Split-Dollar Life Insurance Plans for Doctors

  A Valuable but Complex Business Arrangement for Physicians

 By Gary A. Cook; MSFS, CLU, RHU, CFP® CMP™fp-book

Split dollar arrangements can be a complicated and confusing concept for even the most experienced insurance professionals or financial advisors. 

Moreover, for most physicians and healthcare executives they seem to be fraught with even more confusion. 

The Basic Concept

This concept is, in its simplest terms, a way for a medical practice to share the cost and benefit of a life insurance policy with a valued physician employee. 

In a normal split dollar arrangement, the employee doctor will receive valuable life insurance coverage at little cost to them.  The medical practice business entity pays the majority of the premium, but is usually able to recover the entire cost of providing this benefit. 

Approaches and Structures [IRS Notice 2002-8 and 2002-59]

Following the publication of IRS Notices 2002-8 and 2002-59, there are currently two general approaches to the ownership of business split-dollar life insurance: Employer-owned or Employee-owned. (In addition, Proposed Regulation 164754-01, substantially changed split-dollar arrangements even further.  

Both the medical practitioner and his/her financial advisor should research this area thoroughly before proceeding or making any recommendations. Regardless of the method used, a written agreement must be prepared to spell out the rights and obligations of the parties.

[1] Employer-owned method [IRS Tables and PS38 Rates] 

In the employer-owned method the employer is the sole owner of the policy. A written split-dollar agreement usually permits the employee to name the beneficiary for most of the death proceeds. The employer owns all the cash value and has the unfettered right to borrow or withdraw it as necessary. 

At the end of the formal agreement, the healthcare business entity can generally (1) continue the policy as key person insurance, (2) transfer ownership to the insured and report the cash values as additional income to the insured, (3) sell the policy to the insured, or (4) use a combination of these methods. This is commonly referred to as “rollout.”

Medical practitioners, and their advisors, should be careful not to include rollout language in the split-dollar agreement. Many plans are set up with the intent—although not in writing—to transfer the policy to the insured after a certain number of years.

The reason the rollout should not be included is that if the parties formally agree that after a specified number of years—or following a specific event—related only to the circumstances surrounding the policy, that the policy will be turned over to the insured, the IRS could declare that the entire transaction was a sham and that its sole purpose was to avoid taxation of the premiums to the employee.  

If that happens, the IRS may deem that the premiums paid should be considered income to the employee when they were paid. If this comes up in an audit years after the inception of the agreement, it may generate substantial interest and penalties in addition to the additional taxes due. The death proceeds available to the insured employee’s beneficiary are considered a current economic benefit. Also called reportable economic benefit (REB), it is an annually taxable event to the employee.  

If an individual policy is involved, the REB is calculated by multiplying the face amount times government’s rate tables, or the insurance company’s alternative term rates, using the insured’s age.  

If a second-to-die policy is involved, the government’s PS38 rates or the company’s alternative PS38 rates will be used.

Any part of the premium actually paid by the employee is used to offset any REB dollar-for-dollar. 

The employer-owned method is primarily used when the employer wishes to maintain as much control as possible over the life insurance policy or for officers and executives of publicly-held corporations. This employee perquisite can be used to reward key employees with current inexpensive death protection and simultaneously provide a potential handcuff for them by informally funding a deferred compensation agreement. 

[2] Employee-owned method [Code § 7872] 

With the employee-owned method, the insured-employee doctor is generally the applicant and owner of the policy.  Any premiums paid by the practice are deemed to be loans to the employee and the employee reports as income an imputed interest rate on the cumulative amount of loan based on Code § 7872.

A collateral assignment is made for the benefit of the business to cover the cumulative loan amount.  In some cases, the assignment may allow the assignee to have access to the cash values of the policy by way of a policy loan. This method is unavailable for officers and executives of publicly- held corporations because of the current restrictions on corporate loans (the Sarbanes-Oxley Act). 

The employee-owned method is somewhat similar to the older collateral assignment form of split-dollar. The benefits for the employee are both the ability to control large amounts of death proceeds as well as developing equity in the policy.

Whether or not this new method catches on will depend greatly on the imputed interest rate published by the IRS every July. If set low enough, this may be an excellent opportunity for the employee to use inexpensive business dollars to pay for life insurance.  

Illustrative Example: 

Dr. Charles Tryon is a valuable member of a team of surgeons at St. Mary’s Hospital.  He has recently developed a new technique for treating brain aneurysms.  The hospital would like to keep him on staff for years to come. 

Dr. Tryon is married and has one small child and his wife is pregnant.  He has requested that the hospital provide him with more life insurance.  The hospital’s board of directors meets with a number of financial advisors to review their options and they settle on an employer-owned method split dollar arrangement. 

As a result, they will purchase and pay for a life insurance policy on Dr. Tryon, providing him the bulk of the death benefit for his family, as long as he is a member of their hospital staff.  They have also agreed to bonus Dr. Tryon the amount equal to the Reportable Economic Benefit, in order to keep his insurance cost at a minimum.



