Young Doctors

Most doctors that I meet in the early years of their practice are focusing a lot of their disposable income towards paying down their student loan debt. While this is commendable, it is not necessarily the most efficient way to achieve the desired outcome, or could leave you vulnerable to other potential risks.

Paying up debt, instead of paying down debt

There are two ways to pay off debt off: paying it up, or paying it down. The challenge with a lot of young doctors is that they focus all their energy and money on paying it down, instead of building an asset that can later be leveraged to pay off the debt, which is a way to pay up the debt. If you only focus on paying off a debt as fast as you can, and it takes you a couple of years or maybe even three to rid yourself of that debt, you’ve also lost the opportunity to put that money to work for you during those few years. This is true for a student loan or a mortgage. Applying double payments, or accelerated payments, could allow you to pay the mortgage down much faster, but should the market sink, the equity that you might have worked so hard to build could simply vanish. Just like that. If you’re building a savings account and earning some interest on it, regardless of what the market does, your money will be there and ready for you to use. And if you really wanted to pay down a loan or mortgage, nothing prevented you from doing it at any time.

A student loan is the equivalent of a business loan

One concept that a lot of young doctors struggle with is the acceptance that a student loan is similar to a business loan. If you start a business, and need capital, you approach the bank at BDC and ask for a loan that allows you to get the business off the ground. Becoming a doctor is like opening a business… except that it takes a lot longer to get going, and might cost significantly more than some start-ups. The benefits, once you finally get to join a practice or start your own, are real. A student loan is the equivalent to a business loan. Most businesses don’t pay off these loans as fast as they can, since they used them to get the business going.

I’m assuming that you purchased disability insurance before, or at the latest, as soon as you started practicing. Now that you understand your cash flow better, and have started to build that practice and get your revenue to stabilize, now is a good time to revisit the coverage you bought all these years ago. If all you have is coverage through your medical association, then a review of that coverage is highly recommended as well.

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

Personal Disability Insurance

As a medical doctor, you are key to your business, 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 wouldn’t stop, second, you wouldn’t need to drain your corporate account to cover for your expenses while off sick.

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 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. You can only apply for that coverage if you are incorporated, because the company has to own and pay for the policy.

What this coverage will do for you is very important! Since your personal disability will never match you pre-tax income (gross income), and since your expenses at the corporate level wouldn’t just stop because you can’t work, having a corporate policy to cover your corporate expenses allows you to keep the entire income received by your personal disability policy for your personal needs.

That policy will allow you to receive reimbursements for overhead costs like staff salaries, utilities, rent, loan repayments, accounting and legal fees… For example, the last thing you’d need if you became disabled, would be to have to worry about paying for your medical association fees from your personal bank account.

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

It usually gets triggered after 15 or 30 days, and last for 15 months, 18 months 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

This policy is only applicable for doctors who have partnered with other doctors or individuals in a clinic, or any other type of business for that matter. If you fall into that category, I would assume that you’ve hired a lawyer to draft a Buy-Sell agreement (if you haven’t, get on it right away!). That agreement usually does a good job outlining how you would handle a situation should you, or one of your partners, become sick or died. The challenge is that it often completely misses the question of where the money would come from.

This is where Buy-Sell Disability Insurance comes in. It 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. 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. You need to be in business with your partner(s) for at least 2 years before you can apply for that coverage.

That coverage is probably one of the most misunderstood policies in the marketplace, and is often discarded despite its significance 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.

Now that you understand your cash flow better, and that you’ve hopefully managed to sock away some of these earnings inside your corporate structure, you can start looking at getting a proper critical illness insurance policy set up for yourself.

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. This would only make sense for the doctors who are not incorporated.

Corporately Owned Critical Illness Insurance

If owned corporately, the company will pay for 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 after-tax dollar.

The downside is that if you get sick, the company will receive the money, and if you want to get that money into your personal bank account, you’ll have to pay tax to transfer it from the corporation to the personal. The tax savings on the premium, however, outweigh the additional taxation of the money should you wish to take it out. You could use that money to find a replacement for yourself, or cover corporate expenses, which means that you don’t have to use other funds to cover those expenses.

Joint Ownership Critical Illness Insurance

This strategy offers a very interesting tax strategy, since it allows you to efficiently transfer your retained earnings from the corporate account to your personal bank 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 undeniable.

Life insurance is one of the last tools available to doctors to protect their hard-earned income from the taxman. If you haven’t studied the benefits of those strategies yet, now is a good time to start. These are very relevant if you are incorporated, since the tax savings that can be obtained on the premiums alone make them worth it.

Depending on the amount that you’ll require, you will, in most cases, have a combination of term and permanent life insurance. And you might have some of that insurance owned personally, or have it all owned and paid by your professional corporation.

Personal ownership vs. corporate ownership

Owning a policy personally means that you need to use personal after-tax dollars, as opposed to corporate after-tax dollars, which usually creates a 20% to 30% difference in the taxes you’ll pay for the coverage.

The beneficiary of a corporate policy is the corporation. But depending on when the death occurs, it often flows through the CDA (Capital Dividend Account) to your estate, so it makes more sense to have the policy owned and paid by the corporation, since no additional taxes would be required at the time of death (depending on when that event happens).

Joint Ownership

When a policy is jointly owned, and is designed properly, it can become a very efficient way to move money out of the company into a “sheltered” life insurance environment.

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. You’re also not sure if you’ll qualify for more insurance down the road should your health change, and since the cost of insurance after the initial term goes up (sometimes significantly), having some permanent insurance makes sense.

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, and/or offer some very efficient tax transfers of wealth to the next generations.

If you believe in saving money into your RRSP, setting up a PPP (Personal Pension Plan) or an IPP (Individual Pension Program) 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 (PPP) that can be set up through a corporate account, mostly because of the complexity of the paperwork required to set one up. We rely on partners who are experts on this topic. When done properly, and depending on when you start drawing T4 income, you could see some results as high as twice as much retirement income with a PPP as opposed to a 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 the IPP with the same interest.