get a real financial advisor—somebody who charges fees for their advice. These are generally registered investment advisors. They often have a certification like a Certified Financial Planner certification, a CFP, and they work as advisors. They don't get paid for selling products. They get paid for giving you advice.
We have a list of recommended advisors, people that have been vetted by us initially and in an ongoing way by white coat investors. If we get a bunch of complaints about an advisor, they come off our list. We don't care that they're paying us money to be on the list. They come off the list. It's a lengthy list. We've got a lot of people on it because there's a lot of people that need advisors. An important aspect of that is having a good fit with your advisor. But you can find these people we recommend by going to whitecoatinvestor.com. And if you look at the tab at the top, it says Recommended. And as you scroll down that, you will see student loan refinancing companies, insurance agents, physician mortgage loan companies, and one that's labeled Financial Advisors.
I would be willing to bet dollars to donuts that not one advisor on our list is going to tell you to go ahead and buy this thing that your current “advisor”—and I put that in quotes—is proposing that you buy from them. It sounds like a bad idea. It sounds like you're being ripped off. This is not uncommon, but you need to get yourself a real advisor and get some real financial advice. That's going to cost you. These folks charge thousands of dollars a year for advice, but it's going to cost you a whole lot less than doing the wrong thing, which is what it sounds like you're about to do.
To learn more about the following topics, read the WCI podcast transcript below.
Buying I Bonds with your tax return Discussion with Dr. Jim Dahle and Dr. Mushir Hassan about working in the insurance world as a doc Escrowing home insuranceMilestones to Millionaire
#212 — Engineer and Surgeon Couple Become Millionaires
This engineer and surgeon couple have become millionaires just a short time after she completed training. They hit this impressive milestone before she even began practicing. They have a very impressive savings rate, and they were building wealth while she was in training and he was working as an engineer. They lived off of his income and saved hers while she was in residency. Their next financial goals are to reevaluate their savings plan, automate savings, and learn how to spend more.
Finance 101: Estate Taxes
Estate taxes exist to prevent wealth from accumulating indefinitely in the hands of a few families, ensuring a more balanced distribution over generations. The US federal estate tax applies to individuals with significant wealth at the time of death, taxing about 40% of the estate above a certain exemption threshold. In 2025, this exemption is set at $14 million for individuals and $28 million for married couples. The gift tax is part of the estate tax system, limiting tax-free annual gifts to $19,000 per recipient. While this tax may seem daunting, the vast majority of people won’t be affected since their estates fall below the exemption limit. Those with higher wealth can still reduce their taxable estate through strategic financial planning, such as charitable donations, trusts, and early gifting.
What many people overlook is that several US states also impose their own estate taxes, with exemptions often much lower than the federal threshold. States such as Washington, Oregon, Minnesota, Illinois, and New York have estate taxes, while others, like Kentucky and Nebraska, impose inheritance taxes that tax heirs rather than the estate itself. Some states, like Maryland, have both taxes, making them particularly costly places to pass on wealth. In states with lower exemption limits—such as Massachusetts ($2 million) and Oregon ($1 million)—many more individuals could find their estates subject to taxation, making it essential for residents to plan accordingly.
If you live in a state with an estate or inheritance tax, understanding the specific rules and exemption limits is crucial for effective estate planning. While these taxes primarily affect wealthier individuals, proper planning can significantly reduce tax burdens. Strategies like moving assets into trusts, charitable giving, or even relocating to tax-friendlier states can be worthwhile considerations. While the southern half of the US largely avoids these taxes, many northeastern and upper Midwestern states impose them. By staying informed about both federal and state estate tax laws, you can ensure your assets are distributed according to your wishes while minimizing tax liabilities.
To learn more about estate taxes, read the Milestones to Millionaire transcript below.
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WCI Podcast Transcript
INTRODUCTION
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.
Dr. Jim Dahle:
This is White Coat Investor podcast number 409.
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All right, welcome back to the podcast and thanks everybody for what you do out there. If you're on your way to work, way home from work, had a bad day today, out walking the dog or exercising, whatever you do while you listen to this podcast, know that you're appreciated and if nobody else has said thank you to you today, let me be the first. Thank you for what you're doing.
This podcast is aimed at high-income professionals. Most of our listeners are doctors and you all spent a lot of time learning your craft and trying to be the best you could so that you can help as many people as possible and you deserve the high compensation you get from that. But it's not that hard to feel unappreciated sometimes and you're asked to do a lot so I appreciate you.
It's interesting, we're recording this on February 20th. This is one of the last podcasts I'm recording before we go to San Antonio for WCICON25. But it'll be one of the first podcasts that runs after the conference and in fact, when you're hearing this, it will be the day that ends our presale for the 2026 conference.
WCICON26, The Physician Wellness and Financial Literacy conference is going to be in Las Vegas. It's going to be the JW Marriott in Las Vegas. That is not on the Strip. It's 15 or 20 minutes away from the Strip. And so, it's a really nice resort down there. If you want to go in and have the Las Vegas Strip experience, you can go in and do that in the evenings or whatever but you don't have to have a Las Vegas experience to come to this conference. In fact, I'm told the way the hotel is set up, you don't even have to walk through the casino at any point during your stay there.
It's going to be a little bit later than this year's conference. It's March 25th through 28th, 2026 and with this presale you're getting $500 off. A general in-person ticket is $1,499. That's regularly $1,999 and the premium in-person ticket is $1,999. It's regularly $2,499.
If you go to wcievents.com, today is the lowest price you're ever going to get on next year's conference and you can get that by signing up today for WCICON26. It's a fantastic conference. I'm sure we'll have lots of great things to say about this year's conference by the time I've actually been there but as I'm recording this, I haven't actually been to this year's conference yet. So, looking forward to seeing a whole bunch of you down there this year.
Let's get into your questions. This podcast is driven by you, almost entirely. Very rarely do I talk about something that I feel like it needs to be said out there. It's almost all driven by your questions, your feedback, the things you guys want to hear about and today is no exception.
BUYING I BONDS WITH YOUR TAX RETURN
This is an email I got from somebody that thought this was good information to pass along to you guys. He writes in, “I wanted to let you know I just filed my taxes for 2024 and there's no longer an option to purchase $5,000 in I bonds with your tax refund. The Biden administration adjusted that option. As of January 1st, 2025, it doesn't exist. This was a nice way to obtain more I bonds on top of the $10,000 limit. So I wanted to make you aware in case your readership had questions about it. Thanks for all you do.”
All right. Well, I appreciate that information. And for those who aren't aware, it's true that option for buying I bonds is gone. It used to be you could buy $10,000 electronically at your Treasury Direct account, but you could buy another $5,000 with your tax refund. So if you're doing married filing jointly, you could each buy $10,000 in your Treasury Direct account and then you get another $5,000 with your married filing jointly tax refund.
It wasn't a great way to buy I bonds in the first place. Getting rid of it just reduces complexity, let's be honest. But the big problem with I bonds is if you want to make them a significant part of your portfolio, you better not be very rich yet because you can only buy a little bit a year. $10,000 for you, maybe $10,000 for your spouse, maybe $10,000 for your LLC, maybe $10,000 for your trust.
And then you got to start coming up with new entities if you want to buy more. So if you wanted to invest $250,000 into I bonds this year, it's just not going to happen. And so unless you are, I don't want to say poor because poor people don't buy $10,000 worth of I bonds at a time, but if you've got a multimillion dollar portfolio, you probably can't add these as a significant asset class to your portfolio.
If you are just starting out and you like the concept of an I bond. It's inflation adjusted. It really doesn't go down in principal value. They're very safe investments, not with a hugely high expected return or anything, but they're very safe investments. And if you're just getting started and they're attractive to you and you think buying $10,000 or $20,000 a year is going to keep up with how much you're investing each year, they could be a significant part of your portfolio. But for lots of high income earners, these just don't work.
We tried to add some a few years ago, and I don't know, we've got a very low six figure amount in I bonds after a few years, but it's just not enough to move the needle for us. I think we're probably getting rid of ours this year. Not that I have any problem with I bonds, it's just additional complexity in our portfolio that we don't really need.
INTERVIEW WITH MUSHIR HASSAN ABOUT WORKING IN THE INSURANCE WORLD AS A DOC
All right. We got a question, a request from a podcast listener to get someone who works for an insurance company on the podcast. And a few weeks ago, I passed that request along to you and said, “Hey, any of you that work for an insurance company, we'd like to bring you on the podcast.” Insurance company executives are getting gunned down and they thought it'd be interesting to hear from the other side.
Well, one of you volunteered to come on and talk about what it's like to work on the other side. And I really think there's a lot to learn from that perspective, not only as a consumer, but as a doctor. So, let's get him on the line and let's talk about it for a few minutes.
Our guest today on the White Coat Investor podcast is Mushir. Mushir, welcome to the podcast.