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The above is not intended to be a complete treatise on the split dollar concept. There are many different variations that continue to change and develop daily.  Due to the complexity of split dollar and potential tax implications it is recommended that when considering a split dollar arrangement, an experienced team of advisors be consulted.


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INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

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Homeowner Insurance Policy Endorsements

Home Title and Boat Insurance for Physicians

By Gary A. Cook; MSFS, CLU, RHU, CFP® CMP™ insurance-book

The physician homeowner is well advised to consider a multitude of endorsements and/or potential increases in their insurance policy limits. 

Examples include:

· Scheduling personal property, such as jewelry, furs, golf equipment and computers, which have been exempted from coverage, or coverage has a severe dollar limitation. 

· Increasing liability coverage to take advantage of the minimums needed for “Umbrella Liability” to be covered shortly.

· Theft extension endorsement to remove the exclusion for loss of unattended property from a motor vehicle, trailer or watercraft.

· Earthquake and/or sinkhole collapse coverage.

· Increasing the deductible from the standard $250 to a convenient self-insurance amount. 

Two other important riders include home-title and boat insurance. 

Home Title Insurance

As a routine part of any home purchase, a history of the title to the property, as well as any liens or conveyances, is completed.  This is referred to as title insurance, and typically protects the mortgage lender from any title defects.

If a title defect causes loss, the title insurance company will indemnify the lender, not the homebuyer, to the extent of the loan.  These are single premium policies of indefinite duration, but can terminate when the loan is retired.

Title insurance is usually required by the lender at the time of settlement.  If the state does not required this coverage to be paid by the seller, its payment can certainly be negotiated by the parties involved. The medical professional should also inquire as to the cost of their own title insurance policy.  This second policy would protect them rather than the mortgage lender. 

Although it would undoubtedly add to the expense of closing, there is no harm in requesting that the seller be responsible for providing this protection to the purchaser as well.

Boat Insurance Overview

Watercraft and small pleasure boats are usually covered within a homeowner policy, but generally only for $1,000.  More expensive boats are often insured either under a separate Inland Marine policy or as a Personal Articles Floater (attachment) to the homeowner’s policy.

The decision between these two alternatives usually involves the liability risk element. There is no provision in the Personal Article Floater for liability, and although it could be increased on the homeowners, it is usually preferable to use a separate policy.

Other items to consider are the size of the craft, maximum speed, engine horsepower, waters navigated and special uses, such as water skiing or racing. Yacht insurance is usually written in the traditional terms of Ocean Marine insurance, with both “Hull” coverage and “Protection and Indemnity” liability coverage. 

It is quite different from an Inland Marine policy and is beyond the scope of this discussion. 


And so, what is your experience with any – or all – of the above insurance policy riders; worthwhile or worthless? 

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Insurance Terms and Definitions for Physicians

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A “Need-to-Know” Glossary for all Medical Professionals

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[By Staff Writers]

Attained age: The premium rate charged to an insured at his or her current age on a policy conversion that would be the same as that offered by a company to new insureds who could qualify for standard rates.

Beneficiary: A person or entity named by the policyholder to receive death benefits under a life insurance policy. 

Cash value: The amount available in cash that accumulates in a whole life, universal life, variable life, or universal variable life policy upon voluntary termination of a policy before it becomes payable by death or maturity. 

Death benefit: Gross proceeds payable to a beneficiary from a life insurance policy. This includes the policy face amount and any additional insurance amounts paid by reason of the insured’s death, such as accidental death benefits and the face amount of any paid-up additional insurance or any term rider.

Deficit Reduction Act of 1984 (DEFRA): Act that changed the way life insurance companies are taxed, including a tax law definition of life insurance for purposes of determining whether a policy qualifies for favorable tax treatment. DEFRA made endowment policies obsolete. 

Grace period: A period of 31 days past the payment due date, during which the premium may be paid without penalty. 

Investment yield: Yield calculated after investment-related expenses and before taxes.

Lapse ratio: Percentage of policies that are terminated by the insured or lapse, prior to death.

Life insurance: The transfer to an insurance company of part or all of the risk of financial loss due to the death of an insured person. Upon such death, the insurance company agrees to pay a stated sum or future income to the beneficiaries.

Mortality charges: Charges a company makes against the policy to cover the policy’s share of the cost of death claims, which is the cost of providing the insurance protection.

Nonforfeiture option: Choices available to a policyholder who surrenders a cash value policy before the maturity date based on his or her interest in the contract. 

Period of contestability: A stipulated period of time in which a life insurance company is prevented from voiding a life insurance contract and challenging the coverage because of alleged statements by the insured. When fraud is involved, the period of contestability does not expire. 

Tax and Miscellaneous Revenue Act of 1988 (TAMRA): Act that created a new class of life insurance contracts (modified endowment contracts), which are subject to less favorable taxation rules than those applying to life insurance that failed the TRA 1986 test. 


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Questionable Insurance Policies for Doctors

Beware the Hype of Superfluous Products

Gary A. Cook; MSFS, CLU, RHU, CFP® CMP™

The following insurance policies should be carefully considered by physicians before purchase, since they may be unnecessary, too expensive, provide only minimal benefits or be duplicated in other insurance policies.

