By Joe Dyton, WCI Contributor
By Dr. James M. Dahle, WCI Founder
Life insurance is essentially a deal you make with an insurance company. You pay policy premiums, and in exchange, the insurer will pay your beneficiaries a death benefit after you die. The benefit can be used as your beneficiaries see fit. This could be paying outstanding bills, paying off a mortgage, or paying for future education costs. The important thing is life insurance provides your loved ones with some financial cushion in the event of your death.
Here's everything a physician or other high earner needs to know about life insurance.
A Necessary Evil
On average, insurance companies must pay their purchasers less than they pay in premiums. Life insurance companies have two sources of income:
- Premiums paid and
- Earnings on investments
The main source is the premiums paid. Out of that total income, they must pay all of their expenses (including commissions for the agents), pay out the death benefits to all who deserve them, and have some money left over for profit (at least in the case of a non-mutual life insurance company.) Thus, they CANNOT pay out the amount of money that is paid in. However, despite insurance being a “bad deal,” if you need it, you should still buy it. But don't buy more than you need.
For most people, they need a large term life policy during their earnings years, and that's it. Beware of anyone trying to sell you any other kind of life insurance, remembering that, on average, any life insurance you buy is a losing proposition. So, only buy what you really need. Remember that many life insurance policies, particularly the “permanent” ones, are often products designed to be sold, not bought. Naturally, the best insurance is the insurance that is actually in force when you need it, and the lower cost of term life makes it the most likely to still be in force should you die early.
Types of Life Insurance
Unlike other insurance products like auto or homeowners, life insurance comes in many different forms. Whole life, term life, universal life, and guaranteed life are just a few of the types of insurance policies you could choose from. It’s critical that you understand what these policies entail so you can make the best decision about which one best suits your and your family’s needs.
Below are a few of the most common types of life insurance policies and their definitions to help you make one of the most important financial decisions of your life.
Term Life Insurance
Term life insurance often comes to people’s minds first when they think about life insurance. This type of policy covers a certain period of time, hence the phrase “term” life.
How It Works
You pay premiums over the agreed-upon term of your policy, and if you die within that time frame, your beneficiaries will receive the death benefit from your term life insurance policy. If you outlive the policy, they would not receive anything.
Pros of Term Life Insurance
- Term life insurance is generally more affordable than whole life insurance.
- It offers peace of mind knowing that your loved ones will be taken care of if you die.
- Term life insurance can protect you fairly inexpensively, especially when you are young and healthy.
- You can use riders to customize exactly what kind of policy makes the most sense for you (most of the time, though, there is little reason to get them for term life).
Cons of Term Life Insurance
- Term life insurance is temporary (only for the “term” of the policy).
- If you don't die before the end of the policy term, you get no return or benefit from the monthly premiums you've paid.
- It may be difficult to qualify if you have a negative health history.
Who Should Consider Term Life Insurance?
Term life insurance is a fantastic option if you’re the primary breadwinner in your household. Even stay-at-home parents may buy it, given how expensive their service to the family would be to replace. You should consider it if you’re a younger doc at the beginning of your career so you can protect your beneficiaries when you haven’t saved much yet in terms of retirement assets. Term life insurance is also typically more affordable when you are younger and likely healthier.
A physician's goal should be to get term life insurance for a certain period of time. Once that time frame expires, they hopefully would be financially independent. Therefore, that doc wouldn't need life insurance anymore anyway.
Whole Life Insurance
Whole life insurance is a variation of permanent life insurance. With a whole life insurance policy, you’re covered for your entire life as long as you pay your premiums on time.
How It Works
Like a term life insurance policy, whole life is a contract between you and your insurer. You pay a monthly premium, and your beneficiaries receive a payout after you die.
