Part V. Risk Management & Insurance
Ok, fun time to talk about RISK! What a pleasant topic. Could we just skip this? I mean, yes.... we could.
And as a therapist you know that often the things we least want to talk about, are those which are the most important to address. And managing the risks to which you are exposed is, I believe, one of those things.
When you think about risk as a therapist in private practice, I think it helps to organize the discussion into three separate categories:
- Insurable risk in your personal life;
- Business risks (e.g. risks contained in your private practice); and finally
- Credit risks.
What does it mean to be self insured?
There are times in this guide, where I'll suggest you consider simply self-insuring certain risks. And what the heck does that mean?!
All self-insuring means is that you didn't buy an insurance policy.
Insurance policies are really just about exchanging one set of cash flows for another. When you purchase insurance, you're exchanging your cash outflow (the premium you pay the insurance company) for a different (possible) cash inflow (any claim the insurance company pays you).
The trick is that you hope you never have to make a claim. Because making a claim means something bad happened. So ideally you're actually exchanging you cash outflow for... nothing. This might appear like simply setting your money on fire. And this is, of course, how insurance companies make money. They receive your premium payment and in return pay you nada.
This is the reason some people choose to self-insure. "Forget paying this unaffordable premium cost for a risk that probably won't happen!"
But the thing is, even if you never make a claim, you still have received something of value (albeit it quite intangible). You've transferred risk to the insurance company. For example, if you get sued by a client, your malpractice insurance company bears most of the financial risk of that lawsuit.
But that transfer of risk isn't always worth it. Sometimes insurance is just too expensive, and it's better to simply self-insure. Just because you could buy an insurance policy, doesn't mean you always should. This is just one more example of personal finance being just that: personal. We have to really think through the particulars of your life before deciding on the right course of action. There are few universal right moves.
Insurable Risk in Your Private Life
There are a whole slew of insurance policies to consider purchasing. Do you need all of them? Almost certainly no. Do you need at least a few of them? Almost certainly yes. Let's take a look at the seven core insurance policies to protect your personal life.
Insurable Risk Insurance Resources
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We all need health insurance. And thankfully, much has been done in recent years to expand access (let's hope it survives the Republican challenges, but I digress).
Unfortunately, in the US, health insurance continues to be tied to employment, which I think is insane. But here we are. That makes it challenging for those of us who are self-employed or run our own small businesses.
Often, the easiest (if not the best or always cheapest) choice for health insurance is to purchase a policy on one of the Affordable Care Act exchanges. Which exchange you use depends on your state of residence.
If your practice employs someone other than you (and you're not related to that employee), you are then more easily able to purchase a group insurance policy on the private market. You may want to check out if any of the professional associations of which you're a member have pre-qualified any insurance brokers or insurance companies that would offer such a policy.
This area is too complex for me to dive deeply into at the moment (as I'm feverishly working away to finish the first version of this guide), but I plan to create some additional content in the near future. I'll email you when that content drops.
This one is pretty straight forward. If you own and drive a car, you're required to have liability insurance. So you should get that. But whether you choose to carry comprehensive coverage is a more nuanced decision.
Comprehensive coverage is the coverage that will repair your car if something happens to it. If you're leasing or still have a loan on the vehicle, you'll almost certainly be required to carry comprehensive coverage. But once the vehicle is paid off, it's entirely up to you. Eliminating comprehensive coverage would save you some money in premiums and might be something to consider.
However, remember absent comprehensive coverage you would be on the financial hook to repair the vehicle if something were to happen (regardless of whether you were at fault or not). If you're not at fault, you can sue the responsible party (or their insurer) for damages, which is something your insurance company would typically take care of for you (if you had comprehensive coverage that is).
Carrying homeowners insurance is an important policy if you own your own home. These policies usually also cover some of your personal possessions, even if they aren't stored in your home. They also provide some liability protection if something were to happen in your home or on property you own. These are typically smart policies to have and don't typically cost all that much.
Renter's policies are also a good idea to purchase if you don't own your home. Of course those policies won't cover the physical structure itself (it doesn't belong to you, so it's not your risk to worry about), but it will cover some of your possessions and protect your from liability. Your lessor might also require you to carry renter's insurance (mine does).