Avoid or Purchase?

These suspect insurance policy types include credit life or home mortgage insurance (decreasing term), life insurance for children, accident policies for students and pets, hospital indemnity policies, dread disease insurance, credit card insurance, pet health insurance, life insurance for the elderly, funeral insurance, flight insurance, pre-paid legal insurance and most extended warranties on automobiles, televisions, stereos, home computers and the like.   

On the other hand, the following types of coverage may be important in selected cases: trip cancellation insurance, termite insurance and flood and earthquake insurance. Regardless, the purchase choice for all of the above is your own – so think carefully. 

The “Perfect” Retirement Insurance Vehicle – Does Not Exist! 

Additionally, according to fee-only life insurance expert Peter C. Katt of Kalamazoo, Michigan, doctors should be on guard against believing in the existence of perfect retirement vehicles funded through “springing” cash value life insurance plans.

These plans reportedly feature payments of very large premiums while the policy is subject to favorable tax treatment, and then transferring the policy to the insured doctor when it appears to have no taxable value, after which the cash value springs to life. 

Assessment – Beware the VEBA

Unfortunately, in the real world, tax deductible contributions and tax-free benefits do not exist without resorting to fraud or deception.

Particularly notorious are the so-called continuous group insurance and VEBA (Voluntary Employee Benefit Association) pre-paid retiree plans, despite the fact that the later have been mistakenly endorsed by state medical societies – in certain cases.  


Always remember that no matter how professional and sincere marketers appear, there are no life insurance that can legitimately provide tax-deductible insurance with tax-free retirement benefits.  

Therefore, you should always consult a qualified professional for further information regarding your specific needs. And so, have you ever been “burned” or benefited by any of the above insurance policy types? 

More information: ttp://www.jbpub.com/catalog/9780763733421   

About insurance agents: https://healthcarefinancials.wordpress.com/2007/12/18/insurance-agents-raising-the-bar

Fiduciary education: http://www.CertifiedMedicalPlanner.org



More on “Umbrella” Liability Insurance

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Negligence Based Coverage – Vital for Physicians

By Gary A. Cook; MSFS, CLU, RHU, CFP® CMP™ 

Negligence is generally the basis for liability “umbrella” insurance.   

Definition of Negligence

Negligence may be defined as the failure on the part of an individual to exercise the proper degree of care required by the circumstances.

It may consist of the failure to do something, or doing something that should not have been done.  It is the omission to do what a reasonable and prudent person would have done in the ordinary conduct of human affairs.

Umbrella Insurance Policy Structure

Umbrella insurance policies should be considered anytime the medical professional or healthcare practitioner has a substantial current income or has accumulated a sizable estate, and is concerned about asset protection from potential litigation.   

Umbrella policies vary greatly in structure so care should be taken to examine all of the various aspects of the policy carefully. Not only do umbrella policies vary in structure, but they can be arranged with many different endorsements to meet the specific needs of the medical professional. 


A few illustrations for the practicing physician would be:

· The addition of personal injury coverage (to include libel, slander and defamation of character).

· Incidental medical business pursuits (to include coverage to personal automobiles where the healthcare or business activity was incidental and not the primary purpose of the use of the car).

· The broadening of personal automobile coverage (to the insured regardless of whose vehicle they were driving and the coverage afforded that vehicle).


policy insurance



And so, what has been your experience with this insurance policy type which is typically very inexpensive?

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Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM) 

Key-Person Insurance for Physicians

Another Business Use of Life Insurance

Gary A. Cook; MSFS, CLU, RHU, CFP® CMP™ 

If a key physician were to die prematurely, what would potentially happen to the affected medical practice?

In many cases, especially in smaller practices, it would have a devastating affect on the bottom line, or even precipitate a bankruptcy. 

In these circumstances, a form of business insurance, called “key person coverage”, may be recommended in order to alleviate the potential financial problems resulting from the death of that employee.

Variations on a Life Insurance Theme

In our scenario, the medical practice would purchase and own a life insurance policy on the key person or physician. Upon the death of the key doctor employee, the life insurance proceeds could be used to:

· Pay off bank loans for the practice;

· Replace lost profits of the practice;

· Establish a reserve for the search, hiring and training of a physician replacement. 


Main Lion Hospital [MLH] gained national recognition as an innovator with a new procedure for laser eye surgery. Not only have they invested an enormous sum of money in the equipment used, but they are also very dependent on the talents and continued employment of Dr. David James Williamson IV, who helped design the equipment and procedure.


Fearing the economic consequences if Dr. Williamson were to die, MLH purchased an insurance policy on his life to help pay for the immediate replacement and the training of another specialist.

And so, do you have this type of insurance policy as either the key-physician, or an associate doctor in a medical practice that recognizes the need?

Related information: www.jbpub.com/catalog/9780763733421

More info: www.HealthDictionarySeries.com

Physician Workers’ Compensation Insurance [WCI]

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A Necessity for Contemporary Medical Practices

[Staff Writers]

Workers’ Compensation Insurance [WCI] is reported to be the largest line of commercial insurance, possibly because it is also a statutory obligation for most physicians and all employers who have common law employees.

