Q. Money Is Tight, and We’re Young and Healthy. Do We Really Need Life Insurance?
Recently, I saw a post on social media about another untimely death, with the usual link to GoFundMe. It involved a resident who died of eclampsia while giving birth. The baby survived, and the GoFundMe was to help provide for the partner and child. I suppose it is possible that even people expecting a life insurance payout would start a GoFundMe account, but I suspect that it is rare. Besides, a typical GoFundMe drive raises just a few thousand dollars, averaging $2,600. How, I worry and wonder, will the survivors make ends meet?
Aside from the personal loss of any loved one, losing the breadwinner of a family can be a catastrophic financial event. Consider the death of a resident who stood to earn $300,000 or more per year for the next 30 years. That is a loss of $9 million in expected income. Given how easy and inexpensive it is to insure against that loss, it is a shame to see those losses go uncovered. Consider that a 28-year-old healthy female can buy a $1 million term life insurance policy for just $15 a month. Two quarters a day. You can’t even get coffee at McDonald’s for that, much less a decent latte. This investment represents no genuine financial sacrifice whatsoever for a resident physician making $60,000 per year.
Physicians, even residents, are not invincible. Although the odds of death for someone in their 20s and 30s are low, they’re not zero. Approximately one out of 2,000 people of resident age (25–35) dies in any given year. There are about 130,000 resident physicians in the country. That means approximately 65 of our trainees die every year. Of course, some of them do not have any dependents, so as sad as their death is, it does not produce the same financial catastrophe as for those with dependents. However, what if we assume half of them do have at least one dependent? I do not even want to know how many of those physicians never got around to buying a good term life insurance policy. I hope that number is zero. But the GoFundMe drives leave me worried.
How Life Insurance Works
Term life insurance is not a complicated product. As the policy owner, you will need to pay a premium once a month or once a year to keep the policy active. So long as you pay those premiums, in the event of your death, your designated beneficiary will receive the face value of the policy. They can get the money as soon as they have a copy of your death certificate, and the money comes to them tax-free.
Who Do You Buy a Policy From?
What Length Should You Buy it For?
As a general rule, you want to buy term life insurance that will last until you are financially independent. The idea is that when you have a nest egg large enough to live on for the rest of your life, you no longer need life insurance. If you die, your loved ones will just live on that same nest egg. Because it will likely take a typical physician who remembers to save for retirement 20–30 years to reach financial independence, you should therefore buy a 20- to 30-year level term policy.
How Much Should You Buy?
Obviously, the longer the term and the higher the face value, the higher the premium will be. Most knowledgeable physicians purchase a policy with a seven-figure face value. Once they add up the cost of paying off a mortgage, sending kids to college, and supporting their partner at least for a few years, they end up with a large sum. Remember, the face value should be approximately equal to the amount of money that would make you financially independent. So $200,000 isn’t going to cut it. Most new attendings end up with a $2–$5 million policy, but $1 million seems to be a common amount for residents. Certainly $1 million is far better than the $2,600 that would come from the average GoFundMe.
Should You Buy Whole Life Insurance?
Some insurance agents push a product called whole life insurance, primarily because the commissions they earn from selling it are much higher than what they get from a term policy. However, whole life insurance is far more expensive than term life insurance for a healthy young person, and young doctors have so many other great uses for their money that selling a whole life policy to a resident is, in my mind, akin to financial malpractice. Although whole life has some niche applications to people in some circumstances, being a doctor is not one of them. Just get a basic, easy-to-understand term policy and don’t recommend agents pushing whole life policies to your peers.
Luckily, insurance company applications ask about rock climbing, but not canyoneering.
When you apply for insurance, you’ll have to answer a few questions about your health and hobbies, have your vitals taken, and provide blood and urine samples. Assuming everything checks out, you should be able to finalize the policy with the agent within just a few weeks. It really is a simple process.
Bottom line: If someone else depends on your income, you need to get life insurance in place ASAP. It is more important than saving for retirement, figuring out what to do with your student loans, or buying that new home.
It is my fervent hope that no resident or young physician’s family will ever have to resort to a GoFundMe again to meet their basic needs after that person’s death.
When did you buy your first life insurance policy? What other advice/warnings do you have for healthy, young physicians that haven't purchased it yet?
It isn’t that complicated.
If you have people who financially depend on you then buy life insurance.
The purpose of insurance is to protect against catastrophic losses.
Get a good $1M+ 20-30 yr term life policy in place ASAP.
Who’s going to read my blog if the posts are only 40 words long?
I bought a 2 million dollar 20 year level term policy at age 30. It was inexpensive.
Back then, we had $120,000 in combined student loans and my salary was about $180,000.
Fast forward 20 years and I had mild CKD from taking an NSAID for two years (Cr was 1.5 and still is). I had to pay double the prior policy for half as much coverage to get another ten year level term policy.
Fast forward to my current age of 57. I was just diagnosed with Stage 1A melanoma (focal microinvasion of the dermis) and have had a wide local excision. I am now likely uninsurable. The incidence of metastases for the skin lesion is about 2-3%..