Scheduled Property Riders
What the heck does that mean? A rider is simply an add-on insurance policy attached to the core, or standard, policy. Scheduled property simply means there are specific items (usually high value ones like jewelry) that you've listed on a schedule (with that schedule being incorporated into the core insurance policy). If you own certain high-value items like jewelry, you will likely want to add a scheduled property rider to your home owners or renter's policy. Standard policies typically have absurdly low reimbursement limits for high-value items.
Earthquake & Fire
In certain areas of the world (like Los Angeles where I live) there are additional risks to your home which might require specific additional insurance policies. Earthquake and wildfire coverage is almost always specifically excluded from typical home owner's and renter's policies. A lot of people skip these insurance policies, especially earthquake. And that's understandable because it's quite expensive. But just remember that means you're on the hook to repair your house if it's damaged in an earthquake. And that, too, can be expensive.
No easy answers here, but have a think about the different risks to which your property is exposed and what the financial implications would be to you if any of those events came to pass. And be sure and carefully review you existing insurance polices for those events which are excluded from coverage. That will enable you to consider what additional policies you might wish to purchase.
A personal umbrella liability insurance policy is a general liability policy that covers you (because it's an umbrella of course) once the liability protection provided by your auto and home owners insurance polices is exhausted.
And in general, most people need an umbrella. Because sometimes it rains. Do YOU need a personal umbrella liability policy? The answer is probably yes. And yet not everyone needs one.
I will say that vastly more people truly need umbrella policies than hold them. I know some financial planning colleagues who advocate everyone carry an umbrella policy once they reach the age of majority (usually 18). Yes, that means they encourage clients to purchase their children an umbrella policy the moment they turn 18.
Is that overkill? I dunno, it's hard to say. You might think that if you own little in the way of assets (or even have negative net worth... thanks much, student loans) that an umbrella doesn't make much sense. And you may be right. BUT be aware that some courts may award damages out of your future earnings. That means even though you may just be swimming in a sea of student debt, you could still want to have an umbrella to protect your future wages from being garnished.
Are the nightmare scenarios an umbrella protects you against likely to happen? No, not particularly. But they DO happen. And umbrella insurance is reasonably inexpensive for the protection.
I personally carry $2 million in coverage (policies are usually sold in one million dollar increments) which is decidedly more that my net worth. That $2 million in coverage costs around $700 per year. The cheapest thing ever? No, but it does help me feel more secure.
There is a pretty good chance you'll go through life never needing an umbrella. But if you need one and don't have one, it's a real bummer.
Disability insurance provides you a certain percentage of your income if you become unable to work. It's a common insurance policy to receive as an employee benefit, but when you run your own practice, you get to decide whether you want it or not.
Do you need disability insurance? You don't always, no. You should think carefully about what type of disability would render you unable to work before deciding if purchasing a policy is right for you.
If you do decide a disability insurance policy is worth having, check out and see if any professional organizations of which you're a member offer discounts. CAMFT offers a policy for example.
You should also familiarize yourself with the different definitions of disability used in these insurance policies. If the definition is too narrowly constructed, you might consider yourself disabled when your insurance policy doesn't (and won't pay you as a result).
Also keep in mind that if you're self-employed or own your own practice, insurers typically look at your last year's tax return to determine the base earnings they will cover (and then would pay you a percentage of that base). So if you're about to start your own private practice and might have lower earnings for the next few years, you might want to get a policy in place sooner rather than later.
Here's a Nerd Wallet article providing a pretty decent overview of Disability insurance.
Prefer to listen to a thoughtful discussion around this? Listen to my friends Scott and James discuss on their Real Personal Finance Podcast episode: Do I Need Disability Insurance?
When do you need life insurance? Probably ONLY when someone you care about will suffer financially as a result of your untimely death.
If that statement doesn't describe you, life insurance is likely not something you need. Read on for cautions about how life insurance is often (inappropriately) sold.