Purpose of WCI

Workers’ Compensation provides coverage for lost income due to on-the-job accidents or work-related disability or death, and benefits vary by state. Its purpose is not only to provide these benefits but also to reduce potential litigation.

Physician-Executive Benefits of WCI 

Medical office staff employees accepting the benefit payments from a Workers’ Compensation claim generally forego the right to sue their physician-employer. Workers’ Compensation rates are established by job descriptions and commercial rates for the medical professional’s office are some of the lowest available.

WCI Structures

Generally, the three methods of providing Workers’ Compensation coverage are: 1. Private commercial insurance; 2. Governmental insurance funds; and 3. Self-insurance.

There are however, seven “monopolistic” states – Nevada, North Dakota, Ohio, Washington, West Virginia, and Wyoming – which may not permit private commercial insurance.


The medical professional may be inclined to the third method of WCI coverage, especially in the larger offices.  Since the weekly benefits are typically below $750, this seems to make some sense. In larger medical groups, the physician-owners can elect not to be covered, as it is usually more convenient for the medical-executive to cover this risk with personal disability income insurance. 

Medical clinics or other healthcare entities, which wish to take more direct control of costs and benefit management, should consider self-insuring only after receiving expert advice.  This is one form of coverage that truly requires a trusted, knowledgeable insurance and risk-management advisor. 


What has been your experience with WCI in your geographic area? If your medical practice does not provide WC insurance; why not? 



Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™


Insurance Agents – Raising the Bar

[Few] Insurance Agents Learn About Modern Health Economics  

Staff Writers  insurance-book

As a registered health underwriter [RHU], insurance counselor, long-term care or life insurance agent, it seems that almost everyone today is also acquiring a general securities license, or becoming a “financial advisor.”


Currently, about 240,000 of the nation’s life insurance agents – down from more than one million in 1965 – are being pressured to move toward financial planning as distribution of insurance products over the Internet spreads like wildfire.

Meanwhile, the same insurance and investment companies that are knocking on your door are also courting the medical professionals with their practice enhancement and risk management programs. 

The Pondering 

So, even if you were not interested in doing financial planning for doctor’s, you have seen the status of the American College erode as your own business has declined because of the World Wide Web. 

And, in the eyes of your former golden goose doctor-clients, you may have become a charlatan as everyone is clamoring for a piece of your insurance business and cloaking it off in the guise of the contemporary topic of the day; medical practice management, healthcare business consulting and personal financial planning for physicians.  

Think this is an exaggerated statement? A prior – and oft repeated – survey first conducted by Deloitte & Touche Consulting Group of New York, found insurance agents ranked last in having the trust of a wide selection of the public!  

So you ponder and consider how to regain this lost trust and try to understand contemporary managed medical care and the current healthcare industrial complex?  

But, how do you learn about it at this stage in your career? 

  • What ever happened to the traditional indemnity health insurance, with its deductibles and 80/20 patient responsibility?
  • Where did the whole-life insurance policy buyer go, with its fat-profits for me and my sponsoring company?
  • How did I become a dinosaur insurance sales-agent?  

The Realization 

It was so easy to sell insurance in the good old days – your product provided good coverage – and the agent made a nice sales profit. So what – if it was expensive for the client?  Now, you realize that making a living will be more difficult in the future.  Like all the struggling collateral advisors in healthcare, you find yourself asking; how do I talk the talk and walk the walk – in this new era of insurance change and health reform turmoil?  

The Epiphany 

Slowly, as you study and re-engineer, you become empowered with knowledge for new risk management derivatives that provide added-value to physician clients.

And, you learn to integrate physician-focused financial planning concepts with medical practice management principles.  You learn something about health-economics and you seek to become a “fiduciary” and actually work for the client; not the insurance company. 

You are no longer just an insurance salesman, but are becoming a trusted advisor for the medical community.  You are slowly recreating your career and may successfully avoid the managed care “ripple effect”, after all. 

Educational information: www.CertifiedMedicalPlanner.com

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Medical Practice Business Insurance

More Needed than Just Medical Malpractice Insurance

 By Staff Writers

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There are several insurance, risk management and related liability mattes that physicians face today. These include, but are not limited to the following issues:  

1. New Thoughts on Malpractice Liability Insurance: 

The Capitation Liability Theory of malpractice views liability management and premium costs in light of the managed care revolution.  For example, although the indemnity reimbursement model was the bedrock of healthcare financing, the incidence of litigation is believed to be the most frequent in this system.

Similarly, errors of commission, which may be more likely in a fee-based system, are easier to prove than errors of omission in a fixed system.  

Conversely, a capitated reimbursement system suggests the level of malpractice risk, and associated litigation, decreases as the volume of capitated care increases.  

