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.
Are your kids as cute as mine? Then why don't you have life insurance?
#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.]
Will be starting residency this summer in IM, married with 1 child planning on more in residency. I’ve been trying to get my spouse on board with as many WCI topics as possible. She balks at life insurance during my 3 year residency. Her parents are retired and well off. She contends that if I die in residency she will just go live with them and they’ll take care of her. She thinks we can delay the life insurance purchase until out of residency, which will make our resident’s salary go further.
Wondering what points I can make to best persuade her to purchasing term life as a resident. Thank you!
If your heir doesn’t care about you having life insurance, why buy it?
I guess I’d sit down and really talk out what it means for you to die tomorrow without life insurance though.
Love this Tuesday classic! I had just used Term 4 Sale after having had to dump my NWM whole life as well as replace the term to 80 convertible insurance. Mike, my whole life policy was just too expensive, and even the term to 80 convertible to whole had premiums that were not level, and by year 7 of these policies for me and my wife the cost was now above just getting regular level term even being 7 years older. I was getting into credit card debt in my prime earning years just trying to fund the stupid whole life insurance. Can you believe it! I can’t imaging paying the higher premium for many years, and then if I convert it to whole life paying an even higher premium. It’s just way too much money that could have been invested elsewhere. Sure your heirs get a million bucks when you die or however much the death benefit is, but the premium will drive you to the poor house.
Great article Jim! It never takes long for the ‘but whole/universal life is great’ folks, most of whom are probably selling the stuff, to pop in.
Regarding the definition of death, you just want to be sure that they aren’t using Mad Max’s distinction (e.g. mostly dead and all dead)! 🙂
Hi – I️ recently started looking at life insurance and I️ spoke to two different advisors about purchasing term life insurance. My spouse and I️ settled that I️ probably need about $3million of coverage to meet financial commitments. Below is what each recommended.
1. $3mil 30-Year Term with NYL for annual premium of about $3k per year.
2. The second advisor recommended laddering term policies totaling $3mil but doing one for 20yrs, one for 25, and one for 30. He explained that as my assets grow I️ won’t need as much coverage and it will be ok to let each tier expire gradually. He also explained that the cumulative cost would be much less (~$50k) than just buying a 30 year term policy.
Seems like option 2 makes more sense, but I’m trying to figure out if he has incentive to sell multiple policies? They’re from different companies and each looks like the cheapest option for each term level. Thoughts?
@Chris
I don’t think he’s trying to fleece you. Option 2 is a good option. One caveat, though. Even though inflation is at historic lows, realize that $1M 20-30 years from now is likely to have the purchasing power of $500K in today’s money. That said, if you have a healthy savings rate, your need for death benefit, even in nominal dollars should go down over time and option 2 seems like a pretty darned good deal.
Just my $0.02 — not actual financial advice.
I agree with option #2 as well. I have myself just took out a laddering type approach which should be the cheapest option given you are buying what you need, dropping what you don’t because as you go along your net worth goes up and your need for insurance goes down. Trick is calculating how much you need. For me, I have a spouse who is also a physician, but have a 1mil mortgage and 2 kids that are 4 years and 2 years old, and 180k left in student loans and my wife also has a pretty expensive lifestyle. I calculated need about 4mil now in life insurance, and did term level 1.5mil 10 year, 1.5mil 15yrs, and 1mil 20yrs given hope that out net worth has increased and mortgage decreased at past 10 years would only need 2.5mil, at past 15 years kids college should be funded in a 529 and mortgage paid down even more will need just 1mil, then finally hopefully past 20 years me and the wife would be financially independent and the kids would be past college and mortgage minimal no longer need insurance.
Not really, # 2 is likely good advice. That’s basically waht I did.
