Term life insurance is designed to protect the people who depend on your income if you die prematurely. The amount you need should be based on what you want the policy to accomplish—such as paying off a mortgage, funding college, replacing income for a spouse, or meeting other financial goals—minus the assets you already have available. Rules of thumb based on a multiple of income can be a starting point, but a calculation based on your actual spending, savings, debts, and goals is more useful. Many attending physicians carry somewhere between $2 million-$5 million, and because term life insurance is relatively inexpensive, it is reasonable to round your coverage up rather than trying to calculate the exact dollar amount.
The term should generally last until you expect to become financially independent and no longer need insurance. Most people choose a level premium policy, which keeps the premium the same throughout the term, although annually renewable term insurance can make sense in some situations. Individual policies are usually preferable to relying solely on smaller employer or association policies, and buying coverage while you are young and healthy can make it easier and less expensive to qualify. Term life insurance is largely a commodity, so compare price and make sure the insurer has adequate financial strength rather than paying extra for unnecessary features. Riders, such as return of premium, generally increase the cost, and that money may be better spent purchasing a larger death benefit.
Dual-income couples should consider what would happen financially if either spouse died, as well as what would happen if both died. You do not necessarily need life insurance on both spouses if the financial plan still works without it, but you do need a plan for each scenario. Convertibility options can allow a term policy to be converted to permanent insurance later, but most people do not need to pay significantly more for that feature. Ultimately, the goal is to build enough wealth that life insurance becomes unnecessary. As you approach financial independence, pay off debts, and fully fund your major savings goals, you can eventually let the policy expire or cancel it and redirect those premiums elsewhere.
This is the White Coat Investor Podcast: Financial Boot Camp, your fast track to financial success.
Dr. Jim Dahle:
Let's talk for a minute about term life insurance. Term life insurance is basically a bet that you're going to die. It's kind of morbid to think of it that way, but that's really what you're doing. You're putting a little bit of money down so that if you do die, your beneficiary gets a whole lot of money. Now it's a term life insurance policy, meaning you have to actually die during the term, and you might buy a policy for one year or five years or 10 or 20 or 30 years, but that's basically the bet you're making: is that I'm going to die in this time period, and if I do, I'm going to get a whole bunch of money for my beneficiaries, my heirs, and that's what term life insurance is.
So why would you buy this stuff? Well, you buy it because somebody besides you depends on your income. It might be your spouse, it might be your kids, it might be your parents, it might be some other organization. There's all kinds of reasons, but somebody needs money in the event that you die. Traditionally, it's your spouse, and so the high earner in a family typically buys a pretty good-sized policy so that the financial life of the spouse is the same whether you live or die. Everyone's afraid. What if I overinsure and I'm worth more dead than alive? Well, that's usually not an issue. Most people don't usually quite buy that much. But I suppose if you're worried about your spouse knocking you off, that might be a little bit of a concern.
So who needs it? Well, if you are already financially independent, if you and your spouse and your kids or disabled kids or whoever can already live off all the money you have for the rest of their lives, you don't need any life insurance. You're beyond needing life insurance, and so you know who needs it? Those who need money more than what they have left behind should they die prematurely.
So what you have to do to figure out how much life insurance is needed, or if life insurance is needed at all, is add up what do you want it to do, right? Add up how much is needed without you working, and subtract from that the amount you have, maybe adjust a little bit for possible future inflation. But that's it. That's the whole process. So if you want life insurance to pay for your kids to go to college, and you haven't saved anything for college yet, and you think they need $100,000 each for three kids, and you want it to pay off the mortgage, and the mortgage is still half a million dollars, right? So we're $100,000 times three, $300,000 plus half a million dollars. We're at $800,000, and you want your spouse to be able to never have to work again if you die, and you figure that's going to cost about $5 million, and you already have $800,000 saved up toward that, so $4.2 million. So we add up that $4.2 million plus the $300,000 to send your kids to college plus the half million dollars to pay off the house. Okay, that's $5 million of life insurance. That's literally as complicated as it is.
So what do most attending physicians carry? Typically, something between $2 and $5 million. The more you have in your nest egg, the less you need in a term life insurance policy. The less you spend, the less you need in a term life insurance policy. It's not about, you know, 10x what you make. It's all about what you spend, what you need, and how much you have. Right? Those rules of thumb like have eight or 10 times as much as you make. Those are just rules of thumb, and if that's as deeply as you can think about this subject, I guess use that sort of a rule of thumb. But most people can think a little bit more deeply, and actually do a gross calculation of about how much they need. Term life insurance is relatively inexpensive, so just round up to the next million. If you think you need, you know, $3.1 million, just get four. Okay. If you think you need $2.7 million, just get three. Right. These are relatively large round numbers, and it's fine to overshoot a little bit. That's not a big deal because this stuff is not that expensive.
So, how long should the term be? Well, typically, if you want it to cover you until you have enough money that your spouse can live off it the rest of their life, that's also about the time you become financially independent yourself. So the question is, how long until you're financially independent? And if that's going to happen 20 years into your career, and you're buying this policy right at the start of your career, then you need a 20-year policy. If it's 25 years or 30 years, then you need a 30-year policy. If it's only 10 years away, you only need a 10-year policy, and so in general, you should buy a policy that will last until you no longer need the insurance.