 Therefore, since the future is unknown, choose a malpractice insurance company rated “A” or better by AM Best (http://www.ambest.com). True indications of a strong company are often reflected in the firm’s net premium to surplus ratio, where a lower ratio is better and the industry average is about .81; net liability to surplus ratio, which the industry average is 4.1; net average ratio, where the industry average is 4.9; and reserve-to-surplus ratio, in which the industry average is about 3.6-4.1. (Physicians Insurers Association of America) 

2. Fire, Theft and Liability Insurance: 

Fire and theft insurance is used to cover office equipment and contents, while leasehold insurance protects against loss due to the termination of a favorable lease caused by the insured perils. 

3. Worker’s Compensation Insurance:  

Worker’s compensation is mandatory to cover a loss of income, medical expenses, and rehabilitation. Most states also have established second-injury funds which are designed to compensate employee’s who suffer a second disability injury and thus shield the employer physician from the increased costs associated with a second injury.

4. Business Interruption / Loss of Income Protection Insurance: 

This covers the ongoing medical offices expenses and income loss, because of office damage, and continues during the Period of Restoration.  Most business interruption is written on an indemnity basis, and consists of two broad types: Business Income Coverage Form (Add Extra Expense) and Business Income Coverage Form (Without Extra Expense).  

Either type requires co-insurance and both require a choice of three income coverage forms: (1) business income including rental value, (2) business income excluding rental value, and (3) rental value only. Consideration should also be made for man / woman insurance and account’s receivable insurance.  

5. Dishonesty Insurance: 

A Fidelity Insurance Bond protects the doctor employer against employee dishonesty and covers the loss of money, securities or other property resulting from acts by the bonded person.

In a Surety bond, one party (surety) agrees to be responsible to a second party (obligee) for the obligations of a third party (the principal).

In medicine, surety bonds are used in situations in which one of the parties insists on a guarantee of indemnity if the second party fails to perform a specific act. Such a requirement may arise in connection with professional medical employment contracts or other situations in which there may be doubt concerning the ability to perform medical or office related business tasks.

6. Billing Errors & Omissions Insurance

This coverage protects you against liability for unintentional billing errors when you bill a third party, including Medicare/Medicaid, or managed care organizations. This is usually a separate policy that provides limits of liability from $100,000/$100,000, up to $1 million/$1 million to cover both defense and indemnity costs. 

Other endorsements may also be obtained to pay civil fines, penalties, judgments and settlements, or increased limits of liability, up to $1 million/$1 million. All terms, conditions and limitations are outlined in the actual policy form


What other types of medical practice risks are out there, and how do you mitigate them; if at all?

For more related information:Risk Management and Insurance for Physicians and Advisors” http://www.jbpub.com/catalog/9780763733421

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The Health Insurance Paradigm Shift

Medical Industry Changes to Wholesale Mentality

Staff Writers  

Until a decade ago, most doctors were probably more concerned with acquiring, maintaining or improving their medical acumen than worrying about practice management or personal financial planning.

And this was a good strategy, until recently. 


Variably, since 1990-2000 or so, medical professionals have not only worked harder to earn a living, but that living has not been as lucrative as it once was. Doctors today are working longer hours, diagnosing and treating patients faster; and augmenting their fear of malpractice with the fear of compliance audits like HIPAA, and literally risk their lives as they treat an increasing number of patients infected with HIV, herpes and hepatitis C; etc.  

What do they get for all their trouble? Slowly, a lifestyle that is sinking lower than many of the middle class patients they treat.

The Dramatic Shift

This is a dramatic change from the way things used to be in medicine. Some pundits even use the expression “health insurance payment paradigm shift” because the way doctors practice medicine – and the manner in which they get paid – has drastically changed.

This change has been from an individual retail mentality – to a wholesale and collective one. 

Other experts argue that this is a better deal for patients, while others document that there are more uninsured or underinsured patients than ever before.  

Nevertheless, a study done a few years ago revealed that almost 45 percent of all physicians are now corporate employees, and that private doctors do 40 percent less pro bono charity work than they did in the fee-for-service reimbursement system.  

Why; because they can no longer afford to work for free. 

Medicine’s Lost Professional Status 

Regardless of philosophy, one thing is certain: medical professionals have lost their financial clout, professional status and social standing; as some hospitals are even paid by the U.S. government not to train certain specialist physicians.  

And, twenty percent of medical schools are affiliated with business schools and practitioners are experiencing profound depression because of the managed care insurance crisis. 


The medical profession and healthcare industry is experiencing a professional crisis of conscience; a personal crisis of economics, and a very real problem that hurts everyone, doctor, payer and patient alike.   


How and why this shift happened is very complex, but there are three main factors involved: (1) demand and supply side inequalities, (2) healthcare technology cost escalation, and (3) socio-political timing and demographics.  

What are your own causative thoughts, and/or local and national ideas on the shifting debacle?

For more related information:Risk Management and Insurance for Physicians and Advisors” http://www.jbpub.com/catalog/9780763733421 

Beware “Faux” Health Insurance Models


Certified Medical Planner

The Proliferation of Fraudulent Silent (“Mirror”) Healthcare Models – Should I Join?