A difference is that whole life insurance policies acquire accessible “cash value” as the years go by. This cash value is yours to keep if you surrender the policy. Alternatively, you can borrow against it from the insurance company at pre-set terms. That loan, if not paid back prior to death, is subtracted from the cash value at death. The cash value grows via dividends in a tax-protected way. Sometimes policyholders can pay more than their premium (i.e. paid up additions) to create additional cash value.
Pros of Whole Life Insurance
- Premiums are fixed and won’t increase, regardless of market conditions.
- Policyholders can borrow against their whole life insurance policy’s cash value.
- Your life-long death benefit is guaranteed as long as you make your premium payments.
- There is a guaranteed increase in cash value, although it is often much less than the projected increases shown to you by the agent selling the policy.
Cons of Whole Life Insurance
- Whole life insurance policies have negative short term returns and low (2% guaranteed, 5% projected) long-term returns on the cash value.
- Whole life insurance can be five or even 10 times as expensive as term life insurance during the years when insurance is typically needed. Thus many purchasers who mistakenly buy whole life instead of term life end up dramatically underinsured because they simply cannot afford to get all of the coverage they need as whole life coverage.
- You don’t control how the cash value part of your whole life insurance policy is invested; your insurance company does. The dividend rate and thus the return on the cash value is essentially a black box.
Who Should Consider Whole Life Insurance
There are some exceptions for when a whole life insurance policy is a viable option, but being a doctor does not count as one of those exceptions. Most doctors don't need it. However, it can make sense to have whole life insurance for some specialized estate planning and business purposes. Additionally, whole life insurance might work well for someone who’s willing to sacrifice higher investment returns in exchange for lower but guaranteed returns, a death benefit, and possibly significant asset protection in some states. Others that highly value the ability to borrow money at pre-set terms from the policy (Bank on Yourselfers and some types of real estate investors) may also find value there.
Universal Life Insurance
Universal life insurance, like whole life insurance, is a permanent or life-long insurance policy that does not expire after any certain term. In the 1980s, interest rates were very high and interest shifted away from whole life insurance toward universal life insurance, due to higher potential returns on the cash value and greater flexibility. Even with rates lower, interest in universal life insurance remains relatively high due to its flexibility, which purchasers and particularly sellers have found useful. This flexibility allows for different ways for the cash value to accumulate and can also allow the owner to adjust premiums and death benefits periodically.
How It Works
There are really three main types of universal life coverage. There is “straight” Universal Life (UL), where the cash value accumulation is simply set at a current interest rate. There is Index Universal Life (IUL), where the cash value accumulation can be higher when the market is doing well but does not go down in value in bad times. Then there is Variable Universal Life (VUL), where the returns on your cash value fluctuate directly with the market, providing the highest potential returns for a life insurance product but with the highest volatility.
With all types of universal life insurance policies, you get coverage over the course of your life as long as you pay your premiums and fulfill any other obligations to keep your policy active. When you die, your universal life insurance policy death benefit is paid out to your beneficiaries.
The policy, like whole life insurance, accumulates cash value as it goes along, however there are fewer guarantees associated with the increase in cash value. Just like whole life, you can borrow against this cash value tax-free but not interest-free. Naturally, these benefits do not come free, and universal life insurance, like other permanent life insurance policies, costs a lot more than a term life insurance policy for the same death benefit.
Every time you pay your universal life insurance policy premium, part of the payment goes toward the cost of the insurance, basically providing the death benefit. The rest goes toward the policy cash value. Think of the actual life insurance policy inside the universal life wrapper as an annually renewable term contract. It goes up in cost every year. While very cheap when you are young and healthy, it is very expensive in your later years. However, theoretically, the earnings on the cash value portion of the policy can make up for the additional cost of the insurance later on. If they do not, the policy can consume itself, a true financial catastrophe.
Pros of Universal Life Insurance
- It has flexibility—you can change how much and how often you pay your universal life insurance policy premium. You can also increase or decrease your policy’s death benefit. Because of this, people use universal life insurance for all kinds of reasons besides the death benefit.
