I received a question several years ago 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/comparing 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
In a few years, you may become uninsurable (or your health or habits may worsen, and you become insurable only at a higher price). 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. 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 passes. Likewise, the face value of your insurance will be worth less and less. But that’s OK, 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.
More information here:#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 who have 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. 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 an insurance 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 salespeople 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 $250,000 of your insurance policy.
Let’s say the worst happens: your company goes out of business, and no one will buy the policy from them. If your policy was much bigger than $250,000, 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. You might buy a $500,000 policy as a resident, then buy another $1 million policy upon graduation while keeping the original policy. You can also buy multiple policies so they expire at different times.
For example, I originally 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. But 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.
More information here:#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 who is employed by a single insurance company. You can buy it from an agent who can sell you a policy from any insurance company. WCI has partnered with some agents where you can get a life insurance quote from multiple reputable carriers. These resources are totally free to you.
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.
What do you think? How did you buy your life insurance? Are you glad you used that method? Why or why not?
[This updated post was originally published in 2011.]
The White Coat Investor may receive compensation from White Coat Insurance Services, LLC; licensed in all states including MA and DC; CA license #6009217; NY license #1758759 (exp. 6/2027); Registered address: 10610 S. Jordan Gateway, #200 South Jordan, UT 84095. This does not affect the cost or coverage of insurance.
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