Mushir:
Thanks Jim. Thanks for having me on.
Dr. Jim Dahle:
Now we're bringing you on as requested by a number of White Coat Investors that kind of wanted to hear more about what it's like to work on the other side of the discussion that docs often have with health plans, with health insurance companies, etc. People have requested, “Hey, we want to hear from a doc who's out there looking at all of these pre-approvals and those sorts of issues people run into trying to get insurance companies and health plans to cover procedures or medications or whatever.”
And you've had kind of a broad career and been able to kind of work on both sides of that interaction. So, why don't we start with you talking just a little bit about your career journey, what you trained in, what you did at first and how that's progressed over the years.
Mushir:
Sure. I did a busy primary care practice in suburban Milwaukee for 25 years. I'm actually still practicing that I do volunteer in FQHC two days a month just to keep my clinical skills up. But my full-time job now is I'm the chief medical officer for a local health plan.
I got there by doing some hospital administrative work as a chief medical officer for a local hospital system from 2016 to 2021. And that whole journey starts with a lot of docs. When you're affiliated with a hospital, they ask you to do some committee work and eventually someone starts tapping their shoulders like, “Hey, you seem to like meetings, maybe you should do some more meetings and help lead on some of these things, whether it's P&T or Department of Medicine, what have you.”
I think once you start to realize that, “Hey, there's probably some benefit to having docs at the table where decisions are made that can influence how practices and care is delivered, probably important to have our voice in the room to do that.” That's always been a personal gripe of mine and a desire for me to say it's probably better to be involved to see if you can make things better for both doctors and patients, if you can influence how policies are laid out.
Dr. Jim Dahle:
Yeah, for sure. It sounds like relatively early in your career, you started doing quite a bit of administrative kind of work. And then at some point the offer was made for you to work, and you're careful to distinguish this, work for a health plan, not necessarily a health insurance company, but to work for a health plan on the other side to try to help them appropriately cover medical expenses among those on the plan. Tell us about that transition.
Mushir:
Sure. I was asked about “Do I want to come over to do more work on the health plan side?” My initial response was no, because health insurance companies, I thought, had very negative reputation. I thought they were evil. But the person that hired me, my CEO, said “Why don't you try doing some UM work initially, part-time, and see if you like it?”
And once you get exposed to seeing how the decisions are made, whether folks may have familiarity with MCG guidelines that are sort of evidence-based databases that are used to help judge what is appropriate for, say, inpatient care versus observation, or what's appropriate for newer technologies that are coming to the fore for coverage, then you see that, okay, there's actually some science behind why people will say no. Whether something is considered to be more experimental in the clinical trial phase versus, no, this is standard accepted practice that everyone's doing now. We should be paying for this as standard of care.
And once I saw that there was some degree of science that was behind it, and it wasn't just strictly people doing denials simply because they wanted to have a certain threshold met of denials so they can cover financial losses or gains, then I was more open to the idea of being more integrated with the health plan.
I think it's important to also understand that a health plan versus a health insurance company, health plans that are owned by hospital systems, any profits they go back into the community via the hospital. And so, I think that's an important distinction to make. There's no answering to Wall Street, if you will, that occurs on that side.
I would also, though, stick up for some of the health insurance folks that are CMOs to say that they're also using similar guidelines that I'm using to try and have some degree of evidence behind the why people get to “no”.
Now, as a former primary care doctor, my desire is how can we get to “yes” more quickly and with as little administrative burden as possible? How can you automate things? How can you remove obstacles so people can get to yes more quickly? I think that's part of why I wanted to go into this role is having had the two decades of primary care experience, you knew what frustrated you. The frustration was the stack of faxes at 05:00 P.M. that you had to get through that no one's compensating you for, that you kind of have to go through the doldrums to get done because you're advocating for your patient.
Dr. Jim Dahle:
Yeah. Now, I think you're assuming a little more familiarity with the process than maybe a lot of docs have. You talk about these guidelines that are available out there for what should be covered and what shouldn't be covered. Who writes these guidelines? Where do they come from?
Mushir:
The guidelines, they're two big bodies that are doing. So, a lot of folks have heard of Milliman. Milliman is an actuarial firm that is out there. One of their spin-off businesses is MCG. MCG comes from Milliman Care Guidelines. And they have a body of literature that they've done where they take studies and doctor expert panels and basically compose a database of what they view as being appropriate for whether it's inpatient care, number of physical therapy stays, things like that. That's all kind of encompassed in there where they're using what the literature says that we've published as physicians to be out there.
A lot of docs have heard of Choosing Wisely and just kind of the guidelines that came through that, the ABIM, whether I should give antibiotics for sinusitis, whether you should use an MRI for every episode of back pain. I think doctors have some familiarity for what people think is appropriate care and what consensus bodies have said should be appropriate. Think of that as now then being uploaded into a larger database and that same approach being taken for a number of different evidence summaries.
Dr. Jim Dahle:
So, it's an online database, in essence, multiple textbook size, I suspect, that you can look up just about every condition, every medication, et cetera, and indications for that. And if the patient doesn't meet them, they get denied? That's kind of how it works?
Mushir:
That's the basis for the denial, yes. Now, obviously, there's going to be some nuance that's going to exist for specific patients where then you have the peer-to-peer discussions that can occur, physician-to-physician.
Dr. Jim Dahle:
Yeah. Now, I think one of the things that drives a lot of docs nuts about this is exactly what you mentioned, the 05:00 P.M. stack of faxes of unpaid work. Now, is there anything on the horizon where docs could be paid for doing this work, this fight with the insurance companies? Are there docs out there that are charging patients for it or somehow getting compensated by the insurance company for all that extra work?
Mushir:
Well, I know that, for a fact, there are doctors that are charging for paperwork in regards to what it is, whether it's FMLA forms, prior auth work, what have you. I think that that's something that we then have to take a step back and say, “Okay, on the continuum of care, where should some compensation be?” I think a lot of docs are probably familiar with Epic or some EMR of that sort that has the online accessibility for patients.
We are certainly discussing, as have other health plans, there should be some compensation present there, because you are giving some care virtually in that regard. But I think we can all agree that there's probably a gradient that exists of a refill request is not the same degree of medical intensity and thought process for the doctor as a seven bullet point email that you have to reply back to.
Dr. Jim Dahle:
Yeah, for sure. There's definitely different levels of it.
Mushir:
Jim, I was going to say, I think that you're bringing up an important point, though. There's a lot of work that physicians do that's not compensated, that's administrative, that we have to attack. And we have to attack it in terms of, “Can we remove it all together by using some automation tools?” And if we can't do that, then we have to have a discussion about what can we do to ensure that there's some version of compensation that exists.
It may not be a per sheet type thing, it may be more in a global risk sharing agreement, what have you. But that has to be addressed by both payers as well as likely provider systems that likely employ a lot of the docs that are doing this work.
Dr. Jim Dahle:
Yeah. Another complaint I hear about from time to time is typically some sort of subspecialist who has decided to do a surgery or decided to do some expensive treatment, medication, whatever, and then feels like he got denied by a doctor not in their specialty.
Mushir:
Yeah.
Dr. Jim Dahle:
Is there merit to that complaint? And how often does that happen?
Mushir:
I disagree with the merit to that complaint. And the reason I say it is this way. I'm an internal medicine doctor. And so, if I'm getting a complex lung cancer chemotherapy request, I don't feel comfortable having decision making on such a case. I want to get subject matter expertise involved to do that. If there is an appeal that generates from that, again, I can't review that. I have to have a third party outside reviewer, same specialty review that.
Now, that's our process as our health plan that does it. I would say by and large, most health insurers are doing that as well. And what I've also started to notice is that physicians are also putting that in their appeal letters. I demand that a same specialty reviewer looks at this. That's been our internal process as it is, is that we need to have an independent review person that's not affiliated with us that takes a look at any appeals that come through to us.
Dr. Jim Dahle:
It sounds like they get that on the appeal, but they don't necessarily get it on the initial denial. Is that right?
Mushir:
On the initial denial, that's correct. That could happen. And I'm being purposely a little bit cautious with what I'm saying because there are some specialties that we automatically send out to subject matter experts as well. Because again, we don't feel as though we're not comfortable in making decisions on that sort of thing that we want to get outside expertise involved, say a complex spine surgery, for example.
I think each health insurer is going to have their own level of expertise internally that they'll have to do that as well. The larger insurers, some of the big national carriers will likely have employed orthopedic surgeons, ENT surgeons and such that are subspecialists that will likely review those cases.
Dr. Jim Dahle:
Yeah. And I assume this is a side gig for most of those docs. Most of these reviewers are not full-time employees of the plan or of the insurance company, correct?
Mushir:
From my understanding, yes.
Dr. Jim Dahle:
So how do you get a job doing that if you're interested in doing that as a side gig?