By Dr. David Edward Marcinko; MBA, CMP™


Beware the Silence 

A silent, faux, or “mirror” PPO, HMO or other provider model is not a formal managed care organization.  Rather, it usually is simply an intermediary attempt to negotiate practitioner fees downward by promising a higher volume of patients in exchange for the discounted fee structure.

Of course, the intermediary then resells the packaged contract product to any willing insurance company or other payer, thereby pocketing the difference as a nice profit. And, sometimes these virtual organizations are just indemnity companies in disguise.

Physicians should not fall for this ploy, since pricing pressure will be forced even lower in your next round of “real” PPO negotiations! 

Occasionally, an insurer or bold insurance agent will enter a market and tell its practitioners that they have signed up all the local, or many major, employers. Then, they’ll go to the employers and give them the same story about signing up all the major providers. The true story is that they haven’t signed up either and a Ponzi like situation is created!  

As an active fiduciary Certified Medical Planner™, insurance agent and licensed medical provider, I urge you to be on guard for silent HMOs, MCOs and any other silent insurance variation, since these virtual organizations may not exist except as exploitable arbitrage situations for the middleman. 

So, has anyone been duped out there?

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The CSO Life Insurance Table

Do You Know About the “New-Old” 2001-2009 CSO Life Insurance Table?

By Dr. David Edward Marcinko; MBA, CMP™


As physicians and medical professionals, we know that all life insurance and annuity product pricing is based on mortality – the expectation of when, not if, death will occur.  

But, did you know that at its December 2002 meeting, the National Association of Insurance Commissioners (NAIC, http://www.naic.org) approved a new mortality table for individual life insurance products sold in the United States.  

The 2001 Commissioners Standard Ordinary (CSO) Table is the new valuation mortality table – insurers will use it to determine mortality risk when they calculate their own company reserves.  So, all physicians should be aware that this may lead to structural changes to term policies including a reduction in term rates and higher issues ages for level term products.   

The good news is that several large insurers have already lowered term rates 20-30%. 

The trouble is that the “new CSO table” is not required to be used by all insurance companies until 2009! 

Your comments are appreciated? 

More on: “New Risks for Physicians to Manage”



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Annuity Taxation Basics

The Annuity Taxation Primer for Physicians

By: Gary A. Cook, MSFS, CFP®, CLU, ChFC, RHU, LUTCF, CMP™ (Hon); with Kathy D. Belteau, CFP®, CLU, ChFC, FLMI, and Philip E. Taylor, CLU, ChFC, FLMI insurance-book


The tax treatment of annuities is dependent on whether it is a qualified or non-qualified annuity.  Although both permit the tax-deferred growth of the investment and both have penalties for early distributions, they are governed under different sections of the IRC. 

Qualified Annuity Taxation

Qualified annuities are treated no different than any other tax-qualified retirement investment.  Growth of the investment, whether fixed interest or variable-based, escapes current taxation under one of the 400-series IRC sections. 

Additionally, if the funds are withdrawn prior to age 59½, there is a 10 percent penalty.  As the money is withdrawn, every dollar is taxed as ordinary income.  

Finally, fund distributions must begin no later than April 1 of the calendar year following the year when the owner turns age 70½.

Non-Qualified Annuity Taxation 

The taxation of non-qualified annuities is generally contained within IRC § 72.  Again, the annuity is provided tax-deferred growth and the 10 percent penalty for early withdrawal.  The manner that distributions are taken, however, will determine the nature of their taxation.


Withdrawals from non-qualified annuities are taxed in one of two ways depending upon when the annuity was issued.  Annuities issued prior to 8/14/82 had FIFO accounting (first in, first out). Since principal was first in, it came out first, tax-free.  With annuities issued on 8/14/82 and thereafter, taxation changed to LIFO (last in, first out). Simply put, withdrawals are now taxable since interest is withdrawn first.  

However, if annuitization is chosen, the insurance company using governmental tables develops an exclusion ratio.  This permits a portion of each received payment to be considered a return of principle and thus only a portion of each payment is taxable.  This exclusion ratio remains in effect until the insurance company has returned all of the original principle to the owner.  After that, every payment received will be considered 100 percent earnings and totally subject to ordinary income taxation. 

The 10% Excise Penalty Tax      

Just like an IRA, there is a 10% excise tax penalty on premature withdrawals for deferred annuities.  The government extends tax advantages to the annuity for retirement purposes. The government also extends tax disadvantages to taxpayers who do not use the annuity for retirement. All interest withdrawn prior to the owner being age 59½ will be subject to a 10% excise tax penalty.  

Exceptions to this penalty tax are disability of taxpayer, distribution from a pre 8/14/82 annuity, death of the owner, payout from an immediate annuity or substantially equal payments over the taxpayer’s life expectancy.

Wealth Transfer Issues

Regardless of whether the medical professional or healthcare practitioner has a qualified or non-qualified annuity, extreme care must be given when specifying beneficiaries.  Although these investments have great potential for appreciating sizable amounts of wealth during a lifetime, they are, unfortunately, very poor vehicles for the transfer of this wealth to successor generations after death.