I would have been better served with a 35 year level term policy. I am covered with one million until age 60. Then…I probably can’t get cost effective coverage.
I have accumulated monies, social security, and a pension that will work for my family if I die, but I think covering as much of age 25 to 60 with a level term policy makes sense.
By the way, get a skin checkup by a dermatologist. That’s some cheap insurance. The lesion was on lower mid back. I had never seen it and my wife spotted it.
Just because you can’t get insurance doesn’t mean you have a problem. You have to actually need the insurance too. If you’re now wealthy enough that your family is fine if you die, you don’t need insurance. What you needed at 32 is probably very different from what you need at 50. I needed a lot of insurance at 35. I need none at 45. The nest egg replaces the insurance need. The insurance provides an instant nest egg if you die before you build it.
Huckleberry’s example is tragic and pertinent. Not all of us expect to take until 60-70 to be FI but we do plan on the option to stay at work if FI not quite achieved earlier. But let me throw in my perennial life insurance example for those who calculate a cheaper way to cover expected needs (if this were a rehashed thread it would already be here!). We got term policies when we married- planned one of us might stay home with kids (live like a resident? We lived like a one income family as two docs). Prior to our second child we got a financial check up (was that from reading WCI? Were you around in the late 90s already?) and that fella warned us that while one income would cover our current bills, and the soldier would leave me SGLI if something happened once our term policies expired, the soldier would be in a bad way if overnight he needed a nanny housekeeper and secretary if I died whether or not I was earning doc pay. Luckily I could still get a policy to get us out to the last kid able to drive herself and we already had college planned. TLDR version: at least get term life that’ll cover out to college grad date of any potential children- if you’re male, single, but expect a family that might well be to age 60 or 70!
I’m not a fan of buying insurance for insurance needs you might have. I think you should buy insurance for needs that you actually do have.
Remember that two bad things have to happen for tragedy to occur:
# 1 You have to become insurable before being able to buy needed insurance
# 2 The bad event (death, disability etc) has to actually happen
The true risk is the product of those two risks. Now they’re not completely independent risks, but let’s say the first one is 10% and the second one is 1%, your true risk is only 1 in 1000. Is that really worth insuring against? Maybe not, especially if the insurance is expensive. Otherwise, why aren’t we buying $10 Million in life insurance on our newborns?
Is it necessary to calculate expected inflation when calculating the amount of term life that you need? I have a 20 year policy for 1 million, and a 30 year policy for 1 million, but I worry that in thirty years a million dollars won’t have much buying power.
The theory is that you won’t need a million in 30 years either because your other assets will have grown. So maybe you only need $500K in today’s dollars. But yes, you should consider inflation.
Cautionary tale
I was 34 and my wife was 35 when she passed away from breast cancer. I had life insurance on myself but since she wasn’t the primary breadwinner we didn’t have a policy on her. Having 2 small kids and trying to build up a practice starting out as a brand new attending in a private practice wasn’t a good formula and I ended up leaving that job after making basically nothing for 2 years. We had to dip into savings and things were very scary financially speaking for awhile. Fast forward to now (5 years later), I’m much better off financially (thanks in large part to the WCI) but my earning potential is still much lower given that I’m the primary caregiver for my children. My advice is to get a policy on your significant other as well as even if you are the bread winner, your earning capability will likely go down in the untimely event of their early demise.
I’m sorry to hear about your wife.
Good advice. Stay at home spouses/parents need insurance too. Their services have real economic value.
@Russ I am really sorry for your loss. That is a very tough situation in so many ways. That is the main reason that we got a term life policy on me even back when I was staying home with the kids and my husband was the main breadwinner. It wasn’t as big as the policy we got on him, but it would cover childcare, housekeeper, etc. in the case that I was no longer around.
I have a $2 million term policy which I obtained when my oldest son was an infant. In retrospect, I should have done it before pregnancy, because things like eclampsia happen.
I have instructed my husband that in the event of my untimely death, he will NOT be taking any donations, and if friends insist on giving money he should donate it to the foundation for whatever disease it is that killed me
A minor point but I think significant for those shopping for insurance:
I do not believe it is true that an independent agent can sell you insurance from any company. They can sell policies from multiple different companies, but not all of them. I don’t know how many, if any, such agents represent all companies that sell through independent agents.
Some insurance companies sell only through their own agents. Many of the largest companies in the country operate this way. If you work exclusively with an independent agent, you rule out these companies without ever seeing what their prices would be. Bad shopping strategy.
When shopping for insurance, people should work with at least one independent agent but also look at those companies that sell directly to consumers. That way, one has seen the full range of possible rates.
If the independent agent comes up with the best deal-great! If one of the direct companies comes up with the best deal-again great!
If you shop only independent agents or only direct companies, you miss a large part of the market.
I don’t think you need to look at EVERY company in the country. Term life is enough of a commodity that shopping with an independent agent (essentially a broker) that can sell you policies from 30-50 companies is enough to make sure you’re getting a great deal. How much time and effort do you want to put in to save $4 a year?