Mushir:
I would say it's probably important to do a little bit of dabbling in it and probably try to find the way that I found it, which is reaching out to different health plans. Probably having some hospital experience is going to be helpful because being able to navigate conversations with physicians as peers is a skill set that you want going into such a discussion.
And I think if you've done some hospital leadership roles, it's helpful to have that type of collegial discussion part of your makeup that makes you more marketable to such an entity. There are health insurers that have need for this skill set, folks that have subject matter expertise that may want to offer side gig type of opportunities. There's also then these third party reviewers. There's large third party review organizations that exist that do this sort of review as well that people can offer their services to as well.
Dr. Jim Dahle:
And how well do these jobs pay? You're getting work piecemeal, I assume it gets sent to you and there needs to be a turnaround within a day or two. And what does that typically pay? Is it an hourly rate or by review rate? Or how does that work?
Mushir:
I'm sure each health plan is likely different. We tend to do it by an hourly rate with the folks that we have working with us. Our hourly rate is governed by basically what our market assessment does every three to five years. We would do an hourly rate update every three to five years for what physician time would be.
The difficulty I think in this scenario is going to be, it's likely not going to be as productive for those that are in some specialties to do this sort of work because it's administrative work, not necessarily procedural. So, it'll be less headache, but while still having some intellectual capabilities that are used.
I would say my experience shows that a lot of folks are probably more at the tail end of their careers looking to wind down some of the business and day-to-day practice that like to do this work because they've got a wealth of experience that they bring to the table that they can offer to these review organizations.
Dr. Jim Dahle:
Yeah. Now people who do medical legal work, they're reviewing stuff for malpractice cases, defense or prosecution or whatever. They kind of expect to be paid more on an hourly basis than they typically make in clinic. Is that the case working for an insurance company or plan as well? Or is it kind of much more typical to what you make in clinic?
Mushir:
I think you can expect to make about the same. I don't think anyone's going to come over for a big cut, but I think that the marketing that would come in from recruiting employees that want to do this type of work is going to be the lifestyle issue and being able to have the ability to not feel that you're tied to an office from 09:00 to 05:00 and you can't leave.
Obviously now, even looking at our conversation today, the ability to do things remotely doesn't exist as well. The case review over your laptop has a certain amount of value if you're able to travel with your laptop. And if you want to be in Arizona for a month in the winter and you're in Midwestern, it makes a lot of sense.
Dr. Jim Dahle:
The other question I think people would have are people that maybe are burned out on clinical practice and are looking to transition into something else. They want to work full time for some sort of other company like this.
Is this a good option for somebody that's burnt out on clinical medicine to maybe cut back to quarter time clinical medicine and then do this like you're working as a chief medical officer for a plan, et cetera? Is that, you think, a good option for somebody?
Mushir:
I think it's certainly something to consider. I think that what I would say is we as physicians should really take stock in the wealth of experience that we have, especially over time, that adds to the ability to offer clinical insight into health plan approvals, health plan decision making.
Dr. Jim Dahle:
Now, the other interesting point of view, I think you've got looking at it from that side is you probably see some ridiculous stuff being requested, being coming across wanting the plan to cover. Can you share a percentage maybe of what sort of stuff comes across that just seems absolutely ridiculous for the plan to cover and maybe even an example of something that was declined?
Mushir:
I would say that the outlier stuff that we see that you're kind of scratching your head and saying, “What are they even thinking?”, is definitely less than 5%, probably closer to 1%. Because I think by and large, our profession is pretty good about doing what we think is standard of care for our patients.
Now, you're asking me on the spot to think of a ridiculous case. I'll get probably once a month, an MRI of a shoulder request where a person's been seen for their first visit, having shoulder pain for say, two months, but has done no conservative therapy, no physical therapy, nothing's been tried, and they're going straight to MRI. And so, that to me is clearly someone that's not either informed of the guidelines, nor honestly, is probably practicing what we think is proper medicine.
I think that there's some newer technologies that are out there as well that I have my own opinions on that are pretty good revenue generated for some of the surgical subspecialties that like to be touted as being standard of care, but aren't necessarily endorsed by their own specialty societies. And I think we want to be careful about that. We have to be conscious of the fact that there are some in our profession that are very open to some of the device makers and being the first to try, the early adopters.
Dr. Jim Dahle:
Gives you a good insight into what's getting denied out there. When you think about it being such a small percentage, though, it makes you wonder if the review process is even worth the money that's being spent on it. A doctor to do these reviews is not cheap.
Mushir:
It's not cheap at all.
Dr. Jim Dahle:
And it makes you wonder, is it worth paying you and a bunch of folks like you to do denials, if it's really only one or 2% or 3% of people that, or submissions, whatever you want to call it, claims, I don't know if they're claims yet until you do it. But if it's really that small, is it worth the whole rigmarole to go through this?
Mushir:
Well, I would say this. I think that from a prior authorization standpoint, we have the discussion that you just said, Jim, on a regular basis, which is, “Is the juice worth the squeeze for us to investigate this?”
And let me give you an example. We used to review echocardiograms on a pretty regular basis to see if there's medical necessity for the echo. It just didn't make sense after that, because we were approving 95%. So, okay, if that's the case, it's not worth the squeeze, or just say yes automatically. We do that for a lot of different things now. On a yearly basis, we review to say, if we're approving this at a certain percentage, usually above 90%, it doesn't make sense for us to do that. Let's just remove the authorization requirement altogether to try and really remove the headache that's existing there, because it's not worthwhile for us to do it.
Now, obviously, given the events that occurred in late last year with the unfortunate shooting that occurred, the murder that occurred, there's been a lot of focus on both prior authorization and our broken healthcare system. I think that's probably a topic for another day, but I think that the issue of prior authorization needs to be addressed.
I would say this, we have a lot of smaller groups that insure with us, including some physician-owned practices that have employees, maybe 5 to 35 employees. Not one of those physician-owned practices have come to us and said, “Give us an insurance product where wherever the doctor orders, you just put it through. Remove all prior authorization.” There's been no physician practice that has come to us to ask for that insurance product.
And so, what that tells you is that even as a profession, we also know that there are some outlier physicians that work in our communities that we want to have some degree of guardrails present there. I think to argue that we should just remove all the guardrails and what the doctor orders should be done, the reality is I don't think even physicians when they're business owners agree with that logic.
Dr. Jim Dahle:
Yeah, it certainly is a discussion that I think doesn't get had very often. I think basically it's mostly just griping about prior authorizations and not much perspective from the other side of “Maybe there's some good they're doing as well”, particularly in keeping the costs of the insurance low. If you could just get everything, well, all of a sudden now you're priced out of being able to buy the insurance at all. So you're absolutely right that we've got to think about both sides of it for sure.
Well, our time is short, but is there anything else we haven't talked about that you think docs need to hear about working on the other side or working with the other side to try to get care for their patients?
Mushir:
I think one of my big learnings early on was I didn't realize that there's governmental regulations courtesy of the ACA that mandate that a certain percentage of any revenue that insurance company takes in has to be spent on medical care. And roughly, it's been about 85% minimum. And what I can tell you is that for the most part, a lot of health plans, they're usually spending closer to 90%.
I had this view beforehand five years ago that, “Oh, with some of these big insurance companies, they're probably taking in 40% profit.” And that's been a big learning for me that that's not correct. I think when I've talked to physicians, because a lot of my physician friends, they poke fun at me as to how's it like the other side being Darth Vader now.
And I'll just point that out and say I didn't realize this, that the margins that small health plans in particular have to work with is somewhat limited by a lot of governmental regulation that exists as well, which I think is a good thing, because I think that you're taking revenue to spend it on medical care, that's the right thing to do. But I think that the notion that somehow there's outrageous profits that are being made, I don't know if that's necessarily correct, especially at the smaller health level.
Dr. Jim Dahle:
Yeah. Now, that 15%, that includes, obviously, profit, but does that also include all the other expenses of the insurance company?
Mushir:
Yeah, our entire 500 person organization has to get paid out at 15%. And so there's an administrative cost that's probably around between 10% to 12% that exists in there. So if you get to 90% and you have a 12% administrative ratio, you're not 102%. You haven't made much money.
Dr. Jim Dahle:
Yeah. Yeah. There's not a lot of meat left on that bone at that point.
Mushir:
No.
Dr. Jim Dahle:
Yeah. All right. Well, Mishir, thank you so much for coming on the podcast and maybe giving us some insight into a process that I think a lot of doctors aren't all that familiar with and for sharing your career journey as well.
Mushir:
Jim, thank you. Thank you for the great work that you're doing.
Dr. Jim Dahle:
I hope you enjoyed that interview as much as I did. It's always fun, I think, to talk to White Coat Investors out there and what you're doing in your lives and with your careers. And I always learn something talking to each of you individually.
All right. Our other questions today that we're going to deal with on the podcast also have to do with insurance, not necessarily this particular issue in insurance, but with insurance.