- The funds in the cash value portion of your policy will earn interest based on the type of investment inside the universal life insurance wrapper. This gives you a chance to earn more while ensuring your loved ones are covered financially in the event of your death.
- A universal life insurance policy gives you access to cash by allowing you to borrow against it (tax-free but not interest-free) or surrender the policy (interest-free but not tax-free if there are gains) in order to access the cash value.
- If you want a death benefit even if you die at an old age, you will need a permanent policy like universal life. A term policy can be a very expensive way to get a death benefit in your 70s, 80s, 90s, or later. The huge savings you get using term life insurance instead of a permanent policy assumes you'll be canceling the policy in your 50s or 60s, before you are likely to die. It is designed to pay your survivors a big death benefit if you die early and unexpectedly.
Cons of Universal Life Insurance
- It's more expensive. Meanwhile, term life is the cheapest way to provide a death benefit to heirs during your working years.
- The flexibility that comes with a universal life insurance policy means it’s not a “set it and forget it” situation. There is added responsibility here. If you opt to not pay or underpay during lean times, you might find yourself having to play catch-up later on to maintain your coverage.
- It’s great that you can earn interest on a straight universal life insurance policy—especially when rates are high. When they fall, however, so does the rate at which your cash value grows. Index Universal Life policies (IUL) and especially variable universal life (VUL) policies provide even more volatility in returns. You may want to consider a different type of life insurance if you cannot stomach the inevitable lows. Your cash value typically doesn't go down with an IUL or a straight universal life policy, but the amount you earn with an IUL is extremely variable. The VUL cash value can actually go down, but you get more of the upside when there is upside.
Think of permanent life insurance policies as being on a continuum from most conservative to most aggressive:
- Whole life insurance – Lots of guarantees and relatively low returns, but no decrease in cash value due to investment returns and the cost of insurance never increases.
- Straight universal life insurance – Fewer guarantees and potentially higher returns, particularly in times of high interest rates. Cash value does not decrease due to investment returns, but can due to increasing costs of insurance.
- Index universal life insurance – Even fewer guarantees but with potentially for even higher returns, particularly when markets do well. Cash value does not decrease due to investment returns, but can due to increasing costs of insurance.
- Variable universal life insurance – Almost no guarantees with regards to cash value, but has the potential for the highest returns when the market does well. Cash value can decrease due to investment returns and due to increasing costs of insurance.
Who Should Consider Universal Life Insurance
Life insurance is vital for anyone who has loved ones that depend on them financially. So, while universal life insurance is not as ideal as a term life policy, it’s better than no coverage at all. A universal policy might be useful for someone with a unique financial need, whether that’s a guaranteed life-long death benefit or another source of retirement funds.
While the policy can be used for long-term savings goals, informed investors generally regret mixing insurance and investing in this way. Universal life insurance is generally considered to be inferior to whole life insurance when it comes to Bank on Yourself/Infinite Banking systems. Certainly, there is no reason to fund any type of permanent life insurance policy for retirement savings before maxing out all available retirement accounts.
Guaranteed Universal Life provides a life-long death benefit but accumulates no cash value. It costs about half as much as a whole life policy, but its death benefit does not grow throughout life like a whole life policy would. Still, it can be used to meet a fixed, permanent death benefit need.
Variable Life Insurance
Variable life insurance is another type of permanent life insurance that’s tied to investing. These policies have a cash value account that’s invested in various sub-accounts, which act similarly to a mutual fund. The value, thus, rises and falls with the market. These sub-accounts are only accessible through variable life insurance policies, however.
The theory is that the long-term returns will be higher, but you'll still get the tax-free growth, asset protection, and death benefit. In other words, a variable life insurance policy is designed to deliver stock market returns with life insurance benefits.
In today's world, few true variable life policies are sold, with most agents and purchasers opting for the slightly more flexible variable universal life policies (VUL). Differences are subtle and these two types of insurance are often conflated, including in the remainder of this section.