There is a limit to how much work one might want to do. Varies by the individual. Some will do a lot of work to save small amounts. But until you shop, you don’t know whether the savings will be insignificant.
It is easy to get quotes from 5 direct writers, which would get you a large share, perhaps all, of the market share of companies that sell this way.
Excluding them from consideration seems an extreme strategy. About as extreme as getting quotes only from the 5 biggest insurance companies. Or only from one independent agent.
Most truly independent brokers use software that quotes all of those career agent companies. Their rates are rarely in the top 10.
So I’ve had a term policy for 10 years (2 million, 20 year term). When I obtained the policy I had no “risky” hobbies of any type. In the last 2 years I’ve taken up climbing (mostly gym). Will my policy still cover me if I have an accident while climbing since when I took out the policy I accurately stated that I engaged in no such activity? Just trying to figure out if I need a climbing specific policy. I looked at that document and it looks like after 2 years the only issue that can void it is failure to not pay the premium?
Yes, absolutely, it’ll cover you.
I am a resident and rock climber. I would like climbing covered under my life insurance policy, and realize I will probably pay about 2x in premiums compared to peers without any “risky” hobbies. I am running into an issue where companies will originally quote a reasonable rate, but because I climb >5.13 level are adding a flat $2.00 fee per $1,000 of coverage on top of the quoted rate. I am working with an agent, but we have repeatedly run into this issue. It does not seem to make much logical sense, as you would expect a more experienced and competent climber to ultimately be safer and less risky for the company. Does anyone have experience with this or know of any life insurance companies that have more logical/favorable policies for climbers?
Only 2X? Sounds like a great deal. When I had one that considered me a climber, it was a lot more than that. If there is a period of time in your life when you stop climbing for a while, get a new policy!
I’ve never really understood how they factor in climbing grades and types of climbing. I filled out the questionnaire, but not really sure what mattered on it. If they were smart, they’d consider you lower risk as a sport climber compared to a trad or ice climber and especially a mountaineer. What really matters is exposure, i.e. how often you are doing it. Twice a year? Maybe not so high risk. Twice a week? Much higher, even with more experience.
Hopefully the independent agent you’re working with can help shop you around, but you might want to look into the AAC policy too:
https://americanalpineclub.org/insurance
Although it’s not “real” life insurance, just accidental death.
If I’m interpreting your email address right, I think your canyoneering activities may be higher risk than your climbing ones!
Thank you, Dr. Dahle. Perhaps I am being too cheap, but ~$750 base premium plus $2,000 per year fee for climbing “expert” level routes on a 20 year $1mil policy seems quite steep, especially on my current resident salary (this is higher than my disability premium, although that does not cover disability from climbing). Admittedly, my sample size is 1, so maybe this is actually quite a reasonable rate in the scheme of things.
Thank you for the AAC link, I’ve looking into it before and may end up using it if I can’t get a reasonable rate. If so, would have an exclusion rider for climbing on term life policy and purchase the AAC accidental death policy on the side vs buying a term policy now with an exclusion for climbing and buying a second term insurance policy that covers climbing once I am an attending and can afford the higher premium. After all, my odds of dying driving to and from the hospital during residency are likely much higher than my odds of dying sport climbing, but it would be nice for peace of mind to just have a policy in place now that covers climbing.
You are interpreting my email address correctly, hopefully our paths will cross again in the future, assuming a certain lake remains in existence. I suppose even if a certain lake dries up, the canyons will still be there and may have some interesting new challenges assuming the rock isn’t choss after being submerged for years. It is interesting how the actuaries choose to stratify risk. Thank you again, really appreciate all the help!
I agree it’s steep. It’s sad that flying, skydiving, SCUBA, and climbing are discriminated against but there is no problem with canyoneering, backcountry skiing, cliff diving, motorcycle commuting, and many other similarly risky activities. But that’s the world we live in. Take it or leave it or stop climbing long enough to buy a non-climbing rider policy (I dumped my expensive climbing policy when I was in the military and couldn’t climb for a while and bought a term policy without a rider).
As far as the disability policy, I had a similar exclusion on my main one, but I added a group policy on later that did not. I’ve dumped them both now as I don’t need them.
Just a quick update. Got a great rate and covered for climbing . I went through Larry Keller, one of the recommended agents, and can’t recommend him highly enough. He went above and beyond shopping around to find a company with the most favorable rate for climbers.
It seems as if certain companies care more about the YDS grade you climb, and others are more mountaineering based (peaks >13k feet). Pending on what your primary focus is, there may be companies that look more or less favorable on your particular flavor of climbing. If anyone is in a similar situation, I would recommend reaching out to Larry.
That’s great to hear. So which company did you end up with?
Prudential. I’d have to look back at which had a $2 per $1000 coverage fee for “advanced” sport climbing/bouldering, but there were several. If you frequently mountaineer, Prudential may not be the best, as that is what the majority of their questions focused on. Their form did not even ask about the grade climbed, it only differentiated mountains >13k feet, “rock climbing”, ice climbing, and artificial wall climbing.