Now, most people buy what's called a level premium policy, meaning you pay the same amount every year, right? So it's actually a better deal toward the end because you're older and more likely to die than it is at the beginning. But it costs the same every year. Other people prefer something like an annually renewable term policy, where the price goes up every year, but starts out very inexpensively because you're very unlikely to die when you're 25 or 30 or 35, and then it gets more expensive as you become 50 and 55 and 60, and so you can go either way. Either one's fine. Just recognize that's how it works. And obviously, the sooner you're becoming financially independent, the more likely you are to be better off with something like an annually renewable term policy than you are with a 30-year level premium policy.
The easiest way to shop for term life insurance is to go through the vetted agents at WhiteCoatInvestor.com. They can all sell you a term life insurance policy, but they're not complicated. We're putting together software on the website that can basically tell you what your policy is going to cost if you're young and healthy, right? When it becomes more complicated is when you have a few medical conditions, perhaps you smoke, perhaps you've had a little bit of heart disease or some sort of cancer, and those sorts of things. If it's bad enough, you're not going to be able to get a policy at all. In which case, you might have to look for a group policy. It's going to be small, probably offered by your employer or a professional association. But for the most part, you want to buy individual policies because those are the ones that are big enough to actually cover the needs you have, and so the idea is to buy them before you pick up any really dangerous hobbies or before you develop any sorts of medical conditions that either make it more expensive or don't let you buy it at all.
For the most part, term life insurance is a commodity. It's like buying gasoline. How do you buy gasoline? Well, you drive down the street, and whichever one's selling it cheapest, that's where you buy it. Well, there's a little more to it than that. You want the company to still be around in five or 10 or 20 years in case you die and it needs to pay out. So you don't want to pick the weakest, you know, company from a financial strength perspective, but you don't have to pick the strongest one either. Typically, if they're within the top two or three ratings, that's good enough. And there are dozens and dozens of insurance companies that are within those ratings and are sufficiently financially stable in order to buy a policy that's going to last a few decades.
But that's really it. I mean, you're looking at price. You care a little bit about the financial strength. You want to know how long a term is going to last, but you don't necessarily need a bunch of bells and whistles. Insurance agents are famous for adding bells and whistles to policies. Typically, they don't do it to term life policies. Those are more of the permanent cash value policies, like whole life and universal life and variable life. But, you know, every now and then you'll see even term life policies with bells and whistles on them, like return of premium, right? Get to the end, you get your premiums back. Well, guess who's paying for that? You are, in the form of higher premiums. If you're going to pay higher premiums, I'd rather just see you get a larger death benefit than something like a return of premium policy. Those seem gimmicky to me, and I don't think you need to bother with those sorts of things. Spend your money on just getting a larger base policy instead of buying a $3 million policy with some bells and whistles on it. Get the $4 million policy instead.
A lot of dual-income couples wonder how they should do term life insurance. Just like they wonder, should they both buy disability insurance or should they consider each other to be their disability policy? Well, what you really need is a plan. You need a plan in case spouse one dies. You need a plan in case spouse two dies. If the plan works out fine without any life insurance if spouse one dies, great. If the plan works fine without, you know, any life insurance policies if spouse two dies, great. If the plan still works if both of you died in the same car wreck or plane crash or something, great, you don't need life insurance. But for most people, they're probably going to choose to buy some sort of a policy on one or both spouses just in case one of those things happens because the plan doesn't work without one of them working or without the higher earner working or whatever. And so you just have to run through those situations and decide what both spouses are comfortable with, and then move forward. But you don't have to have life insurance. You do have to have a plan.
One bell and whistle that occasionally people consider is a convertibility option. This is a chance to convert a term life insurance policy to a whole life insurance policy at the time it is expiring, or even before it expires. As a general rule, most people don't need whole life insurance, and so this feature is not really worth much. So you shouldn't pay a lot for it, but it's often given free. And if they're giving it free, and the policy is otherwise the same as any other policy you can buy, I think it's fine to own it. If you're only paying a tiny little bit extra to have that feature on it, I think that's fine. But I wouldn't pay any significant amount extra just to have a convertibility feature on the policy.
Typically, when your term life insurance policy expires, it doesn't actually expire. They offer to let you continue to renew it, but as an annually renewable term policy. But because you've been paying, you know, level premiums for 30 years, they're priced on average like maybe what it cost 15 years ago, and so you're much older, much more likely to die now. The price is dramatically higher to shift into an annually renewable term. You might think they're just trying to get you off the policy, but they're not. They're pricing it fairly for somebody your age now, and if you went out and bought a five-year or a 10-year policy now, it'd be dramatically more expensive than the one you bought at 25 or 30 years old. And so recognize that that's how the policies typically wind up at the end.
But the idea is, by the time you get anywhere near the end of your term life insurance policy, you're already financially independent, and you don't need it, right? We no longer have life insurance on us because we don't need it. We have enough money that if either one of us died, the other one is going to be just fine. We've already met our savings goals for the gifts we want to give to our children, the 529s, and those sorts of things. We've already paid off our mortgage. We don't have any need for life insurance, and I hope you can get there by mid to late career as well, and just cancel your policies and put those premiums toward something else. Hopefully, something you really enjoy.
DISCLAIMER
The White Coat Investor Podcast is for your entertainment and information only, and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.
Medical school may not have taught you about money, but we will.
We will never sell your information. Modify your preferences or unsubscribe at any time.
Get ready to take control of your financial life. You can do this, and we can help.
We won't sell your information. Modify your preferences or unsubscribe at any time.