How It Works
Like with whole life insurance, variable life insurance has a permanent death benefit along with a cash value component. The money grows inside the cash value account tax-free, and then in retirement, the money is borrowed from the policy so it can be spent. Upon death, the death benefit pays off all the loans taken (and still provides a bit of money tax-free to the heirs.)
Depending on your state, there may also be significant asset protection benefits for this money, and depending on estate tax laws in place at your death (and the liquidity of your estate), there may be estate tax benefits as well.
Pros of Variable Life Insurance
- The cash value can be invested in mutual fund-like subaccounts.
- Variable life insurance investment growth is tax-deferred until you make withdrawals from the policy.
- The IRS considers withdrawals to come out basis first, so you can take out up to the total amount of your policy contributions tax-free.
Cons of Variable Life Insurance
- If you die while your policy is active, your insurer can use the actual cash value to close out any loans you might have taken out. Your beneficiaries would then receive what’s left over.
- If your policy lapses before you die and its value exceeds your total contributions, it’s taxed as income.
- Variable life insurance policies often offer limited investment options.
- Policies can be more expensive than other life insurance options, with low returns.
Who Should Consider Variable Life Insurance
Some financial advisors believe there are cases where high-earning doctors can benefit from investing in a variable universal life (VUL) policy rather than a taxable account. In these situations, insurance costs would be lower than the tax costs in the long run. However, most if not all of the following should be true for whole life insurance to be a good idea:
- You’re in the highest tax bracket now
- You'll be in the highest tax bracket in retirement
- You’ve bought a GOOD VUL packed with good investments, like DFA or Vanguard funds you would invest in anyway
- You’re committed to holding it your entire life
- You will have no trouble making the premiums (consult your crystal ball if necessary)
- This is money you plan to completely spend in retirement
- You cannot invest in an extremely tax-efficient manner in a taxable account, and
- Neither the government nor the insurance company changes the rules significantly over the next six to seven decades
If any of those are not true for you, keep your investments and life insurance separate.
Group Life Insurance
Group life insurance is a life insurance policy that’s offered to multiple people under one contract, such as in a job setting. Companies might offer group life insurance policies to employees as part of their benefits package.
How It Works
Employees usually have the option to sign on to their company’s group life insurance policy. If they do, they will pay a monthly premium, which is often less expensive than an individual one because more people are paying into it. If an employee dies while on the policy, their listed beneficiaries would receive the death benefit.
What happens to the policy after an employee leaves depends on the company’s policy. Some organizations allow employees to turn their group life insurance policy into an individual policy.
Pros of Group Life Insurance
- Group life insurance is less expensive, if not free, for employees since they’re getting coverage through work.
- It’s typically easier to get approved for a group life insurance policy than other types of life insurance, no matter an employee’s medical history.
- Securing life insurance through a group life policy is usually an easy process because it’s done alongside other hiring paperwork.
Cons of Group Life Insurance
- Insurance companies may choose to increase the coverage cost over the life of the policy, leaving older employees to pay higher premiums or let their policies lapse.
- Since group life insurance policies are tied to an employer or organization, employees may not be able to keep the policy if they leave.
- Employees are beholden to the life insurance company their employer selects.
- Companies usually don't provide anywhere near as much life insurance as an employee needs, forcing them to buy an individual policy to supplement their group life insurance policy.
Who Should Consider Group Life Insurance
A group life insurance policy may be a good option for someone with a health condition that might make it difficult to secure coverage otherwise. Younger employees might also want to consider a group life insurance policy due to the potential for coverage to become more expensive as they get older.
Guaranteed Life Insurance
Guaranteed issue life insurance is available to those who don’t qualify for traditional life insurance because of a preexisting condition or potentially unaffordable premiums. Like with simplified issue life insurance (as we'll discuss below), you’ll have to answer questions about your medical history and overall health, but an exam is not required.
