Established Doctors

As mentioned above, you’ve been practicing now for a couple decades or more, your have a very clear idea of what your cash flow looks like, and you’ve probably been updating your disability policy along the way when you thought about it… But here are some of the common situations we encounter on a regular basis: you either haven’t really paid attention to how much coverage you have, or you’re paying more than you need to for that coverage. You also haven’t necessarily kept up with the expenses of your clinic/business, and if you have any business overhead expenses insurance, it is not adequate and would leave you short to cover all corporate expenses should you become disabled. For those of you who have partnered with other doctors, or into any other kind of business, the terms of the buy-sell agreements are often not backed up by a policy.

Depending on the risk you want to protect against, and the structure of your business, you should have either two, or three of the strategies listed below.

Personal Disability Insurance

As a doctor, surgeon, specialist, which in our case also means business owner, you are often key to your business. Should something happen to you (injury or illness), that would prevent you from working, you’d want to know two things:

• first, your income wouldn’t stop,
• second, you wouldn’t have to strain your business to cover for your corporate expenses.

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. There are no ways around that one… It is what it is.

But for that reason, if you ever need it, the benefit that you’d receive would not be taxed. It usually kicks in after 30, 60 or 90 days depending on how you’ve designed it, and lasts for 2 years, 5 years, or till age 65.

Business Overhead Expenses Insurance

Business Overhead Expenses insurance is a policy that is owned and paid by the company/corporation/business. So you need to be incorporated to qualify for that one.

This 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 business, so it is usually a no-brainer! It usually gets triggered after 15 or 30 days, and last for 15, 18 or 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

Since you’re well established, secure, and have accumulated some good savings inside your corporation, you’re going to look for opportunities to “grow” that money through various strategies. And given your title, you’ll be solicited to hand your money over for all sorts of investments! Be cautious! You’re also only 10-15 years from retirement, and you probably need to be very weary to what you’ll throw you money at, as you can’t afford for it to vanish. It happens more than you think!

But if you happen to join a business with other doctors, or a brother-in-law, or a friend who has that great startup that you’ve been waiting for… getting a proper buy-sell agreement drafted by a lawyer should be your second step (first one being thorough review of the business proposal).

The Buy-Sell Disability Insurance policy allows 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. 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 market place, and is often discarded despite its significant important for a business owner. 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.

In the last few years, the CRA has come with some new rules that significantly affect your ability to grow and protect your wealth inside your company. The restriction on corporate passive income are simply ludicrous. And while the life insurance vehicle offers a great opportunity to grow and protect your money from the taxman, having a properly set critical illness policy offers two critical benefits: first, it offers a much needed protection against the biggest risk you face, which being unable to work because of an illness, the second being a very efficient tax planning strategy to transfer corporate dollars into your personal bank account at at very efficient tax rate.

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. Most doctors have little of that personal coverage in place, cause they saw it as an expenses, as opposed to a tax strategy that comes with an insurance coverage.

Corporately Owned Critical Illness Insurance

If owned corporately, the company will pay and own the policy, but the company will also be the beneficiary. This usually means a significant tax saving on the premiums. Imagine if you could save 30% on your insurance premiums, or get 30% more coverage for the same price! That’s what a corporate ownership offers in most cases.

The advantage of owning the policy corporately is that you can use corporate after-tax dollar to pay for the premiums, instead of much higher taxed personal dollars.

The downside though is that if you get sick, the company will receive the fund. And if you want to take the money out of the company to use it personally, then you have to pay some taxes to extract that money out of the company. But you usually have more coverage, and have saved so much money on taxes over the years, that it still makes it worth it!

Joint Ownership Critical Illness Insurance

This is one of the best tax strategies left for business owners/medical practitioners who are looking at a way to strip the retained earnings from their corporate structure into their personal bank account in a tax efficient manner.

The strategy does take 15 to 20 years to be implemented, which usually lines up perfectly with your retirement goals. At your age, you’ve managed to accumulate that wealth inside the company, and are hopefully still fairly healthy so you can qualify for the coverage. This is one strategy that you should really consider. Some accountants don’t like the inherent risks that CRA might change their mind down the road and start taxing the return of premium more, but it is worth the risk, especially as often these kinds of strategies or agreements are grand-fathered in when a tax change is made.

As mentioned above, the government has been attacking doctors with tax rules and restrictions that really affect your ability to build a sufficient nest egg to provide you with a comfortable retirement.

Life insurance has always been a very efficient way to reduce the tax erosion of your dollar, but the new tax rules are now confirming it as one of the last tools available to doctors/surgeons/specialists to grow and protect your wealth. I published two books about this, so I’m quite passionate about it!

Depending on the kind of policy you get (term vs permanent), and on the ownership you decide (personally or corporately), you need to make sure that you use the living benefits of these products, and not only the death benefit ones…

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 usually creates a difference of at least 20%  in premiums.

The beneficiary of a corporate policy is usually the corporation, but depending on when the death occurs (and the adjusted cost basis), that money is going to flow through the CDA (Capital Dividend Account) to the estate without any taxes, which makes this ownership type the most relevant in most cases.

The books I wrote on the infinite banking concept are extremely relevant right now, especially when the market take a dive, like it is currently. Getting an alternative that will be guaranteed regardless of the stock market, that will be taxed at a much lower level, and that offers multiple other benefits is something that no doctors/specialist/surgeon should overlook.

Term vs Permanent

Term insurance is usually much cheaper in the short term as opposed to Permanent, but it is not meant to be there for the long run. Term is great to cover short term needs for insurance, and also to create a guaranteed conversion opportunity into a permanent product. The permanent policies are the ones that allow you to build equity and access funds during retirement with little to no tax. The permanent type policy also offers a very efficient tax transfer of wealth to the next generations.

Everybody should have a mix of permanent and term insurance.

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

There are only but a few advisors who really understand the process, or more importantly, the paperwork connected with setting up a PPP. I rely on the partners in my business to offer the expertise 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 retirment income with a PPP as opposed to traditional RSSP.

IPP

The IPP is quite similar to the PPP, with a little bit less flexibility. Incorporated professionals often look at either the PPP or IPP with same interest.