First off, thank you for all that you do. I love the site. I am a 29 Yo orthopedic resident with a spouse who is a NICU NP. We have 1 child currently. I am looking into purchasing life insurance. After reading your site and listening to the podcast, it appears long-term level premium term life insurance is the way to go. I had met with an insurance agent and he offered me a “laddered” policy for 30 years, where my premiums would remain the same but my coverage would taper down every ten years during the 30 year period, i.e. 2 million benefit for the first 10 yrs, 1 million for the second 10 yrs and 500K for the final 10 yrs of the policy. My family can afford the higher premiums to get the policy that is right for us, but I am confused if all term policies are structured this way of tapering down or if this was just something that company did specifically. I have used the term4sale site listed above to get quotes. My questions is if it is better to have term life insurance where the benefit remains the same throughout the term versus this laddered policy? Thank you again.
I think laddering can be very smart. Just realize that inflation by itself kind of ladders a policy already.
Hey man laddering is actually separate individual term policies and can be bought like this with any insurance company. It is the most cost efficient way really to buy life insurance b/c as your assets grow, you will need less death benefit,. I myself need 4 million in life insurance now, but plan to have my assets grow and pay down debt where in 10 years I will only really need 2.5-3million, in 15 years 1-1.5million, and in 20 years only 1 million, so I have laddered policies with lincoln for 10 years at 1.5mil, 15 yrs at 1.5 mil, and 20 years at 2million death benefit. This cost me $1500 per year and as each policy lapses the cost would go down, whereas if I did just one $4 million 20 year term policy it would have been $3000 per year for 20 years. that would have been a lot more money for insurance my family did not need.
Thank you for the help!
*** Sorry correction- the “ladder” term policy that he showed me would basically be buying three different term policies- one 30 yr policy with a 500K benefit, one 20 yr policy with a 1 million benefit and one 10 yr policy with a 500K benefit. This would ultimately correlate to 2 million benefit the first ten yrs, 1.5 million benefit the second ten yrs and 500K benefit for the final 10 yrs. The premiums of those combined would be a little cheaper than a single 30 year term policy with 2 million benefit and then would be even cheaper later on after the policies start to fall off. My question is if I can afford the premiums for a single 30 year policy with 2 million benefit, should I go ahead and opt for that one versus 3 policies that would save money but would give me much less coverage later on? I crunched the numbers and based on the instant quote tools above a 30 yr term plan with a 2 million dollar benefit will cost somewhere around 36.5K over the 30 yrs. Alternatively, the 3 “ladder” plans will end up costing around 22K altogether. Is the 14.5K savings over 30 years worth the tapered down benefit after the first ten years using the Ladder approach?
Hey man I would say it depends on what you need. I would not pay for insurance that you don’t need. Really have to crunch the numbers but this would include money for you wife not to have to work, paying off the mortgage, paying off kids college, etc. And also again you will be able to build your assets as time goes on. For example, as my 529 grows I need less life insurance to pay for kids college. Dude, since you are on this forum and you’re only a resident, and then going to be making bank in ortho and hopefully you will also take Jim Dahle’s advice and live like a resident until your student debt is gone and live frugally, I doubt you will need 4million of life insurance for the full 30 years!!! again though depends. If you plan to not be aggressive with debt, blow every dollar you make, and fall victim to lifestyle inflation, then yeah would may need $4million for the full 30 years. I doubt you will make that mistake though 🙂
Laddering is totally reasonable. I have two laddered policies. I suspect I’ll end up cancelling both long before the terms end so obviously the shorter term ones saved me money.
Jim,
Do you have any specific recommendations for people who have pre-existing medical conditions and buying term life insurance? To make a long story short, I am currently in my last year of residency and 6 years ago began having severe headaches which prompted a head MRI that revealed an incidental brain lesion. While scans have remained stable since that time and headache symptoms have only improved, the differential diagnosis included demyelinating disease, low grade brain tumor, or completely incidental finding… The likelihood of being an incidental finding increases with each year that passes but I do not know how to navigate this problem with previous physician notes documenting these findings and assessments in the past. Any suggestions would be much appreciated in how to navigate purchasing term life insurance wisely (not having my application rejected thus having to report in future applications that I was rejected in a previous application).
Thanks for all you do. Truly love your content and all the help you provide!