Upon the death of an annuity owner, an annuity can be subject to both federal estate and federal income taxes.  This double taxation often results in a 40 to 70 percent loss of annuity value before the heirs can receive it.   The retired medical professional should seek wealth transfer advice if he/she holds a large portion of their wealth in annuities or other qualified plans such as IRAs. One good strategy to consider may be the Stretch IRA. 


As always, your thoughts and comments on this Executive-Post are appreciated.

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A Brief Overview of Annuities for Physicians

[By Gary A. Cook, MSFS, CFP®, CLU, ChFC, RHU, LUTCF, CMP™ (Hon)]

[By Kathy D. Belteau, CFP®, CLU, ChFC, FLMI]

[By Philip E. Taylor, CLU, ChFC, FLMI]fp-book1


Annuities were reportedly first used by Babylonian landowners to set aside income from a specific piece of farmland to reward soldiers or loyal assistants for the rest of their lives.

Today’s annuities substitute cash for farmland; however the concept is the same. In 1770, the first annuities were sold in the United States and were issued by church corporations for the benefit of ministers and their families. Annuities have grown on a tax-deferred basis since enactment of the Federal Income Tax Code in 1913.  They began to gain widespread acceptance in the early 1980s when interest rates credited exceeded 10%.  During the last two decades, annuities have been the fastest growing sector of premiums for life insurance companies.

Nevertheless, are they actually “needed” by contemporary physicians – – or merely “sold” to them? 

An annuity is a legal contract between an insurance company and the owner of the contract. The insurance company makes specific guarantees in consideration of money being deposited with the company.

Annuities are generally classified as fixed or variable – deferred or immediate.  As their names indicate, deferred annuities are designed as saving funds to accumulate for future use.They are growth-oriented products where the tax on the interest earned is deferred until the money is withdrawn.  An immediate annuity is used for systematically withdrawing money without concern for the money lasting until the end.  The insurance company assumes this risk.

Deferred Annuities

The deferred annuity contract, like a permanent life insurance policy, has been found by some to be a convenient method of accumulating wealth.  Funds can be placed in deferred annuities in a lump sum, called Single Premium Deferred Annuities, or periodically over time, called Flexible Premium Deferred Annuities.  Either way, the funds placed in a deferred annuity grow without current taxation (tax-deferred).  .

Fixed Deferred Annuity

Fixed deferred annuities provide a guaranteed minimum return of return (usually around 3 percent per year) and typically credit a higher, competitive rate based on the current economic conditions.

Fixed annuities are usually considered conservative investments as the principal (premium) is guaranteed not to vary in value. Insurance companies are required by state insurance laws to maintain a reserve fund equal to the total value of fixed annuities.  Fixed annuities are also protected by State Guaranty Fund Laws. 


Dr. Park, a retired physician, desires a safe financial vehicle for $100,000 of her excess savings.  She doesn’t need the earnings of this investment for current income and also wants to reduce her income tax liability.  She decides to purchase a fixed deferred annuity with her $100,000.  The annuity guarantees a 3 percent annual return and the current rate is 6 percent. 

After the first year, $6,000 of interest is credited to the annuity and Dr. Park has no current income taxes as a result.  If the 6 percent interest rate does not change, after 3 years, the annuity will have $119,102 of value.

Variable Deferred Annuity

Recently, variable deferred annuities have become very popular.  Like fixed annuities, variable deferred annuities offer tax-deferred growth, but this is where the similarities end.  Variable annuities are not guaranteed.  The appreciation or depreciation in value is totally dependent on market conditions.

Variable deferred annuities assets are maintained in separate accounts (similar to mutual funds) that provide different investment opportunities.  Most of the separate accounts have stock market exposure, and therefore, variable annuities do not offer a guaranteed rate of return.

But, the upside potential is typically much greater than that of a fixed annuity. The value of a variable deferred annuity will fluctuate with the values of the investments within the chosen separate accounts.  Although similar to mutual funds, there are some key differences.  These include:

·  A variable annuity provides tax deferral whereas a regular mutual fund does not

·  If a variable annuity loses money because of poor separate account performance, and the owner dies, most annuities guarantee at least a return of principal to the heirs.  This guarantee of principal only applies if the annuity owner dies.  If the annuity value decreases below the amount paid in, and the annuity is surrendered while the owner is alive, the actual cash value is all that is available.

·  When money is eventually withdrawn from a deferred annuity, it is taxable at ordinary income tax rates.  With taxable mutual funds, they can be liquidated and taxed at lower, capital gains rates.

·  There is also a 10 percent penalty if the annuity owner is under 59½ when money is withdrawn.  There is no such charge for withdrawals from a mutual fund.

· The fees charged inside of a variable annuity (called mortality and expense charges) are typically more than the fees charged by a regular mutual fund. 


Variable deferred annuities are sensible for physicians who want stock market exposure while minimizing taxes.  Most financial advisors and Certified Medical Planners™ [CMP™] recommend regular mutual funds when the investment time horizon is under 10 years.  But if the time horizon is more than 10 years, variable annuities may occasionally become more attractive because of the additional earnings from tax-deferral. 