How It Works
The reason guaranteed life insurance is named as such is because insurers guarantee they’ll issue you a policy. One condition is that you must be within the age range that the insurer is willing to write policies for—usually between 50-80 years old.
Guaranteed life insurance does not require a medical exam, but your insurer will ask a few questions to help set your rates. Additionally, many guaranteed life insurance policies come with graded benefits. This means that there’s a waiting period for your full death benefit to kick in. If you were to die within the grading period, your beneficiaries would only receive your refunded premiums, plus interest. They receive the full benefit amount if you die after the waiting period has concluded.
Pros of Guaranteed Life Insurance
- The underwriting/decision process moves much faster for guaranteed life insurance policies; you should be set up in two weeks or less.
- Your chances of being denied a policy are very low, and you don’t have to go through a medical exam.
- You could potentially save money on your premium as unknown health issues that normally would drive up your premium would not be revealed due to a lack of a medical exam.
Cons of Guaranteed Life Insurance
- Guaranteed life insurance policies don’t offer as much coverage as other types of life insurance; they often max out at $500,000.
- Insurers take on a greater risk writing a life insurance policy without a medical exam, which could lead to higher premium costs.
- Without a medical exam, you could miss out on the chance to add riders or benefits to your life insurance policy.
Who Should Consider Guaranteed Life Insurance
If you’re concerned that your current health standing or prior medical history will get you denied for life insurance or lead to higher premiums, take a look at your “no medical history” life insurance options, such as guaranteed issue life insurance. Coverage will likely be more expensive than a life insurance policy that requires a medical exam, but at least you can provide your loved ones with some sort of financial cushion in the event of your death.
Simplified Life Insurance
Similar to guaranteed life insurance, simplified life insurance is more easily obtained coverage that only requires minimal questions about your health. It’s meant for people who need to get life insurance quickly and don’t want to deal with going through a medical exam.
How It Works
The simplified life insurance process moves quickly. Applicants typically will have their policy when their application is accepted. There’s no medical exam but rather a short health questionnaire that insurers use to assess how much risk they’d be taking on by insuring you. The questionnaire also allows the insurance company to determine your premium price and the amount of your death benefit.
Pros of Simplified Life Insurance
- Simplified life insurance policies don’t require a medical exam.
- The policy begins almost immediately after your application is accepted.
- Maximum coverage is often higher than a guaranteed life insurance policy.
Cons of Simplified Life Insurance
- Simplified life insurance policy premiums are higher because insurers obtain less medical information which leads to more risk on their end.
- There could be a longer grading, or waiting, period in place for your beneficiaries to receive the full death benefit in the event of your death. Your policy may need to be in place for at least two years before death to be eligible for the full death benefit.
- While simplified life insurance policies may offer more coverage than a guaranteed life insurance policy, the ceiling is still going to be lower than a standard term policy that requires a full medical exam.
Who Should Consider Simplified Life Insurance
Simplified life insurance might be a good fit if you need coverage right away, you don’t want to go through a medical exam, or you have concerns that your medical history will prevent you from getting better coverage elsewhere.
Joint/Survivor Life Insurance
Survivorship life insurance is a type of life insurance used to cover married couples or business partners. It provides coverage for two individuals for a lower cost than two separate life policies. There are two types of survivorship policies: first-to-die and second-to-die. Survivorship coverage is available in term life insurance, whole, and modified whole.
How It Works
A first-to-die life insurance policy pays the death benefit when the first insured policyholder dies. Business partners can use it to provide funds for the surviving partner to buy out the deceased partner's business interest and cover other expenses that may arise from a partner's death. This can be especially useful since many physicians and dental groups form partnerships or LLPs. Meanwhile, married couples may use first-to-die survivorship life insurance to provide the surviving spouse with money for living expenses that may arise after the first partner dies.