-Dre
Have an independent agent shop it around informally to avoid declines.
If my spouse (main earner in the family) already purchased life insurance as part of the company’s benefit, should we get additional term life insurance beyond that?
Three issues to think about:
# 1 I have yet to see a company provide as much insurance as a family needs. They typically provide something like 2X your salary and most of my readers need $1-5M.
# 2 If you leave the company, that policy doesn’t go with you. So I’d buy one that is portable and would go with you for at least part of your coverage.
# 3 The non main earner in a family may also need insurance. Even a stay at home mom does a lot of stuff that would cost a lot of money to replace-cook, housekeeper, laundry service, chauffeur, child care etc. What is the plan (financially speaking) if that person dies? Is there enough money to do that plan? If not, insure that person too.
As a single 30 yo female fellow physician-in-training w/ no health issues and currently ~$147k in student loan debt, I am curious if I need to buy a life insurance policy? I’m confused what would happen with my debt in the unlikely and unfortunate event of death. I know this is morbid, but I currently have disability insurance and am debating my need for further policy holding. I’ve been told that life insurance is unlikely to be needed currently as I have no dependents, but I am unsure who my debt would fall on. I have been reading the blog and just am still a bit confused. Thanks for the help!
Federal loans disappear. Private loans vary, either disappearing or being put against your estate. But if you die with a negative net worth, nobody goes after your mom or anything.
If you have no dependents, you don’t need life insurance.
Great post! I’ve been in the industry for over a decade and Term4sale is the best quoter. They have all the of the top companies for term and UL products.
Hello!
I am just wondering what is the consensus on voluntary life insurance from my employer? I will lose that coverage after my termination. Should I opt to purchase a term life-insurance plan as well? Is the voluntary life insurance from my employer worthwhile at all?
Thanks!
I would probably try to have your own independent, portable coverage so you are not dependent on the employer to have it. If you want their coverage to cover part of your need, that’s probably fine.
WCI, great post! What do you know about Lemonade’s life term insurance? Would you get it? Monthly payments are cheaper than all/most insurance companies I’ve talked to but it is a new service they are providing. They even offer a 30 year policy while NWN only goes up to 20.
Thanks!
First time I’ve heard of it. Sure, why not consider it. But as a general rule, if it doesn’t require some type of exam, you’ll likely pay more than you will for a policy that does require one. Otherwise, there are tons of people with bad health who buy that policy causing prices to rise.
Most companies offer a 30 year term policy, NML is unique that way (and in the way that they sell you whole life you don’t need it seems).
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Convertible term option to WHOLE LIFE YES WHOLE LIFE could be a great feature. What if I want life insurance beyond 30 years? I want to leave a legacy behind, I cannot do this with TERM LIFE INSURANCE can I?
I disagree. I find a conversion option to be a feature of a term life insurance that is rarely used by someone who knows what they’re doing. I certainly wouldn’t pay extra for it.
There are many ways to leave a tax-free legacy behind (taxes, investment real estate, your own home etc all due to the step-up in basis), and some have a higher return than whole life insurance.
You can buy a 40 year term rate, just had a client build a term ladder this week and wanted the 40 year to be included. If you really want to go long term than 40 years right now then you can buy one of the stripped down ULG that have no CV and minimum funding, most reps don’t like to do those since premiums don’t hit ‘target premiums’ which is what compensation is paid off of.
If you want term insurance longer than 30 years you can buy a 40 year term policy up through your 45th birthday, a 30 year through age 58, 20 year plan through age 70, a 10 year plan through age 80 and a 1 year plan through age 85.
When we build term insurance single policies or laddered series we rarely see the death benefit need longer than 30 years but it does appear from time to time. When it does we just use a 40 year term life plan or if someone really wants a very long term plan then for that portion of their insurance needs we can use a ULG that builds no cash value and is funded at the absolute minimum amount to last to the date / age the client wants. We rarely see the 30+ years as a ‘need’ which is what we can assess, it usually comes from a client as a ‘want’ if it exists at all.