Paying off debt as asset protection

Being in a high income, high risk field I often think of asset protection. The lawsuit may not come from medical work, but from an auto accident or someone slipping on my front step. All of these can lead to suits, and as a high income earner we all have a target on our back. The last thing I want to do is work hard to save money to then have it taken away by one law suit. There are of course many ways to protect your assets and they should all be put into place.

Insurance

Malpractice insurance

For one, having a good malpractice insurance as a physician is key. Hopefully your group has paid for your insurance and it has adequate coverage for potential lawsuits. In some states there is a maximum limit to the amount that can be paid out for a malpractice claim. Make sure that your malpractice covers you up to the maximum.

Tail coverage

Tail coverage is another way to protect your assets. If you leave your job on May 1st, and receive a lawsuit on May 2nd for care provided back in February, then tail coverage will cover that claim. If you do not have tail coverage, then you are SOL (S+++ out of luck).

This to me is a crazy concept. I always assumed that coverage was coverage. If I had malpractice insurance in February but get sued in May after leaving my job that I would still have coverage. This is not the case and tail insurance is very important.  I cannot underestimate the importance of tail coverage. I know 2 people who left their jobs and then had suits claimed. In most places, patients have up to 1 year from the day of care to file a suit. So keep yourself covered.

Auto insurance

Having a good auto insurance (for that unfortunate auto accident you may have) is a must for any high earner. I have a friend who was driving. His car was hit and went into the sidewalk hitting a pedestrian. The car driver that caused the accident had no insurance, and so the pedestrian sued my friend. It went to court and was dropped, but without good auto insurance he would have been stuck paying the attorney fees. The other option is to not have a car! Radical yes, but if you live in a town with good public transportation it is definitely worth considering.

Home insurance

Make sure you have a policy that covers any medical expenses to people damaged working on your home. You should always make sure the people you hire have their own insurance, but in the off chance something happens and they sue you, your insurance will kick in.

Umbrella insurance

Most people think of the auto insurance, but forget about the umbrella policy. For just a few hundred dollars a year, you can typically get coverage for one or two million. This is coverage on top of the unlikely instance that your auto insurance (or home insurance) does not cover all of the financial obligations of a lawsuit.

I pay down my debts to protect my assets!

Asset protection outside of insurance

So you have all of the insurance policies in line to protect your assets. What else can you do for security?

Some assets are protected by law. For instance, retirement accounts such as your 401K can not be pilfered in a lawsuit.

Additionally, most jointly owned homes are protected to an extant. The laws vary by state, but at least a portion of your home is protected. This is called a Homestead exemption and typically is for a specified amount of money. In California this is between $50,000 and $150,000. Some states, like Massachusetts, proved $300,000 in protection.

You could also place your assets under your spouse’s name if they are in a lower risk field. Sure she or he could run off with all of your cash, but what is the likelihood of that (hopefully low).

There are illegal ways to protect your assets, like starting an offshore account and place all of the assets in a shell company. Also probably not the most legal or good citizen thing to do.

Then there is the other legal ways to protect assets. Placing them in LLC’s or Trusts (discussed here and here)  to protect them. We placed our house into a Trust which provides some legal protection in case I get sued for some major bucks.

 

Debt paydown as asset protection?

Another consideration is debt pay down as a means to asset protection. I have thought about this alot. My debt is owed. I will pay my creditors and the likelihood of me ever defaulting is very low. Plus, thanks to the government, your gambling debts and credit card debts will be wiped away in bankruptcy but not your student loan debt.

So we have established that I will be paying off all of my debts (luckily now that is just my student loans and mortgage as I was able to pay off all my other consumer debt). For the upcoming future, why not use the debt pay down as another form of asset protection. If I pay off $100,000 in student loans and then get sued for $MILLIONS and I have not adequately insured or protected my assets, that is $100K less that the lawyers can’t get. If that money was sitting in a taxable account (say a Vanguard Index Fund), then it is available to the creditors and lawyers.

Now the likelihood of all of this is low, but still some food for thought. It may be worth while paying down debt before placing tons of money into taxable accounts. This is different than your 401ks, 403(b)s, and other protected retirement assets.

Does it make math sense as far as gaining 4-6% with investments versus the 3% my loans are worth? No. Does it give me peace of mind and let me know that is money that will go to a cause I determine in the unlikely chance I get sued for a lot of money? Yes!

 

So take it or leave it, but what do you think of debt pay down as a form of asset protection?  

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Also published on Medium.

DadsDollarsDebts

I am a Dad and Doctor trying to find financial freedom by owning my dollars and debts. Helping dads with their finances so they can focus on the family.

10 thoughts on “Paying off debt as asset protection

  • July 4, 2017 at 5:25 am
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    This makes good sense to me. We obtained an umbrella policy last year and I’m more comfortable knowing it’s there. I hope all your doctor readers and friends get that tail coverage. Yikes!

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    • July 4, 2017 at 6:58 am
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      Having adequate insurance coverage definitely provides me peace of mind. Glad to hear you got an umbrella policy. It is crazy to think of the things that happen. I have a friend that was rear ended and ended up on the side walk. He accidentally injured someone walking. The person who rear ended him had no insurance so the injured person sued my friend. My friend won in the end, but it is crazy he could be sued for something that was not his fault!

      Reply
  • July 2, 2017 at 8:53 am
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    This is a neat idea! The less debt you have, the more assets you’ll be able to pass on. It’s all about leaving a legacy, after all, and we should protect those assets by eliminating gross, nasty debt.

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    • July 2, 2017 at 9:24 pm
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      Debt is painful and I know there is low interest debt (School loans if you graduated in the early 2000s) and other debt that is supported by an asset (homes) but I still don’t like having debt.

      Reply
  • July 1, 2017 at 7:21 am
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    Very interesting, I hadn’t thought of debt payoff this way, but it is a good point. Would you consider paying off something like a mortgage in the same category as the paying off student loans for the “asset protection” angle?

    And woah… that Tail Coverage piece of Malpractice Insurance was new to me. I wonder how many doctors know to include this…

    Reply
    • July 1, 2017 at 7:55 am
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      Yes, absolutely. I consider my mortgage in my net worth. So as it dwindles, the net worth goes up. This is also a less touchable asset if I was sued as my wife is co-owner.

      The tail coverage stuff is crazy. Some insurers don’t provide it which to me is crazy. I just assumed you would be covered for anything that happened during your time working. Apparently that is not the case with all plans.

      Reply
    • July 1, 2017 at 7:54 am
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      I do like the “you will feel great aspect” of paying down debt. I am trying to get rid of my student debt currently. The unusual side is that if I die, my debt is forgiven. A argument for keeping it (3%). I just don’t want to plan my future as a dead person.

      Looking forward to checking out more of your site and thanks for coming by.

      Reply
  • July 1, 2017 at 5:53 am
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    I view our mortgage debt as functionally equivalent to a bond allocation. Liability protection is one aspect sure. But it’s also a guarenteed return. Money in means less interest out. If the 3-4 percent you pay on your mortgage is more then the 2 percent you can receive on bonds, then provided you already have liquidity the debt is the better bet. It reduces the assets you need to pay off later as well.

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    • July 1, 2017 at 7:50 am
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      Completely agree. I had not thought about the illiquidity but my goal with any investment at this point is to set it and forget it. That way I will not need the liquidity. It is pretty wild how low bond interest rates have been for so long.

      Reply

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