If you have dependent children, you almost certainly need (term) life insurance. (Unless they don't depend on your earnings for financial support.) This is one of the very few absolute must-dos in the world of financial planning. Get term life insurance to cover their needs if you can't provide for them. (There's potentially a need for disability insurance here as well.)
I'd also suggest you think through if a stay-at-home parent should carry life insurance. Sometimes this get overlooked, but if the stay-at-home parent were to pass, there would be greatly increased child care costs. Or, the surviving spouse may choose to take a few years away from work to be with their children. Life insurance can financial support for navigating such a situation.
You may need life insurance even if you don't have children.
Even if you don't have children or other dependents, life insurance may still make sense. If you were to die, would your spouse need to start (or keep) working to pay living expenses? Even a small life insurance payment can help ease the financial stress of your passing. Eric & Kali are a husband and wife team who run their own financial planning firm, Beyond Your Hammock. Eric wrote an interesting article about why they chose to purchase life insurance policies on one another even though they don't have children.
Eric also wrote this excellent article that aligns with the way I think about life insurance, and how to evaluate if you need it. He also covers how to navigate the conflicts that life insurance salespeople have.
If you'd like help thinking through Life Insurance a bit more, my friends Scott and James over at the Real Personal Finance Podcast have just the episode for you: Do I Need Life Insurance?
At some point, life insurance will likely no longer make sense.
If you're independently wealthy and don't need to work, you likely don't need life insurance. If you were to die, you'd sadly be gone, but your money will still be here. And of course, you have a solid estate plan in place to make sure that wealth is transferred effectively and efficiently to your dependents. You do, right? If you don't, please use the time you would have used to purchase life insurance and go find a qualified estate planning attorney. (And I will add that life insurance can be used as part of a sophisticated estate plan for very high net worth families.)
How much life insurance do I need?
It's hard to know how much life insurance to purchase. This Nerd Wallet article provides a pretty good overview of how to think about this. The article does mention that you want to include enough of a life insurance benefit to pay off your home mortgage. And maybe you do, but let's take a moment to talk about debt payoffs in a bit more detail.
First of all, if you have federal student loan debt, no one needs to pay that off if you die: that debt is discharged upon your death. However, there is a potential risk that that debt forgiveness creates an income tax liability - and that would be a good thing to have life insurance policy proceeds to pay for.
Second, think through what would really happen to your assets and debts if you died. If you're single and die with a bunch of debt, that's tough luck for your lenders (I mean, worse luck for you but I digress): no one else is on the hook for your debts. Your creditors could go after whatever assets are held by your estate, but no one in your extended family is on the hook for any of that. There is one big exception to this: anyone who has co-signed on any of your debts. Those folks are still on the hook and life insurance might be a good tool to protect them.
If you have a family, debt payoff requirements get more complicated. But again, you need to think through whether you need life insurance to fully pay off your debts. If you have a spouse, or children, they'll still need a house to live in and likely a vehicle for transportation. But do they need to pay off the mortgage and car loan entirely? Maybe, but maybe not. They really just need money to continue making the mortgage and loan payments. If you want to provide a huge lump sump life insurance benefit to pay off all debts, that's of course fine. But you have to pay a higher insurance premium to get that benefit. Like in all areas of personal finance, it's all about balancing cost and benefits.
Term Life or Bust
Someone may have tried to sell you on the benefits of a whole life (or permanent life) insurance policy. They are almost certainly pulling one over on you. In all but a few cases, simply buying term life insurance for the amount of coverage you need is the right move.
UNLESS you're solving a thorny estate tax problem or business transfer situation. In those (fairly unusual) cases, whole life insurance might make good sense. In all other cases, just stick with term.
What's that? You've heard that whole life policies can be a great investment and you'd like to hear more about why I think term is better? Ok, fine. Please give me one moment, I just have to climb up on my soapbox. Ok, I'm all set. Let's do this.
Life Insurance Rant
When is the wrong time to buy life insurance? When you're buying it for any other reason than for its value as life insurance. With very few exceptions (that aren't even worth writing about), life insurance is not a good vehicle for savings nor is it a good store of value against which to borrow. If you've been told that, ignore that advice. It's nonsense. Whoever told you that is probably hoping to earn a big commission on selling you something you don't need.
