Residents

As a resident, you’re not earning your full income yet, but you are just about there, and you know what field you’ll be working in. This is a very opportune time for securing some fantastic rates, and also getting away with a level of coverage that you might not have access to for a few years after your residency is completed.

Not only can you lock your health down, but you can get discounts of up to 25%, get approved for amounts that you wouldn’t have access to for a couple of years, and reduce your current premium to a fraction of what it will be once you start your practice.

Depending on where you’ll end up working, the kind of overhead expenses that you’ll have, and if you’ll partner with someone, you should have either two, or three of the strategies listed below.

Personal Disability Insurance

This one is the most important coverage that you can have as a medical practitioner. You can’t pay for the coverage with your corporate bank account, and you can’t write off the premiums, but it is the one that will keep you afloat should, you become disabled or unable to perform your regular duties.

As a business owner, yes that what you’ll end up becoming, you are often key to your business/practice, and should something happen to you (injury or illness), that would prevent you from working, you’d want to know two things: first, your income won’t stop, second, your business/clinic/practice won’t need to come up with your income if you’re not producing activity or revenue for the business anymore (since you’re disabled and unable to work).

Having a personal disability insurance allows you to achieve both results:

• you will receive a tax-free income from the insurance company once you’ve satisfied the requirements listed in your contract,
• you won’t need to draw an income from your business since you’ll receive it from the insurance company, allowing you to keep that money in the business to hire your replacement or more drastic measures.

Personal disability is a policy that is owned personally, and paid personally. This way, if the time comes that you need to receive the benefit, it won’t be taxed.

It usually kicks in after 30, 60 or 90 days (depending on how much you’re willing to pay for it), and lasts for 2 years, 5 years, or to age 65.

Business Overhead Expenses Insurance

Business overhead expenses insurance is a policy that is owned and paid by the medical corporation. You need to be incorporated to have access to that coverage. That policy allows you to receive reimbursements for overhead costs like staff salaries, utilities, rent, loan repayments, accounting, and legal fees.

This coverage offers a tax deduction to the company, so it is usually very well received!

It usually gets triggered after 15 or 30 days, and last for up to 24 months, after which duration you’re pretty much expected to either have gone back to work, moved on and have been replaced by someone else, or have closed the company.

Buy-Sell Disability Insurance

This one is not one that you usually end up looking into at this stage. You need to be in a partnership with other doctors in a clinic for a couple of years before the insurance company will consider offering you coverage. But it is good to know that it exists, for when the time comes.

Buy-Sell Disability Insurance is a policy that would allow you to buy the shares from a partner who has become disabled after a period of 12, 18 or 24 months (depending on what the shareholder’s agreement states).

This coverage requires you to have a personal disability or a group disability policy first (which you should have anyway). It pays a lump sum or a series of payouts or a mix of both, to the remaining shareholders if held personally, or to the company if the company is the owner of the policy.

That coverage is probably one of the most misunderstood policies in the marketplace, and is often discarded despite its significance for a clinic with multiple partners. It doesn’t matter much what your shareholder agreement says if you don’t have any money to back it up! That insurance coverage helps you ensure that you have the funds necessary to fund these shares back should something happen to one of your partners.

If you are looking at partnering with other doctors in a clinic environment, you need to look at this coverage at the end of your first year working together, since some of these policies can take some time to be implemented, especially if some of the partners are closer to retirement (usually a bit harder to insure).

Critical Illness is another type of coverage that is often overlooked because of the misconception that the disability coverage is the same thing as the critical illness coverage. Those two types of insurance are different, and you need to have both. Especially since you have access to a great tax strategy if you’re incorporated with that type of coverage.

There are three types of ownership for the Critical Illness, and each type has its advantages and downsides.

Personally Owned Critical Illness Insurance

If owned personally, you have to pay for it with personal after-tax dollars… but the benefit if you were to file a claim would be tax-free. Often residents consider this type of coverage as they are not incorporated yet, or might not incorporate. There are different types of coverage, some more expensive than others.

Corporately Owned Critical Illness Insurance

If owned corporately, the company will pay and own the policy, but the company will also be the beneficiary. The advantage of that structure is that the corporate after tax dollar used to pay for the premiums is much more efficient than the personal one, which could mean up to 30% savings on your premiums (probably not at this stage of your career, but later as your income increases significantly).

If you get sick and file a claim, the company will receive the money, which means that if you want to take the money out of the company, you’ll lose some of it to taxes. But the tax savings on the premium can justify that inconvenience.

Depending on how long after you contracted the coverage, you’d get sick, would determine the relevance of owning it personally or corporately.

Joint Ownership Critical Illness Insurance

This strategy offers a very interesting tax efficient transfer of your retained earnings from the corporate account to your personal account. The strategy does take 15 to 20 years to be implemented, and is not suitable for just anybody. But if you can use that strategy, its benefits are very strong.

Life insurance is quite interesting since it offers different strategies based on the kind of policy you get (term vs. permanent), and the type of ownership you have (personally or corporately).

Personal ownership vs. corporate ownership

Owning a policy personally means that you need to use personal after-tax dollars as opposed to the corporate after-tax dollars, which often means a difference of up to 30% in taxes.

The beneficiary in a corporate policy, depending on when the death occurs, is often going to the estate through the CDA (Capital Dividend Account), so the worry about getting a death benefit taxed is reduced and the benefit of having the policy corporately owned outweighs the risk of added taxation.

Term vs. permanent

Term insurance is usually much cheaper in the short term as opposed to Permanent. The challenge is that you only “rent” the insurance, and are not building any equity inside that policy. The beauty about it, though, is that if you purchase the Term policy with the right insurance company, the guarantee to be able to convert it later into a permanent product makes it even more relevant.

Everybody should have a mix of permanent and term insurance. The term is cheaper, and can cover a horizon of 20 years, the permanent one is more for the long term, and will help cover funeral costs and estate fees at the very least, can be used as a personal bank, and offers a very efficient tax transfer of wealth to the next generations.

If you believe in saving money into your RRSP, setting up a PPP (Personal Pension Plan) or IPP (Individual Pension Plan) is a very efficient way to get additional income when you retire.

PPP – Personal Pension Plan

Very few advisors in the financial industry really understand the personal pension plan that can be set up through a corporate account, mostly because of the complexity of the paperwork required to setting one up. We rely on partners who are experts on this topic. When done properly, and depending on when you starting drawing T4 income, you could see some results as high as twice as much retirement income with a PPP as opposed to traditional RSSP.

IPP

The IPP is quite similar to the PPP, except that it is easier to put in place in terms of paperwork. As opposed to the PPP, your health for the IPP matters, and you need to ensure that you can qualify for it. Incorporated professionals often look at either the PPP or IPP with the same interest.