Second-to-die life insurance does not pay the death benefit until the second insured person passes away. Affluent couples may use this type of policy to provide liquidity to pay estate taxes for their heirs or simply as the primary holding in an Irrevocable Life Insurance Trust. Once in the trust, the death benefit is separate from the estate and is not subject to estate or income tax.
Pros of Joint/Survivor Life Insurance
- Both spouses or business partners are covered under one policy, which might be less expensive than buying two separate policies.
- If one spouse or partner has a health condition that makes it difficult to get life insurance, they may be able to do so with survivor life insurance.
- The surviving partner can access the policy’s cash value if necessary, through a life insurance loan.
Cons of Joint/Survivor Life Insurance
- Survivorship life insurance policies only yield one death benefit.
- A partner can’t be the beneficiary of a survivorship life insurance policy, so you’d need to either have a separate life insurance policy or a first-to-die joint life policy for them to receive the death benefit.
- In the event of a split, survivorship policies can be hard to update.
Who Should Consider Joint/Survivor Life Insurance
Survivorship life insurance can be part of a financial plan that ensures the continuation of a business even if a partner dies and can be handy in some estate planning situations. Survivorship coverage is not the right choice for every couple or business, but it can be an affordable alternative to buying two separate life insurance policies. This coverage can be especially helpful if one person in the partnership can’t afford or has difficulty qualifying for a life insurance policy due to a health issue.
Final Expenses Life Insurance
Final expenses insurance is a type of whole life insurance that has a smaller death benefit than most other policies. It’s also typically easier to get approved for. Final expense life insurance is typically meant to pay for the deceased’s funeral costs, the casket, cremation, etc. But the death benefit can be used to pay for anything.
How It Works
If you’re retired or later on in life without much savings to help your loved ones after you die, a final expense life insurance policy can help. The premiums aren’t as high as other types of life insurance, and since the payout is not as big, it’s easier to secure coverage—even if you have some health issues that would make you a bigger risk for another policy.
Pros of Final Expenses Life Insurance
- Final expenses life insurance can be secured regardless of health status.
- Premiums typically won’t increase over the life of the policy.
- The death benefit is not taxable.
Cons of Final Expense Life Insurance
- If you live long enough, your premium payments could exceed the eventual death benefit.
- Your beneficiaries won’t receive the death benefit if you let your policy lapse.
- Without a full health exam, your insurer will have little information to go on, which could lead to higher premiums.
- These policies are generally much more expensive per dollar of coverage than many other types of insurance.
Who Should Consider Final Expenses Life Insurance
Final expense life insurance is mostly a product designed to be sold, but it can be purchased to ensure your family won't have to pay for your final expenses.
Split Dollar Life Insurance
Split dollar life insurance is an agreement between two parties where they agree to share a permanent life insurance policy’s costs and benefits. This agreement is often established between a business and an employee.
How It Works
Split dollar life insurance is less of an insurance product and more of a strategy to share the policy costs and enjoy the benefits of a permanent life insurance policy. Employer and employee will form an agreement that breaks down how much premium costs, the cash value, and how the death benefit will be shared. Other agreement terms include policy length and employee requirements.
Pros of Split Dollar Life Insurance
- Employers subsidize premium costs.
- Split dollar life insurance can be an attractive recruiting tool for companies.
- Split dollar life insurance could protect a permanent policy from estate taxes, while the cash value could boost retirement savings.
Cons of Split Dollar Life Insurance
- Employees lose split life insurance benefits if they leave their company or the employer ends the policy.
- Split life insurance can make filing taxes more difficult.
- Since split life insurance is attached to permanent policies, they’re more expensive than a term life policy.
Who Should Consider Split Dollar Life Insurance
Split life insurance should be considered any time the employer will be paying some or all of the premiums on your behalf.