One thing insurance agents seem to love to do is sell whole life insurance policies. This despite the fact that 99.999% of the time all you need is a simple term life insurance product. And term life insurance is cheap. Whole life policies are expensive - often unbelievably so. You can guess which type of policy will earn the selling agent the biggest commission.
Despite what many sales agents will tell you, insurance polices are rarely (if ever) good investments or appropriate ways to save for retirement. Unless you're solving a thorny business transfer or estate tax planning issue, you are almost always better off with term insurance. Sure, there could be that 0.001% of the time where whole life is better than term life. But I'll believe that when I see it. Rant over.
If you have business partners, life insurance can be an important tool.
And since you own your own private practice, think though what might happen if you (or one of your coworkers or co-owners) were to unexpectedly pass away. This is another reason to carry life insurance. But using insurance proceeds to fund post-death business buy-outs gets complicated very, very quickly. I highly recommend you consult a qualified financial planner and estate (and tax) attorney.
Long-term care insurance provides you benefits when you require long-term care for a chronic health condition. These policies generally cover the expenses of care in a variety of settings including nursing homes, assisted living facilities or even your own home.
This website provided by the US Department of Health and Human Services provides a good overview, as well as things to consider when purchasing a policy.
In general, this is a type of policy you should look to put in place sometime in your late 50's. Earlier than that and likely you'd just be wasting money. Later than that and your premiums will likely be quite high, or insurance carriers may decline to offer you coverage. Buying long-term care coverage in your 50's is, however, just a general rule of thumb. The best time for you to buy long-term care insurance will depend on your overall life & financial circumstances as well as your health.
Much like life insurance, once you've accumulated a certain level of assets, long-term care insurance no longer really makes much sense. You can afford to simply self-insure in the event you need expensive long-term care. Of course, you may still choose to hold a long-term care policy if you're concerned about depleting your financial resources (which would of course prevent them from being passed on to your loved ones).
Real Personal Finance Podcast: When do I need Long-Term Care Insurance
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Buying Insurance from Sales People
There is really no way to buy insurance policies other than from people who have an incentive to sell you an insurance policy. Even if you don't use an agent and go direct to the underwriting insurance company, that company still wants to sell you that policy. So you have to take the recommendations you get while going through the sales process (and it is a sales process) with a grain of salt.
That's why you really need to sit down and think about when it makes more sense to self-insure. Most insurance professionals are only compensated when you purchase a policy. They have clear incentives to encourage you to insure (rather than self-insure). That's why it's important (and difficult) to find an insurance agent that you trust. Or, retain a fee-only financial advisor like yours truly to help guide you to the best financial decision for you. There are also fee-only insurance experts out there. You pay them for their time and expertise (much like you'd pay an attorney).
Risk in Your Private Practice
Owning and operating any business exposes you to certain risk. You'll likely want to use some combination of the three risk management strategies I'll discuss in this section to mange these risks. For risks that are insurable, you can transfer the risk to an insurance company. For certain risks you can contain them within the business by forming a business entity. And finally you can reduce your exposure to certain risks by putting certain policies and procedures in place.
Private Practice Risk Management Resources
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Mostly what you need to worry about here is malpractice insurance and professional liability insurance. Always, always, always keep your malpractice insurance at an adequate level and in force. I talk about that more in the business entity section below.
Beyond those two basic policies, there are a whole slew of additional policies you might consider. Often times, it makes more sense to skip these policies. Instead, you'll self-insure these risks and protecting yourself through a combination of business entity & thoughtful policies and procedures.
If you're looking for a comprehensive deep dive of all the different policies you could consider, this episode of Therapy for Your Money is a great resource. I'll be honest, this conversation overwhelmed me a bit. It will certainly give you a very comprehensive view of the different insurance policies you could put in place.
Business entities, such as an LLC or Professional Corporation, are a confusing topic. I've found a fair bit of misleading information out there. To begin to dispel some of that confusion, let's start with three key points.