Both types of deferred annuities are subject to surrender charges.  Surrender charges are applied if the annuity owner surrenders the policy during the surrender period, which typically run for 5 to 10 years from the purchase date.  The charge usually decreases each year until it reaches zero.  The purpose of the charge is to discourage early surrender of the annuity. 

Equity Index Annuity 

The equity index annuity combines the basic elements of both the variable and the fixed annuity. The credited interest earnings are generally linked to a percent of increase in an index, such as the Standard & Poor’s 500 Composite Stock Price Index (S&P 500). This percentage is called the Participation Rate and may be guaranteed for a specified period of up to 10 years or adjusted annually. Thus, the physician annuity owner is able to participate in a portion of market gains while limiting the risk of loss. 

Typically, the indexed annuity has a fixed principal, with the insurance company and contract owner sharing the investment risk.  If the S&P 500 Index goes up, so do interest earnings.  If it declines, the insurance company guarantees the principal.   

So, the physician contract owner accepts the risk of an unknown interest yield based on the growth or decline of the S&P 500.  Medical professionals and healthcare practitioners should pay particular attention to surrender penalties, asset management fees and any monthly caps on appreciation. 

Immediate Annuities

Immediate annuities provide a guaranteed income stream.  An immediate annuity can be purchased with a single deposit of funds, possibly from savings or a pension distribution, or it can be the end result of the deferred annuity, commonly referred to as annuitization.  Just like deferred annuities, immediate annuities can also be fixed or variable.  

Immediate annuities can be set up to provide periodic payments to the policy owner annually, semiannually, quarterly or monthly.  The annuity payments can be paid over life or for a finite number of years.  They can also be paid over the life of a single individual or over two lives. 

Insurance Agent Commissions

Immediate Fixed Annuity

Immediate fixed annuities typically pay a specified amount of money for as long as the annuitant lives.They may also be arranged to only pay for a specified period of time, i.e., 20 years.  They often contain a guaranteed payout period, such that, if the annuitant lives less than the guaranteed number of years, the heirs will receive the remainder of the guaranteed payments. 

A note of caution here, as the selection of an immediate annuity is an irrevocable decision! 


Dr. Jones is 70 years old and retired.  He is only of average wealth, but is concerned that if he lives too long, he could deplete his savings.  He decides to use $100,000 and purchase a lifetime immediate annuity with 20 years certain.  The insurance company promises to pay him $7,000 per year as long as he lives. If Dr. Jones dies four years after purchase, he would only have received $28,000 out of a $100,000 investment.  However, his heirs will receive $7,000 for the next 16 years.  If Dr. Jones survives to the age of 98, he would have received $196,000 (or 28 years of $7,000).

Immediate Variable Annuity

Immediate variable annuities provide income payments to the annuitant that fluctuates with the returns of the separate accounts chosen.  The theory is that since the stock market has historically risen over time, the annuity payments will rise over time and keep pace with inflation.   If this is indeed what happens, it is a good purchase, but it cannot be guaranteed. 

Some companies will, at a minimum, provide a guarantee of a low minimum monthly payment no matter how poorly the separate accounts perform.

Split annuities

A popular method of adding income and yet still accumulating savings is through the use of two separate annuity policies.  Part of the funds is placed in an immediate annuity to provide monthly income.  The balance is placed in a deferred annuity grows to the total value of the premium paid for both annuities.  

The income that is received from the Immediate Annuity includes a portion of the initial premium, as well as the taxable interest earned.   Only the portion of income that is interest is taxable. The ratio between the annuity principal and interest being paid out is called an Exclusion Ratio. 


Dr. Jeanne Jones has put $100,000 into a 5-year non-tax deferred vehicle at 5%. The earnings to supplement Jeanne’s retirement is $25,000.  With a combined federal and state tax of 33%, the net after tax income would be $16,750. Jeanne takes the same $100,000 using the split annuity concept she would receive $24,444 over the 5 years.  Based on an exclusion ration of 89%, her total taxable amount is $2,797.  This would yield $923 in taxes at the same 33% tax rate.  Jeanne would have $23,521 of spendable income with the split annuity compared to the $16,750.

Qualified Annuities

The term qualified refers to those annuities which permit tax-deductible contributions under one of the Internal Revenue Code (IRC) sections, i.e., § 408 Individual Retirement Accounts (IRA), § 403(b) Tax Sheltered Annuities, § 401(k) Voluntary Profit Savings Plans.  Qualified annuities can also result from a rollover from such a plan.  


Currently, there is much lively debate in the industry as to whether an annuity, which is tax-deferred by nature, should be used as a funding vehicle within a tax-qualified plan, i.e., a tax-shelter within a tax-shelter.  Since the investment options within the annuity are also generally available to the plan participant without the additional management expenses of the annuity policy, it is felt this could be a breach of fiduciary responsibility. And, most insurance agents are not fiduciaries. 

Both the National Association of Securities Dealers (NASD) and the Securities and Exchange Commission (SEC) have gone on record as criticizing these sales.  

However, there are numerous examples of deferred annuities that have outperformed similar investment-category mutual funds, even after taking the annuity expenses into account. 


Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com



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