TAIL COVERAGE
I got an email that was titled “American Physician Partners: Tail Coverage Debacle.” And the emailer said, “I don't know if you already did, but I didn't see it and was wondering if maybe you could re-comment as a lot of us that used to work for American Physician Partners before they let us all go without much to do at the end of July 2023. Have you ever done a discussion on insurance coverage, specifically tail coverage, when the company just disappears and you're left without because they didn't pay it, because they folded or some variant of that?”
Well, it's interesting because about the same time we got this speak pipe from Mohamed.
Mohamed:
Hey, Dr. Dahle, this is Mohamed from the Midwest. I have a question. I'm a surgeon. My wife is an OB-GYN. She practices both OB and gynecology and we had a question. She is debating to take a slight leave from work. She's less than 55 years old and we're trying to understand the implications of that in terms of tail coverage and needing to pay for tail coverage and the cost associated with that. Any advice on that would be great. Love your podcast, really trust everything you do and glad you're doing well.
Dr. Jim Dahle:
Okay, so let's talk about tail coverage. What are we talking about here? We're talking about malpractice insurance. And for most of you listening to this, you have a malpractice insurance policy of some kind.
It is one of two types. The first type is occurrence. You buy a policy for this year, for 2025, and anything that happens during 2025, if there's a claim resulting from it, it's paid for by that occurrence policy. No matter when the claim is made, if the claim is not made for six months or a year or two years or 19 years, that occurrence policy covers the defense of that claim. It covers any settlements offered. It pays any judgments that come out of that claim, at least up to policy limits. That's kind of the gold standard for insurance coverage.
And I don't want to say it's relatively new. It's been around for a long time, but I feel like it's becoming a little bit more common these days. In the olden days, people bought coverage that was basically claims made coverage. Meaning it's not if something occurred during 2025, it covers any claims made during 2025.
That works fine as long as you keep working and keep buying claims made policies. But what happens if you stop working? What happens if you retire? Well, then what? What if there's a claim next year for something you did this year? Well, now you don't have any coverage.
And so, the solution to that is a type of policy called tail coverage. Meaning it's the tail, the end part of your coverage, the end of your career, it's the tail, get it? And so, the idea was when you quit practicing, you bought tail coverage and that covered anything that happened prior to then, but that a claim had not been made for.
And you think about that and you're like, “Well, how long is that time period?” Well, the statute of limitations on malpractice in most states is something like two years. But it's often two years from discovery of the problem or two years from the time that minor turns 18. So, it can be a lot of years. It could potentially be decades.
And so, it's important coverage to have. The last thing you want to do is retire, have some claim come up that you don't have coverage for and all of a sudden now you're out the couple million dollars you were planning to live on in retirement, it's a real problem. And you got to do something about that if you're in a situation where you find out or you knew ahead of time that you had claims made coverage, you've got to know about the tail.
Let me tell you a story. When I joined my current emergency medicine group in 2010, we had claims made coverage. And I asked, “Well, what happens if you fire me or I quit and move on to another job?” – “Well, then you'd have to get a tail coverage”, they tell me. And I'm like, “Well, how much is that?” And the managing partner of my group did not know how much it was. He had to go to the insurance company and ask. And what we discovered is that the amount was the equivalent of two and a half years of malpractice coverage.
I think at that time, my malpractice coverage was like $16,000 or $18,000 a year. Thankfully, it's gone down for emergency docs in Utah since 2010. It's a lot cheaper now for me, especially now that I'm only working part-time. But that's what it was. For a year of claims made coverage, it was $16,000 or $18,000 a year.
Well, the tail, when we got the quote, was about $50,000. It was not insignificant. So what does that work out to be? Two and a half, three years of coverage. And I don't know that that's some sort of a rule of thumb, but it's not cheap is the bottom line. It's going to cost you more than a year of your regular coverage.
This is not something you can ignore. When you're negotiating a contract, you need to know what kind of coverage you're getting. And if it's claims made, who's going to pay for the tail under what circumstances?
What I ended up doing as I negotiated this pre-partner position with my group is I negotiated that if I left, I'd pay for the tail. If they fired me, they'd pay for the tail. Now, it all worked out fine. Obviously, I'm still in the group 15 years later, and we've subsequently swapped to an occurrence policy. This was never an issue for me.
But for these two people, the one sending in the email where the company just went kibosh, and the other one who wants to take some time off but has claims made coverage, you don't have a lot of choices here. You can either buy the tail yourself. And like I said, it's probably not that cheap. You can roll the dice and just hope a claim doesn't come in. Or there is a third option. This is one I recommend in most cases. It might not work for the person taking a few months off or whatever. In that case, I would just try to keep your malpractice coverage going, even if you have to pay the premiums yourself.
But what I would do in most cases, if you're changing jobs or whatever, and you need tail coverage, is I would talk to the new employer, the new insurance carrier that's going to be covering you afterward into giving you nose coverage. Get it? Tail coverage is at the end and nose coverage is at the beginning. Essentially you're buying your tail coverage from your new insurance company. And that's what I'd recommend you try to negotiate because this is not something you can ignore. $50,000 is still a lot of money to most doctors. And I'm sure if you're an OB-GYN, it's probably more expensive than that. Neurosurgeons, probably more expensive than that.
But when I got a quote for it for emergency medicine back in 2010, that's what it was. It was a little over $50,000 to buy that tail coverage. I suspect it's a little bit cheaper now for emergency medicine. It's probably a lot cheaper for a lot of other specialties, but this is something that definitely needs to be on your mind when you're negotiating any sort of a contract that involves insurance coverage.
QUOTE OF THE DAY
All right, our quote of the day today comes from Henry David Thoreau, who said, “The price of anything is the amount of life you exchange for it.” I love that quote.
Okay, another question about insurance. This one's coming off the Speak Pipe. I think two separate Speak Pipes, but let's listen to these.
CAN WHOLE LIFE INSURANCE BE A GOOD TAX STRATEGY?
Jamil:
Hello, my name is Jamil. I am a physician. My CPA who is also my tax planner recommends me to purchase whole life insurance as a part of tax strategy to save income tax. I am now 45 years old. I already have two term life insurances, so I do not need a death benefit. So the whole life insurance is only to save tax.
The annual premium is $100,000 a year. I have 92% cash value every year for 15 years against my death benefits, which I don't really need. Would you recommend me to go ahead? I appreciate your valuable advice. Thank you.
Dr. Jim Dahle:
Thanks for your great question. We are not big fans of whole life insurance here at White Coat Investor. I don't have anywhere near enough information about you or your situation to decide if this is a good idea for you or a bad idea for you. Most likely it's a bad idea for you because it almost always is a bad idea to buy whole life insurance.
There are a few niche uses for it. Lowering your tax bill this year is not really one of those. So if you really don't want a permanent death benefit, you've almost surely not bought something that you should have bought.
Whole life insurance is a lifelong insurance policy. No matter when you die, whether you die at 35 or 65 or 95, it's going to pay that death benefit to your heirs, to your estate, whatever. That's the main purpose to buy it is you're buying a policy that's going to pay out no matter when you die. Because if you buy a term policy at age 35 and it's a 30 year term and you make payments on it until you're 65 and then it's done.
Most of the people that buy it aren't going to die before 65. They're going to die after 65 and there's not going to be a payout to their heirs or their estate or whatever. Because of that, it's much cheaper than to buy whole life insurance. And the truth is most of us don't have a permanent need for a death benefit. We have a temporary need for a death benefit. We need it for 15, 20, 25, 30 years, something like that. And after that time period's up, we're financially independent. We have plenty of money. If we died, our loved ones could live off what we were planning to live on for the rest of our lives.
And so, buying insurance for a period of time in which you don't need insurance is a good way to waste money. And that's the main problem with whole life insurance. If you don't need a permanent death benefit, don't buy a policy that offers a permanent death benefit.
Now, sometimes people get talked into buying whole life insurance as some sort of a retirement account. And mostly it's because people don't realize you can always invest more in your taxable account. Just because you maxed out your backdoor Roth IRA or just because you maxed out your 401(k) or your 403(b) and your 457(b) or whatever, you feel like you can't save any more for retirement.
Well, that's a bunch of crap. You can always save more in your taxable account. And it's probably going to get you better returns doing that, especially if you invest relatively tax efficiently and you're investing in relatively aggressive investments like stock index funds or real estate or something like that, you're probably going to come out ahead than investing in whole life insurance.
A big problem for doctors is they come out of residency and they get their first tax bill after that first year. And they gasp when they realize they're paying more in taxes than they used to make as a resident or a fellow. And that's really hard for them. They feel like they need to do something about that tax bill.
But I've got news for you. This is the way our progressive tax system works. Mitt Romney got much maligned for it back when he was running against Barack Obama for the presidency. But he correctly pointed out that something like 47% of taxpayers don't pay income tax. That is a true fact. Now they pay payroll taxes, they pay sales taxes, property taxes, those sorts of things, but they don't actually pay income taxes.