First point: the primary function of a business entity is to create a liability shield between your business and your personal assets. For example, if someone slips and falls in your office and breaks their arm, they could sue you for negligence. If you have a business entity in place, they would have to sue the business entity (rather than you personally). They could only go after the assets held directly by that business entity. The individual suing you would not, for example, be able to force you to sell your home to compensate them. Without a business entity in place, however, you could be forced to use your personal assets to cover any damages the legal process determines you owe.
Second point: no business entity will ever protect you from personal liability for actions you take as a licensed professional. Whatever actions you take as a licensed mental healthcare practitioner create potential personal liability regardless of business entity. These professional actions likely include supervision of other therapists. That is why carrying adequate malpractice insurance is essential. The courts won't care if you have set up an LLC or Professional Corporation or any other flavor of business entity. They will still hold you personally liable. Please keep that malpractice policy current!
Third point: be sure to check your state's specific legal requirements. Some states require that if you are a licensed professional you must use certain types of business entities. Instead of a "normal" LLC, you would have to form a "Professional LLC." And in California, professionals aren't able to use LLCs at all - the only business entity option is a Professional Corporation. Be sure and stay in compliance with your state's regulations, or you won't be able to reap the full benefits of your business entity.
There is a lot more that could (and probably should) be covered here. But honestly I haven't found much educational content I like. I find a lot of the conversations around this topic to be muddled. And muddled thinking in a complex subject area like this is a recipe for poor decision making.
But never fear, I'm in the process of putting together a short video on this subject. I'll post that once it's live.
No one likes policies and procedures. If you think they're a drag to follow, try creating them. I've had to do plenty of policy creation for my own financial planning firm. It hasn't been all that fun. AND it's been a really good use of my time. Why? Because I can carefully think things through once. And then I don't need to think about it again. I can just follow the policy (at least until I conduct a periodic review of my policies).
What am I thinking so hard about when I draft those policies and procedures? Well, I'm thinking about the risks to which I'm exposed. Certainly regulatory risk is a big one. There are just certain things I need to do. There are certain boxes I need to check to ensure that the California (and other) regulators are satisfied about the way I run my business. And yes, it can be somewhat of a pain.
But here's the thing about regulation. If you can look past the annoyance to the reason regulation exists in the first place, you'll discover that regulation has a heart of gold. Most regulation has good intentions (even if in practice some of it goes a bit astray). And that intention is to protect consumers from harm.
And I think that's really the heart of any risk management strategy. You're thinking through your policies and procedures to help make sure you don't unintentionally harm anyone. Of course you can't anticipate or control every factor that might lead to injury. But you can have a good think through of the things that could go wrong and then put thoughtful policies and procedures in place.
Viewed through that lens, I think the dreary work of formulating (and following) policy and procedure as an extension of loving kindness to anyone that interacts with me professionally.
I go into the more detail around policy and procedure in the pages on creating a healthy private practice, specifically in the compliance and operations sections. Primarily what you'll want to think about is HIPAA compliance (although there may be other areas to think through, especially if you are seeing clients face-to-face).
Credit risk is the risk of identity theft and the risk that something funky is happening with your credit file.
Credit risk is a fairly straightforward and simple thing to mange, but that doesn't make it easy. And credit risk management is something which many of us put off or ignore. It is admittedly one of the many small annoyances of modern life. Annoying as it might be, it's still pretty important. So let's take a moment to discuss how to manage the two risk areas related to your credit.
Credit Risk Management Resources
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Identify theft refers to when someone poses as you and takes out a bunch of debt in your name. Spoiler alert: they don't plan on repaying it. And the real bummer is, they create brand new credit accounts that you might never know even exist until it's too late - carefully monitoring the accounts you have for fraudulent transitions isn't enough. The risk of identity theft isn't necessarily huge, but the downside is awful.
What should you do to manage this risk? Well, you have two basic options.
First, you could log in and check your credit reports on a regular basis.
This is free, which is great. And understanding your credit report and knowing how to access it is also a great tool to have.
There are three credit bureaus that you need to be most concerned with: Equifax, Experian and Transunion. Each of these bureaus compile all manner of your financial transactions and report on how you use credit.
