By Dr. James M. Dahle, WCI Founder
I received a question today from a physician about how to buy life insurance. This is surprisingly simple for 98% of doctors. Wondering what type of life insurance and how much life insurance you should buy? Buy the cheapest, long-term, level-premium term life insurance policy from a reasonably-reputable company that you can find.
#1 Buy Term Life Insurance
Don't let anyone talk you into buying any type of permanent life insurance such as whole life, variable life, universal life, variable universal life, etc. Term life insurance is a commodity, so the pricing is very competitive and shopping/comparison is simple. Fees and commissions are necessarily kept low because people shop for it primarily on price. Don't mix insurance and investing.
#2 Buy Long-Term Level-Premium Term Life Insurance
You may become uninsurable (or your health or habits may worsen and you become insurable only at a higher price) in a few years. So buy insurance now for the longest term you need, meaning until you become financially independent. The default option should be 30 years. Level premium means the premiums never go up. So you may pay $100 a month for $1 Million in insurance. Twenty-five years from now you'll still be paying that $100 a month. As you get older and inflation kicks in that $100 a month will cost you less and less as time goes on. Likewise, the face value of your insurance will be worth less and less. But that's okay, because your portfolio will be growing to replace it so as time goes on you have less need for insurance.
Another reasonable option, especially for someone who plans to become financially independent relatively early in life (and thus cancel their life insurance), is to buy annually renewable term insurance. It starts out dirt cheap and gets more expensive each year. But if you don't need it after 50 or so, you will have spent much less money than buying a 30-year level premium policy that goes to age 60 or 65.
#3 Buy a Lot of Long-Term Level-Premium Term Life Insurance
Your decision shouldn't be “Should I get $300,000 or $350,000.” This stuff is pretty cheap. The default option should probably be about $2 million, but it varies according to your circumstances. A dual-physician couple that has no kids and could easily live off one income probably doesn't need life insurance at all.
You need to decide what you want the insurance to cover. Until I was financially independent, I basically wanted my family to have the exact same lifestyle whether I was here or not. So if I died, my insurance would need to pay off the house, send the kids to college, allow my wife to stay at home until the kids are out of the house, and provide most of her retirement portfolio.
#4 Buy a Lot of Long-Term Level-Premium Term Life Insurance from a Reasonably-Reputable Company
Although the company can go out of business at any time, this isn't nearly the risk it may seem to be. You probably don't need to buy from the “very best” company, despite what many insurance salesmen will tell you. If the insurance goes out of business, the policy will likely be acquired by another company and its terms won't change. If not, your state will guarantee at least the first $300,000 of your insurance policy.
Let's say the worst happens and your company goes out of business and no one will buy the policy from them. If your policy was much bigger than $300,000, chances are you'll be healthy enough to buy a new one to replace the old policy for a similar price. For example, if you buy a 30-year policy at age 30, and you need a new one at age 50, you'll likely only need a 10-year policy, which really won't be much more expensive than the original 30-year policy.
Buy Multiple Policies
You can minimize this risk by buying more than one policy. Most of us end up doing this anyway as our insurance needs change. For example, you might buy a $500,000 policy as a resident, then buy another $1,000,000 policy upon graduation, keeping the original policy. You can also buy multiple policies so they expire at different times.
For example, originally I had one policy that would expire at age 53, when our original financial plan anticipated we would be financially independent. My other policy was set to expire when I was 60, which would be helpful if I had not met my goal of financial independence by my early 50s. It was a Plan B of sorts. Of course, once I was financially independent I canceled both before age 50 not long after I dropped my disability insurance. This plan cost me a bit more per month than if I had just gotten a shorter policy, but less than if I had just gotten a longer policy. It's a small cost and hassle for the extra benefit it provided.
#5 Buy the Cheapest, Long-Term, Level-Premium, Term Life Insurance Policy from a Reasonably-Reputable Company That You Can Find
Term life insurance is a commodity. This isn't disability insurance where the definition of “dead” is all-important. With life insurance, you're either dead, or you're not. By law, you have to buy life insurance from an agent. But you don't necessarily have to buy it from a “captive” agent, that is, one that is employed by a single insurance company. You can buy it from an agent that can sell you a policy from any insurance company. Two of the best places on the internet to compare life insurance policies are insuringincome.com and Term4sale.com. Both are advertisers on this site but are totally free resources to you.
Here's how it works. You enter in your information and it spits out a comparison of the same policy from several dozen insurance companies. Term4sale.com gives you the names of three local agents you can buy your policy from. Print out the list, walk into one of the agent's offices, and ask them to sell you the cheapest policy on your list. Done. You'll get the price quoted on the site. Easy, quick commission for them and you have what you need without any hassle. Well, you might have to tell the agent once or twice that you definitely don't want to buy a whole life insurance policy, but that's it. (Joe Capone at insuringincome.com promises to help you get your desired policy without having to decline whole life insurance multiple times.)
If your circumstances are unique, such as risky hobbies or health problems, a good agent can point you to the cheapest policy that is least likely to move you from the most preferred classification due to your particular risk. Lastly, remember that policies are usually cheaper if you pay annually rather than monthly, even counting in the time value of money. If you can handle the slightly more complex budgeting, you might as well save a few bucks.
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.
What do you think? How did you buy your life insurance? Are you glad you used that method? Why or why not? Comment below!
[This updated post was originally published in 2011.]