It's a progressive system. A whole bunch of people have a negative income tax or pay nothing in income tax. And the people who pay all the income tax are those who earn a fair amount of money. And as a physician, if you're doing this right, you're making a fair amount of money. You're making $200,000, $300,000, $400,000, $600,000, $800,000 a year. Maybe your spouse is also earning some money.
When you're earning that sort of money, your tax bill is not insignificant. It's usually some sort of a six-figure amount. And so you start thinking, “Oh, I got to do something to reduce this.” Well, the truth is that you reduce your tax bill mostly by living your financial life differently. Not by filing your taxes in some sort of unique way, not by coming up with some sort of trick with your taxes, like buying whole life insurance.
You live your financial life differently. You save more for retirement. You make tax-deferred contributions instead of Roth contributions. You give more money to charity. You get married, you have kids, you buy a house, and now you can all of a sudden deduct your mortgage interest. You move to a different state with a lower state income tax. These are the sorts of things that really make a dent when it comes to lowering your tax bill.
Now, when it comes to investment-related taxes, you try to do some tax-loss harvesting. You try not to buy and sell willy-nilly and pay a bunch of capital gains taxes. You try to invest in tax-efficient investments inside your taxable account. You use depreciation to shelter your real estate income.
So, you try to learn how to be tax-efficient when it comes to your investments. But for the most part, buying a whole life insurance policy is not a great way to do this. Now, I can't tell exactly what your setup is. Maybe this is being bought by your business or something, and so somehow it's qualifying as a business tax deduction. That's the only way I can think that buying a whole life insurance policy is going to save you any taxes this year.
Now, whole life insurance does have some tax benefits. As the money grows inside the policy, you don't pay taxes on the dividends because technically they're returns of premium. You paid too much in premium and it's being returned to you, and that's not taxable, those dividends as they get paid. It grows in sort of a tax-protected way.
But if you surrender that policy and take your money out of it, assuming there's a gain, which there often isn't in the first five to 15, sometimes longer years, if there's a gain, you're going to pay taxes on it when you surrender that policy. And you're going to pay those taxes not at long-term capital gains rates, but at ordinary income tax rates.
What a lot of people do that have whole life insurance policies, whether they meant to buy them or not, they borrow against the policy. And when you borrow against the value of your home or the value of your car, the value of your whole life policy or the value of your investment or portfolio, well, that's tax-free. It's not interest-free, but it's tax-free.
And a lot of people in the last few years of life, when they have highly appreciated shares of mutual funds or stocks in their portfolio, instead of selling them and paying a bunch of capital gains taxes, they just borrow against them and pay a little bit of interest in the last year or two of life, and then their heirs benefit from the step-up in basis of death, and nobody ever pays those capital gains taxes. That's a conscious decision lots of elderly people make to try to pay a little bit of interest instead of a lot of capital gains taxes.
Now, the one real benefit of whole life insurance that's pretty unique is if you do a partial surrender of the policy. You surrender as much of the policy as will get you basically what you paid in premiums. And the benefit here, the tax benefit, is that with that partial surrender, basically the premiums, the principle, the basis, whatever you want to call it, comes out first.
If you paid $300,000 toward this policy and 30 years later, now it's worth $450,000 or something, and you only take $300,000 out as a partial surrender, well, that comes out tax-free. It's your principle.
That's the cool tax benefit of whole life insurance. The rest of it is just kind of the way the tax world works. But that part is cool. It's better tax treatment than you get with an annuity, for instance. And even when you sell something that's appreciated in your taxable account, some of it is going to be principle and some of it is going to be earnings, appreciation. And so, you're going to pay capital gains on the appreciation portion of it, but you can't just pull out the principle like you can with the whole life insurance policy. That is a cool feature of whole life insurance. That's the way it works.
The problem is this whole time you've got this investment, you're paying for insurance you don't need and you're getting a lousy return on the cash value portion of this policy. And it's just one pot of money. The death benefit is the cash value. So if you borrow a bunch of money against the policy, that cash value you're taking out by borrowing against it. Let's say you've got a death benefit of a million dollars and you borrowed out $800,000 to spend in retirement. When you die, it's not going to pay you another million dollars. It's only going to pay you $200,000. It's one pot of money there. So, keep that in mind. But that's the way those policies work.
A lot of people get sold these policies because they're products designed to be sold. They're sold to you by people who are paid very well to sell them. They get paid big commissions and a typical commission on selling these things is something like 50% to 110% of that first year's premium. So, if you're buying a policy that's $100,000 a year, that guy who sold it to you is getting paid $50,000 or $100,000 to sell it to you. That's a serious conflict of interest.
And if you're taking financial advice from somebody who is financially benefiting from selling these things to you, whether they call themselves a CPA or a tax planner or a financial advisor, that's a real problem. Because you're selling you something that you probably don't want once you understand how it works. You almost certainly don't need if you're in a situation like you are and that person is selling you this product designed to be sold, not bought.
A lot of White Coat Investors as they become more financially literate realize they own one of these things. And I did too. I owned a whole life policy for seven years. Thankfully, mine was not $100,000 a year premiums. Mine was pretty trivial. In fact, as I was calculating my net worth in 2004 for a talk I'm giving at WCICON coming up, I saw that in 2004, I had $540 in cash value in whole life. And I didn't keep it very many years beyond that.
Mine was a pretty tiny policy, but I dumped it anyway because you know what? I didn't need it. It was sold to me inappropriately. It made me angry every time I looked at it. And frankly, my overall return in those seven years I owned it was minus 33%. It was terrible. And so, lots of White Coat Investors that do this realize they've been conned essentially into buying something they don't want and they surrender it and walk away.
Now, if you have a big loss, it can make sense to exchange it into a very low cost variable annuity like those at Fidelity and let it grow back inside that annuity to basis to the amount that you paid for those whole life insurance premiums. And then you surrender the annuity and walk away essentially with your money. And what that gets you is a little bit of tax free growth as it grows back to basis.
But most people just kind of surrender it and walk away and count their losses as a stupid tax or whatever you want to call it. Just the price you pay for making a mistake because you didn't know that much about how the financial world works.
But when I hear about a doctor buying a huge whole life policy, like $100,000 a year, the first question I ask him is “How much money do you make? How wealthy are you? Do you really not have a better use for your money than dumping $30,000, $40,000, $50,000, $100,000 a year into whole life?”
And the answer is almost always that they have a better use for their money. They might have a mortgage they're paying 7% on. Well, that's going to way outperform your whole life insurance policy as an investment. Maybe they need to save for their kid's college or maybe they're not putting enough away for retirement already. Or maybe they need to buy a car or whatever. Everyone's almost always got a better use than funding some huge whole life insurance policy. And I'll bet you do too.
I've got a couple of blog posts on the website. If you go there and search, “Dump” is really all you have to search and these posts will come up. One is how to evaluate your own whole life insurance policy. That basically involves getting an in-force illustration calculating what your return's likely to be going forward. Because sometimes even though you bought something you shouldn't have bought going forward, the return is acceptable to you. Maybe you'll make 5% going forward and you're okay with that. Great, keep it. I don't care. I'm not getting money for you to dump your whole life insurance policy or something. You want to keep it, keep it.
The long-term returns on a whole life insurance policy are not awesome. The guaranteed returns tend to be, this is assuming you keep it to like your life expectancy, like five decades. The guaranteed returns tend to be something like 2%. The projected returns tend to be something like 5%. And that's what you're going to get if you hold onto this thing for life. No matter what the dividend rate is, that's what the returns actually are on what you're paying in premiums.
So, if that's okay because those crappy return years are heavily front-loaded, if you've had this thing for 10 or 15 or 20 years, you might just want to keep it. But probably not if you're having to pay out $100,000 a year toward it. You're probably not going to want to keep it.
And then the other blog post just explains to you how to dump it if you want to get rid of it. And that's often just surrendering it. Sometimes it's exchanging it into an annuity. You can also exchange the cash value into a long-term care policy, if for some reason that's something you're interested in. I think most White Coat Investors are probably planning to self-insure that risk by retiring on a multimillion-dollar portfolio. But if you're one of the people that thinks a long-term care policy is really attractive to you, you might want to exchange it into that.
I hope that's helpful to you. I'm sorry you're just discovering that the person you thought was a financial advisor is actually a salesperson, and that you probably bought something you don't actually want to own, especially if you don't want the death benefit. That is the reason people buy these things.
Now, anybody who's got a whole life policy, thinking about getting rid of it, make sure you put the term life insurance coverage you need in place before dumping the whole life policy. The most important thing when it comes to insurance is having something in place in the event that you need that coverage. And the nice thing about a whole life policy is that it does have a death benefit. So if you died tomorrow, it would pay your heirs something.