Each of the three major credit reporting bureaus are required by law to provide consumers with a free credit report once every 12 months. Pulling this report has no impact on your credit report (e.g. it is not a 'hard' pull).
There are many websites with domain names suggesting they offer free reports, but there is only one official site. Be sure to use AnnualCreditReport.com.
The approach I like is to pull one credit report every four months. This is admittedly hard to stick to and remember, so consider setting a calendar reminder. The benefit of the every four month approach is that you are just pulling your one free credit report for each bureau once every 12 months. And because you're checking one of your three primary credit reports each four months, there is a reduced risk of something bad happening without you being aware of it. I will add, however, that sometimes not every credit account shows up at all three bureaus. Why? I don't really know, but mistakes and oversights happen - which is why it's important to be checking those files in the first place!
Another option is to subscribe to a credit monitoring service.
As Investopedia describes, "Credit monitoring services provide you alerts when certain suspicious activity is detected. It pays attention to credit reports to see when new hits happen or when credit is taken out. Some credit monitoring also scans the dark web for your personal information being sold." I considered putting that description in my own words, but... it's a good description so let's just go with it.
I personally use the service provided by Experian. It's around $20 per month, which feels steep, but it honestly helps me sleep at night. And it provides a convenient place to review all of my credit reports (from all three bureaus) as well as monitor my overall credit score (the FICO score being the most commonly used of these scores).
If you're looking for a review of other credit monitoring services out there, here's Investopedia's list of the best credit monitoring services. These are probably all decent choices, although I don't know enough about any of them to recommend one over another.
Funky credit files (and yes, that is a technical term) can be the result of either errors or mayyyyyybe the ways you've used credit in the past.
PSA: there's no need to judge yourself or feel shame around how you've managed credit. Most of us have made missteps with credit. (Like the time I was 20 and ran up $1,600 of credit card debt from Abercrombie & Fitch. It made sense at the time, and I did have a plan of sorts. But when my parents found out, they had a different perspective. It was a learning and growth moment for everyone involved. But I digress.)
To catch errors, a great habit is to check each of your three credit reports each year, as I outlined in the Identity Theft section above. This is free.
And if you need to boost that credit score a few ticks, check out some of the resource links below. There is no quick fix for a low credit score, so please don't fall victim to the many scams requesting a "reasonable" payment for an alleged quick resolution to your credit woes. Slow and steady wins the race here.
Real Personal Finance Podcast: How to Maintain a Good Credit Score and Why It Matters
Investopedia article: How to Improve your Credit Score
In rare cases, it might make sense to work with a credit repair company, as this Investopedia article discusses. But be very cautious. There are so many scams. Let's trot out the tired old cliche: If it sounds too good to be true, it (probably... and maybe always) is.
A credit score is simply a number that attempts to summarize the likelihood you'll repay a loan, or otherwise fulfill your financial obligations (like paying rent). The number is based on the contents of your credit file. So your credit score isn't really distinct from your credit file. It's a separate thing, but it's based on is the information found in your credit report.
Looking for more information? Here's a good overview courtesy of Investopedia.
Need a break? See ya later, 🐊!
And if you're still raring to go... 🚀
Let's delve into Incapacity & Estate Planning!
Standard Not Advice Disclaimer
Just a friendly reminder that none of the information included anywhere in this guide is financial, legal or accounting advice. I don't know the specific financial circumstances of your life (or your private practice), so there's no way I can make blanket statements about what's right for you.
What I offer in this Guide is a suggestion on how you might think things through and then decide (for yourself) what's right.
For some topics, I've also included what I've learned works well for most people. But you're not most people, you're you. You might be in that minority where the general suggestions are the wrong approach.
Take everything said here (and anywhere else online) with a grain of salt, and seek out professional advice if you suspect you need it. Of course, I'm always happy to have a no cost introductory conversation with you to see if I can help.
I know this sounds like a legal CYA (that's cover your ass) statement. And yah, it is that. AND it's also an extension of loving kindness to you, the reader.
The way I cover my ass here is by making sure I don't encourage you to do anything that ends up causing you harm. I don't want that for you, and you don't want that for you. Take your time, think things through, be deliberate and seek out professional advice if you suspect you need it.