By Eric Rosenberg, WCI Contributor
In an ideal situation, we all live to a ripe old age where we spend at least a few decades enjoying hobbies, family, and anything else we dream of during our golden years. However, as every medical professional knows, life doesn’t always work out the way we plan. Many people die before their time, and the loss can be financially and emotionally devastating to loved ones. While we can’t do much to dampen the emotional loss, we can always plan ahead with life insurance for the potential financial loss (while trying to answer the question, “How much life insurance do I need?”).
Life insurance can be thought of as income insurance. If the insured dies while covered by the policy, the beneficiaries get a payout. Keep reading to learn more about how life insurance works and how to decide how much life insurance is right for your family.
Do You Need Life Insurance at All?
Remember, life insurance doesn't bring you or anyone else back from the dead. It just provides money when someone dies. So if nobody else depends on your income besides you, you don't actually need any life insurance at all. Generally speaking, life insurance is for financial dependents. No dependents? No life insurance need.
How to Calculate How Much Life Insurance You Need
Assuming you have a need for life insurance, the best time to get term life insurance is when you’re a young resident, fresh out of medical school. Life insurance costs tend to go up with age, so you’re best off locking in a lengthy term life insurance policy when you’re as young as possible.
There are various ways to calculate how much life insurance you’ll need. Most doctors will ultimately end up looking for around $1 million to $5 million in life insurance. If you read no further, The White Coat Investor recommends picking the average $3 million, 30-year term life insurance policy for simplicity. But, if you want to get more accurate with the right calculation, here’s a look at the numbers.
Here is the White Coat Investor formula for your life insurance need:
Add up these:
- Monthly expenses x 12 months x 25 years
- Remaining mortgage amount
- Estimated college costs
- Large ticket items
- Non-forgiven private student loans
- Current nest egg
- Current college savings
Then round up to nearest million
Here’s an example to make the numbers more tangible. Let’s say you spend around $5,000 per month, have a mortgage balance of $250,000, want to save $300,000 for your kids’ college expenses, and have $175,000 left on your student loans. You have $25,000 in retirement accounts and $3,000 saved so far in the college fund.
The estimated life insurance here would be (put on your high school algebra cap for this):
=($5,000 x 12 x 25) + $250,000 + $300,000 + $175,000 – $25,000 – $3,000
=$1,500,000 + 725,000 – $28,000
Rounding up, you would want $3 million in coverage.
That might sound like a lot today, but the added cost of buying additional life insurance in five or 10 years will have you kicking yourself that you didn’t go all-in when you had a cheaper option.
As WCI founder Dr. Jim Dahle wrote in his Financial Boot Camp book:
“Is the number between $1 million and $5 million? Good. Don’t worry about buying a little too much. This stuff is cheap, and it is better to have a little too much (especially when future inflation comes into play) than too little. Remember that life insurance proceeds are tax-free, so don’t worry about having to buy enough to cover a tax bill too.”
Next Steps to Get the Right Amount of Life Insurance Coverage
For most doctors, the best choice is a 30-year term life insurance policy. Think of it like this, if you're comparing term life to whole life insurance. Whole life insurance, in most cases, costs too much for the benefit, while term life insurance gives you precisely what you need. By the time the term ends in 30 years, you should have enough savings and investments to no longer need life insurance. Whole life insurance would cover you for life, but if you become financially independent, you would no longer need life insurance anyway.
Term life insurance policies are very similar between providers, so the price will be the most important factor for most applicants. There are many life insurance policy comparison websites that will give you multiple options after completing one form. You can also work with an independent agent to help you pick a policy provider.
You don’t have to limit yourself to one insurance company or provider. You can mix and match several $1 million policies, for example, until you reach your desired total.
Here’s a list of recommended insurance agents if you want to go that route. These agents are all vetted by The White Coat Investor, so you know you’re working with someone trustworthy.
Don’t Ignore Life Insurance While Costs Creep Up
As you age, the cost of a new life insurance policy goes up and up. But if you lock in a rate now, you’ll have the same monthly or annual cost for the entire life of the policy.
Don’t sit idly by and ignore life insurance while costs begin to rise. Lock in the right policy for your family so you can rest easy that they’ll be protected in a worst-case scenario.
Have more questions about life insurance and what kind of policies would be the best for you? Hire a WCI-vetted professional to help you sort it out.
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