Okay, let's move on from whole life. Let's talk a little bit about annuities, another product that comes to us from the insurance industry.
SHOULD YOU BUY AN ANNUITY WITH A TAX-DEFERRED IRA?
Dr. Lakshmi Konapu:
Hi, I have two questions. First is, where do I find the WCI recommended financial advisor list? Second question, I have about $300,000 in tax-deferred IRA. My advisor suggested individual modified single premium fixed indexed annuity policy from SILAC Insurance Company. The product name is Teton. There's a 10-year with Elevation Plus Rider. Is it a good advice? My name is Dr. Lakshmi Konapu.
Dr. Jim Dahle:
Thank you for your question, Lakshmi. I get questions like this all the time from White Coat Investors, and questions like this bring a lot of people to the White Coat Investor and get people started on their journey toward financial literacy. I love these questions.
Those of you who've been listening to this podcast for years or reading the blog or read my books kind of know how this answer is going to go. Lakshmi, you have made a common mistake, one I have made, one that maybe most White Coat Investors have made. You have mistaken a salesperson for a financial advisor. This is somebody who is selling you a product, in this case, some sort of indexed annuity. And just because it has the word index in it and index funds have the word index in them does not mean this is a good thing.
They are selling you a product, not giving you unbiased advice. Almost surely this is bad advice for you. I don't have all the details of your financial situation. I guess it's possible somehow that this is appropriate for you, but I doubt it. There's almost surely a better use for your money, for your saving strategy, for your investment strategy than buying some index-linked annuity like the one you're being sold by somebody who is pretending they're an unbiased financial advisor.
So, what should you do? Well, first of all, don't do anything right now. If you buy that annuity, you're going to end up with some sort of a surrender penalty when you try to get rid of it in six months, when you realize that you don't actually want this thing.
I would recommend you get a real financial advisor. If you're not educated enough yet, if you're not financially literate enough yet to function as your own financial advisor, or if you just want to have somebody there to help you, I would recommend you get a real financial advisor, somebody who charges fees for their advice.
These are generally registered investment advisors. They often have a certification like a Certified Financial Planner certification, a CFP, and they work as advisors. They don't get paid for selling products. They get paid for giving you advice. And we have a list of recommended advisors, people that have been vetted by us initially and in an ongoing way by White Coat Investors. If we get a bunch of complaints about an advisor, they come off our list. We don't care that they're paying us money to be on the list. They come off the list.
It's a lengthy list. We've got a lot of people on it because there's a lot of people that need advisors. An important aspect of that is having a good fit with your advisor. But you can find these people we recommend by going to whitecoatinvestor.com. And if you look at the tab at the top, it says Recommended. And as you scroll down that, you will see student loan refinancing companies, insurance agent, physician mortgage loan companies, and one that's labeled Financial Advisors.
You can also get there directly by going to whitecoatinvestor.com/financial-advisors. You'll find a whole long list of real financial advisors there that will give you real advice. And I think I would be willing to bet dollars to donuts that not one of them is going to tell you to go ahead and buy this thing that your current “advisor”, and I put that in quotes if you're watching this on YouTube, is proposing that you buy from them.
Sounds like a bad idea. Sounds like you're being ripped off. This is not uncommon, but you need to get yourself a real advisor, get some real financial advice, and that's going to cost you. These folks charge thousands of dollars a year for advice, but it's going to cost you a whole lot less than doing the wrong thing, which is what it sounds like you're about to do.
Speaking of recommended people we have, we have a new partnership with Farmers Insurance Choice that lets you compare multiple quotes for auto, home, and renter's insurance from top rated carriers all in one place. Find the best coverage for your needs and see how much you can save. Get your quote today at whitecoatinvestor.com/save.
I'm going to have a blog post coming up where I'm actually going to shop all of our insurance around for the first time in many, many years and see what we can save. I think it's going to be pretty interesting as it's been quite a while since we did it. And obviously we have lots of insurance between our home and three cars and soon to have two teenage drivers on there. It'd be interesting to see what we can save. But you can check that out yourself by going to whitecoatinvestor.com/save.
All right, lots of insurance topics today, but let's do something a little bit different. Well, we're still going to talk a little bit about insurance with this, but let's talk about some mortgages.
ESCROWING HOME INSURANCE
Speaker:
Hey, Dr. Dahle, I have a question about mortgages. My wife and I are looking to buy our first home and I was wondering is there any benefit to escrowing our home insurance as well as property tax money? Or is this something we should not escrow and just pay annually? Thanks.
Dr. Jim Dahle:
Okay, great question. The truth is your lender is probably going to require you to escrow your home insurance and your property taxes because they want to make sure their investment is secure. Their investment is in this home. If you stop paying, they have to foreclose on your home in order to get their money back. So you stop paying the mortgage, they start sending you notices after a month or two saying we're going to foreclose on you if you don't pay. And within three, four, six months, they're going to foreclose and take your home.
What they don't want to happen during that process is that your home burns to the ground. Because if your home burns to the ground and you just walk away, they're out of luck because the home is not insured. So, they want to force you to buy home insurance. Once it's paid off, you don't have to have home insurance. You can let your house burn to the ground and not have any insurance at all.
But while you have a loan on it, they're probably going to require that you have home insurance. And one of the ways they do that is by requiring you to have an escrow account, probably through them, that pays that home insurance. Same problem with property taxes. Your home doesn't disappear in 20 minutes like when it burns to the ground, but the government authority in your area can take the home.
Also very bad for the lender who thought that home was their collateral on the loan they were making to have that go to the city or to the county or whatever because your failure to pay property taxes.
They generally require you to have an escrow account that will pay your home insurance and your property taxes. That's convenient for lots of people. They don't mind that so much. They basically put a certain amount of money in there every month. It just gets charged as part of their mortgage. So, it feels like paying rent is just one big bill that comes every month. And it changes by a few dollars every year as those home insurance and property taxes change prices. But basically, you kind of pay the same amount every month.
And what that escrow account does is whenever the home insurance is due, once a year or twice a year, they pay out a big lump sum out of that escrow account. When the property taxes are due once a year, they pay it all in a big lump sum out of that escrow account. So you might have $15,000 in the escrow account one month, and the next month, you only have $2,000 in there because they have just paid you a $13,000 property tax bill on your behalf out of there.
I don't think you have a choice. You can ask the lender, but I don't think you have a choice. They're almost surely going to require you to have an escrow account until you pay off that mortgage.
Now, for those of you out there who are mortgage free like we are, we do not have an escrow account. We pay our home insurance directly. We pay our property taxes directly. Now, obviously, we have to make sure that we manage our finances in a way that we have that money when those bills come up. But I much prefer that control, and I don't want to be dealing with somebody else doing this for me. That's what an escrow account is, is paying somebody to help you budget so you can pay your home insurance and property tax bills.
Well, I don't need that. I can budget that myself. And so we don't have any sort of an escrow account. When we paid off our mortgage, we started managing this stuff ourselves. And I think that's probably what most people who are mortgage free do. But until then, you're probably stuck with an escrow account. I'm sorry. Maybe it's good for you, maybe it's not, but you're probably stuck with it either way. I hope that's helpful.
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All right. Don't forget the WCICON26 ticket presale ends tonight. This is the lowest price ever. We're going to the JW Marriott in Las Vegas. This is out toward Red Rock. I'm told I'm even going to be leading at least one hike out there. So this is going to be a great place. It's one of my favorite places to go. It is not on the Strip. You can get to the Strip quickly if you want, but it is not on the Strip in Las Vegas. But it still has all the conveniences of being able to fly direct into Las Vegas for relatively cheap prices from all over the country. March 25th through 28th, go to wcievents.com to get $500 off your registration today.
All right. Thanks for those of you leaving us a five-star review and telling your friends about the podcast. That does help to spread the word. A recent one came in from Ruralmainedoc who said, “Helped me get on track. This podcast has a practical and pragmatic approach for high-income professionals to become financially literate and achieve the financial goals they may not have even known they had. I appreciate that so much of what is discussed here is good sense for everyone – To live below your means and make a plan for the future. The variety of people at many different stages of career brings a depth of perspective. I love appreciate growing my financial literacy while feeling connected to a larger community. Thanks for all you do.” Five stars.
I appreciate that from way out in Maine. Maine is one of those places on my list to spend more time and I've been to Maine before. I need to spend more time in Maine. That's my kind of place, I think.
All right. That's it. Keep your head up, shoulders back. You've got this. We'll see you next time on the White Coat Investor podcast.
DISCLAIMER
The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
Milestones to Millionaire Transcript
INTRODUCTION
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.
Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 212 – An engineer and a surgeon become millionaires.
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All right, as you're hearing this, it's March 3rd. We just wrapped up. I may not even be home by the time you're hearing this. We just wrapped up our annual WCICON, the Physician Wellness and Financial Literacy Conference. And we announced to all those people at the conference next year's conference. We're headed back to Vegas. We're excited about this. WCICON26 is going to be in Las Vegas.
Wait, wait, wait. I know what you're thinking. You're thinking, “Las Vegas, I hate the Strip.” It's not on the Strip. We're going to the JW Marriott. It is not on the Strip. It's not just off the Strip. It's probably a 15, 20-minute drive away from the Strip. It's a resort out toward Red Rock and it's a beautiful place. It's a wonderful facility. Now, the beautiful thing about Las Vegas is you can get a flight, often direct and inexpensive, into Las Vegas from just about anywhere in the country. And then a quick little Uber ride, you're out at the JW Marriott.
Now, if you want to go into the Strip one evening and you want to go see a show or something, all those classic Las Vegas activities, go shoot machine guns or go gambling, whatever you want to do, you can do that. It's 15 minutes away. You can go spend the evening. We always knock off the educational sessions relatively early at WCICON because it's a wellness conference. You can go spend the evening on the Strip if you want to, but you do not have to be on the Strip to come to this conference.
This was a very deliberate decision we made to be away from the classic Las Vegas experience, but still in a very warm place in March. It's a little bit later than it was this year. It's going to be March 25th through 28th, 2026. It's going to be great. I'm told I'm even leading some hikes in the afternoon and evening, which I'm excited about.
Las Vegas is a destination, has been for me for many decades, not necessarily because of the Las Vegas experience, which I've had, but because of all the cool stuff that surrounds Las Vegas. It's an outdoors paradise. There's all kinds of awesome climbing and mountain biking and camping. You can even go up into a mountain not far from Las Vegas and go skiing.
The Southern Utah National Parks are not that far away. Lots of people tour those by flying into Las Vegas. You can get over to the Grand Canyon, take a few days onto the conference and enjoy some of that stuff as well. That is a great time of year to be in Southern Utah and Northern Arizona.
March 25th through 28th, this is the lowest price you can get is to buy now. This is what we call our pre-sale. And it's through March 6th. If you're hearing this the day this podcast drops, you got like three more days. In person, it's going to be $1,499. That's regularly $1,999. And the premium in person is $1,999. That's regular $2,499.
This is located in beautiful Summerland to the west of the hustle and bustle of the Strip. It's surrounded by red rocks. It's a beautiful retreat off the Strip but still close enough to enjoy the endless entertainment that is possible 24/7, 365 in Las Vegas. If you want to sign up, go to wcievents.com through the March 6th is the cheapest pricing that you can get. Sign up for that now and we'll see you next year at WCICON.
Okay. We have a great interview today. You're going to really love meeting these folks, but stick around afterward. We're going to talk about estate and inheritance taxes. We had somebody write into me the other day, and they basically said, “Hey, I didn't know anything about these death taxes from the states.” Well, if you don't know about them either, let's talk about them. Stick around after the interview.
INTERVIEW
Our guest today on the Milestones to Millionaire podcast is Sean. Sean, welcome to the podcast.
Sean:
Hi, thanks for having me.
Dr. Jim Dahle:
Sean, tell us what you do for a living and how far you are out of school, and then tell us about your spouse and her career.
Sean:
I'm an aerospace engineer, 14 years out of undergrad, been with the same company effectively that entire 14 years. And my significant other is a minimally invasive surgeon, six months out of a very long training career.
Dr. Jim Dahle:
Yeah, that would be a long training. A five-year residency and a one-year fellowship, I assume?
Sean:
Yeah, plus one year of research in med school and three years of research in the middle of residency. I'm not going to complain about being able to see her for a year.
Dr. Jim Dahle:
Yeah, yeah, exactly. Yeah, it was a lengthy training period for sure. All right, and you're in the Midwest and recently accomplished a significant milestone, especially given that the doctor in this couple is only a few months out of training. Tell us about the milestone you've accomplished.
Sean:
Yes, we became millionaires right about September 1st. Right after she finished training and even before she walked into the office, the first day as an attending.
Dr. Jim Dahle:
Yeah, all right. Well, that's pretty awesome. Her income didn't contribute all that much to this, given at least her attending income, given she's only been attending for like six months. Obviously, she made something during residency and fellowship. But what would you say your household income has been on average over the last 14 years since you came out of school?
Sean:
Yeah, I started around $60,000. And then once she started getting her residency income plus mine, we were around $130,000 starting there and finished last year at $266,000.
Dr. Jim Dahle:
Okay, but still, if you add all of that up for 14 years, the total amount you earn is not that much more than a million. And you've got a million dollars in net worth, which is pretty awesome. So tell us about how that's divided up. How much is in retirement accounts and home equity and that sort of thing?
Sean:
Yeah. We have about $870,000 in investments. Our IRAs are worth about $80,000 and $70,000 each. My 401(k) is $493,000. Hers is $109,000. She put over $100,000 away during her residency. A 403(b) that she has is $36,000. I have an HSA of around $38,000. She has a couple thousand in one. And then taxable, we have about $27,000 and $13,000 in taxable. We're holding about $63,000 in cash. And the house that we bought during residency, we're now holding that as a rental. There's about $168,000 in equity in that.
Dr. Jim Dahle:
Tell us about that. How's the rental business going? Are you guys enjoying that? You expect to build a big real estate empire? Or is this just kind of an accidental landlord situation?
Sean:
It's a little more intentional than an accidental landlord. I've been interested in it. Looked at buying properties a couple of times during residency and just never got to that point. And then when we were leaving, we didn't need the cash right away to go towards any goals. And there was a small possibility that she could go back to where she did her residency as an attending. Went through one property management company that was truly awful, had nine months of vacancy and had to switch. Learned a little bit, enjoying where we are now with it, but not actively pursuing anything else in terms of direct real estate investment at this point.
Dr. Jim Dahle:
Very cool. And at about what point in your careers did the marriage happen?
Sean:
Technically we're still not married. But we've been together since undergrad and mixed finances as soon as we moved in together in residency.
Dr. Jim Dahle:
Any concerns among you two about that? Just mixing finances before being legally married?
Sean:
No, I think we've had open and honest communications and she's delegated a lot of the responsibility to me. We've had a lot of conversations, a lot of trusts. We actually have living durable powers of attorney over each other. Technically either one of us could go onto the other one's bank accounts and run away. So, it's just been a long relationship with building that trust.
Dr. Jim Dahle:
Yeah, works well when it's a good relationship with lots of trust, for sure. But there's obviously some risks there that it sounds like you guys have considered. Okay. Well, tell us a little bit about how you did this, how you became millionaires. She's six months out of training. It's pretty awesome to be a millionaire already. Tell us how you did it.
Sean:
We were incredibly fortunate with our parents. I graduated undergrad with about $17,000 in loans from really the first three semesters. Financially had changed and I went to school for free for five semesters. And then her parents covered all of her undergrad. And then during med school, she racked up the loans but then her parents came in, covered all that for us. We were certainly set out without any disadvantage of having to overcome those loans.
And then I started contributing. I think the lowest I contributed to my 401(k) was 10% in my first year and gradually ramped that up. And then really the key, I think during residency was we basically lived off of my income. I paid for the mortgage. We didn't have any loans. We didn't have any car loans. Went on plenty of vacations, went out to eat. But we were basically able to put away her entire residency salary equivalent into savings to the point where she was contributing 23% to her Roth 401(k) during residency. And so, we had a lot of time in the market with a lot of money going in there.
Dr. Jim Dahle:
Yeah. And the last few years have been good to people investing at least in US stocks. Very cool. Have you ever discussed with her parents why they decided to let her borrow and then wiped out the loans rather than paid up front for tuition and expenses, et cetera?
Sean:
No, we haven't had that conversation or any kind of conversation about expectations in the future when they retire. I imagine we could end up in a sandwich house with grandparents and children if we go that way. But we're expecting that that might happen. And a nice trade for when we have money in the future if we have to take care of them versus them taking care of us when we really could benefit the most from those loans.
Dr. Jim Dahle:
Yeah, a very cool gift anyway. Because I've talked to people about this over the years. And they're like, “Well, should I let them borrow so they feel like they have skin in the game and then I'm planning to wipe it out afterward?” And obviously, that approach involves some expenses, some interest and some loan origination fees and those sorts of things. But it's just an interesting approach, I find it interesting. And maybe it's that people came into money later. They didn't have money when they started med school. And afterward, they were able to help with it. I don't know.
You got some significant help from your parents, but still did a great deal of this yourselves. A lot of people would struggle with this concept of living off one income and saving the other one. Do you recall the conversation you had when you guys decided to do that and how you decided to substantially limit your spending in order to accumulate wealth?
Sean:
I think it came pretty easily to us. I think Paula Pant, you've had her around as a guest, “You can afford anything, we cannot afford everything.” And we just had grown up with that, both of our upbringing. To get everything we needed, it just made sense that it all fit within one income. The house, we went and got exactly what we needed. And it happened to be right about 2X what I was making. The low end of the rule of thumb.
Dr. Jim Dahle:
It helps to be in the Midwest, I suppose.
Sean:
It does. And I think that is a huge advantage that we had too. Looking at the Midwest, fellowship coming, sticking in the Midwest, and then attending, sticking in the Midwest. Once we had a couple of years in residency, we knew we liked the geographic arbitrage in the Midwest.
Dr. Jim Dahle:
Yeah. Now there's a whole bunch of people out there that are coupled with a doctor. It's a long road, and particularly long in your case, but even normally just undergrad, and med school, and residency, and maybe a fellowship, that's a long road by itself, even without any extra stops along the way. What advice do you have for somebody that's looking down that tunnel and the light seems a long ways away?
Sean:
Hang in there. But putting things on autopilot early, I think is helpful. And building that muscle memory of just having stuff come out of your paycheck because you know it's going to pay off in the future by having that time in the market. And then also recognizing that the amount of hours that have to go into residency, if you are the partner who's not in medicine and can take an active interest and do the homework, that'll pay dividends for both of you during training and after as soon as those paychecks come in. But at the same time, right-sizing what you're learning and passing that on so that you're not leaving your significant other in the dark.
Dr. Jim Dahle:
What's next for you guys in your financial roles?
Sean:
I knew you were going to ask that question. I think some re-evaluation of maximizing our savings. There's quite a few accounts that she has that are kind of edge cases, even looking over your forums and listening to the podcast, I'm discovering edge cases. We're going to have to re-evaluate those and what we want to put away into tax-protected accounts that we don't have access to for a while. We need to bump up our automated taxable accounts. And then I think we're slowly discovering that we might have a spending problem on the fortunate side of not spending enough.
Dr. Jim Dahle:
You mean that you're not good at spending money?
Sean:
Exactly, exactly.
Dr. Jim Dahle:
It's a good problem to have in the beginning.
Sean:
It is, it is. And so, we need to see where money can benefit us the most now and thinking about seriously spending some more on that.
Dr. Jim Dahle:
Yeah. Congratulations, Sean, on your success. You guys should be very proud of what you've accomplished. Thank you for being willing to come on the podcast and share your experience to inspire others.
Sean:
Thank you for being a resource for not just the White Coat Investors, but those of us that support the people in the white coats.
Dr. Jim Dahle:
Okay, I hope you enjoyed that interview. Lots of good stuff to learn from their example. You can do this. You can become a millionaire. And that's wild for a lot of us that didn't grow up with that much money. We were sitting there in residency and not making much money and really busy. And we got a negative net worth.
You can be a millionaire and it doesn't take as long as you might think. Use the advantages that you have. If you have a spouse that's working or you have a bit of an inheritance or you didn't have to borrow that much for school or whatever, take advantage of those things. All of us have our challenges as well that you'll need to overcome. You can do this. You'll not only become a millionaire, but you can retire as a multimillionaire and have a very comfortable retirement and awesome financial life.
FINANCE 101: ESTATE TAXES
I promised you at the top that we're going to talk about estate taxes. Now, most of you know about the federal estate tax. This is the idea that as a country, we've decided we don't want to have barons and dukes and princess that have inherited money for generation after generation after generation after generation.
And so, we basically tax wealth when you die. If you're a certain amount of wealthy, you'll lose about 40% of your wealth with each generation. When the next generation dies, 40% will be gone. And the idea is to keep the wealth from all accumulated in the hands of just a few people. That's the idea behind an estate tax.
Now, the gift tax is technically part of that estate tax system. Anytime you're giving away more than $18,000 a year, that counts toward your estate tax exemption. Now this exemption or exclusion sometimes it's called, is going to be $19,000 a year. Now that we're in 2025 is $18,000 a year. Last year, the total estate tax exemption, its lifetime exemption, also went up in 2025. It's actually scheduled to be cut in half at the end of 2025. But given Republicans control the house, Republicans control the Senate, and Republicans control the White House, I expect this is probably going to be extended substantially.
But that exemption for 2025 is $13.99 million, $14 million basically, if you're single. Double it if you're married and it's portable now. Your spouse can use whatever you didn't use. $28 million for most married people. If you die in 2025, that's how much is exempt from this estate tax which gets to 40% pretty darn rapidly. And I think that the first million dollars may be taxed at less than 40%, but after a million dollars above and beyond this $28 million it's getting taxed at 40%.
But the good news is most of you out there are not going to die with more than $28 million, at least in today's money. If this law remains the same, and it continues to be indexed to inflation over the years, you're probably not paying any federal estate tax if you're like most White Coat Investors.
Now, if you had some really successful entrepreneurship venture, or you're just really, really thrifty and high income and saved a lot of your money and invested it well, maybe you can get there. But most people just aren't going to get there. And there's lots of things you can do to make sure you don't get there. You can use some trust and you can give money away to charity and you can give money away earlier in your life and those sorts of things. But it's relatively easy to deal with because that estate tax exemption is so high.
But a lot of people don't realize though, is that there's a bunch of states that also have an estate tax. And their exemptions are not always as high as the federal estate tax. So, let's talk about what states have this., Washington has one, Oregon, Minnesota, Iowa, Nebraska, Illinois, Kentucky, Pennsylvania, New Jersey, New York, Vermont, Massachusetts, Connecticut and Maine. I think I've got them all.
Now, a few of those states, four of those states don't actually have an estate tax. They have an inheritance tax, which works a little bit differently. It's applied to the heir, not to the estate. And often the exemption is very low on that. And so, the tax rates are different in each of these states. The exemption amount is different in these states and a few of them have this variant called an inheritance tax. Oh, I don't know if I mentioned Maryland. Maryland's got both. Not only is it having an estate tax, it's got an inheritance tax. So, maybe not the place to be living when you die. Oh, Hawaii as well. I forgot to mention Hawaii. Hawaii has one.
Okay, what are the exemption amounts? Well, let's go through these. Connecticut, it's $13 million. Okay, that's just about what the federal one is. That's not too bad. Hawaii, it's $5.5 million. That's a lot lower than the federal one. Illinois, it's $4 million. Maine, it's $6.8 million. Maryland is $5 million. Massachusetts, only $2 million. Lots of people are going to be paying an estate tax in Massachusetts.
Minnesota, it's $3 million. New York, it's $6.9 million. Oregon, $1 million. That's a real amount and it's not insignificant. It's 10 to 16% of your estate is going to go to Oregon above a million dollars. If you live in Oregon, maybe move somewhere else before you die. Just kidding. But it's probably worth doing some estate tax planning. Rhode Island, $1.8 million. Vermont, $5 million. Washington, a little over $2 million. District of Columbia, $4.7 million. Okay, lots of those are quite a bit lower than the federal estate tax exemption.
Now, when we talk about the inheritance tax in Kentucky, it's pretty low. It's $1,000, that's it. Above that, inheritance tax, 0 to 16%. Nebraska, it's 4100,000. New Jersey, it's 25,000. And who did I forget? Maryland, I don't know if there is an exemption there. 0 to 10% in Maryland.
Learn your state's estate tax and inheritance tax rules. Most states don't have this, but some do. If you're in one of those states I listed, and they're generally what we call blue states. Mostly in the Northeast, Minnesota, Illinois, Washington, Oregon. Not California though. And nothing basically in the southern half of the country. So, keep that in mind. It's worth knowing about if you're in one of those states, you need to do a little bit more estate planning than you might if you're not in one of those states.
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When I think about locums, I'm reminded of a friend who basically did locums straight out of training. He was married at the time too, and went to work for these places that paid him pretty well because they really needed the help, but also paid for all the expenses of living there. A food stipend, a housing stipend, et cetera.
There were basically no expenses for several years at the beginning of the career, and the pay was a little bit higher than it otherwise would have been. Well, no surprise that friend got to financial independence very quickly.
In fact, I suspect if you combine a locums approach with something like a short-term rental empire strategy, that might be the fastest pathway for a doctor to get to financial independence. And so, if early financial independence within five-ish years of getting out of training is something that's really important to you, consider locums and consider combining it with something like short-term rentals.
We've come to the end of another great episode of the Milestones to Millionaire podcast. This podcast is centered on you. About your challenges, your triumphs, et cetera. We need people to apply for it. If you go to whitecoatinvestor.com/milestones, you can apply to be a guest on this podcast.
Otherwise continue to send in your questions on the Speak Pipe for our regular podcast. Those can be left at whitecoatinvestor.com/speakpipe or just send an email to [email protected]. This is all driven by you and what you find interesting and what you want to talk about on this podcast.
Thanks for being a listener. Without you, there's not much of a podcast. It's just me talking to the wall. We're glad you're here.
Keep your head up and your shoulders back. You've got this. We'll see you next time on the Milestones to Millionaire podcast.
DISCLAIMER
The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
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