Mortgage Life Insurance
Mortgage protection insurance is simply a life insurance policy where the payout is tied to the size of your mortgage. The idea is that if you die, your mortgage gets paid off and your family can then live in the house without having to worry about making the mortgage payment. Yes, they'll still have to pay the property taxes and insurance.
The product is often sold by banks and lenders rather than life insurance companies. The beneficiary of the policy is actually the lender, not your heirs. You generally have to buy it within 24 months of getting a mortgage, but some companies may allow you to do it for up to five years. That time period may be extended after a refinancing. You also likely need to be under 45 years old to qualify.
The payout also gets smaller over time as the mortgage shrinks. But don't expect the premiums to get any smaller.
Pros of Mortgage Life Insurance
- If you die, your mortgage will be paid off
- Often no exam is required, allowing the otherwise uninsurable to have something in place
Cons of Mortgage Life Insurance
- Level premiums for a decreasing death benefit
- Relatively expensive life insurance on a dollar for dollar basis
Who Should Consider Mortgage Life Insurance?
If you can't buy standard term insurance due to medical conditions or risky hobbies, mortgage life insurance may be worth considering.
Who Should Buy Life Insurance?
Anyone who has people who depend on their income or economic value should buy life insurance, including young, healthy physicians. Losing the family’s breadwinner or even a stay-at-home parent could be a catastrophic financial event. For example, if a resident who stood to earn $300,000 or more per year for the next 30 years died, that’s a loss of $9 million in expected income. Given how easy and inexpensive it is to insure against that loss, it would be 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. That’s just 50 cents a day.
How Much Life Insurance Coverage Do Physicians Need?
There are various ways to calculate how much life insurance you’ll need. Most doctors will ultimately end up looking for around $1 million-$5 million in life insurance. If you read no further, The White Coat Investor recommends picking the average $3 million, 30-year term life insurance policy for simplicity. But, if you want to get more accurate with the right calculation, here’s a look at the numbers.
Here is the White Coat Investor formula for your life insurance need:
Add up these:
- Monthly expenses x 12 months x 25 (i.e. the retirement nest egg needed)
- Remaining mortgage amount
- Estimated college costs
- Large-ticket items
- Unforgivable private student loans
- Current nest egg
- Current college savings
Then round up to the nearest million.
Here’s an example to make the numbers more tangible. Let’s say you spend around $5,000 per month, have a mortgage balance of $250,000, want to save $300,000 for your kids’ college expenses, and have $175,000 left on your student loans. You have $25,000 in retirement accounts and $3,000 saved so far in the college fund.
The estimated life insurance here would be (put on your high school algebra cap for this):
=($5,000 x 12 x 25) + $250,000 + $300,000 + $175,000 – $25,000 – $3,000
=$1,500,000 + 725,000 – $28,000
Rounding up, you would want $3 million in coverage.
That might sound like a lot today, but the added cost of buying additional life insurance in five or 10 years will have you kicking yourself that you didn’t go all-in when you had a cheaper option.
As WCI founder Dr. Jim Dahle wrote in his Financial Boot Camp book:
“Is the number between $1 million and $5 million? Good. Don’t worry about buying a little too much. This stuff is cheap, and it is better to have a little too much (especially when future inflation comes into play) than too little. Remember that life insurance proceeds are tax-free, so don’t worry about having to buy enough to cover a tax bill too.”
How Much Does Life Insurance Cost?
There’s no concrete figure when it comes to how much life insurance costs. How much you’ll pay for your life insurance premium will depend on a few factors. These factors include your age, health, gender (costs more for men), how much coverage you want, and your lifestyle. As an example, a healthy 30-year-old man could expect to pay approximately $200-$300 for a 20-year term life insurance policy with a $500,000 death benefit. Again, there’s no true magic dollar amount that works for every situation—instead, the cost of insurance rises fairly gradually as the amount of death benefit increases.
Life Insurance Riders
A life insurance rider is optional coverage you can add to your policy—usually for an additional cost. The value in riders is they can cover life events that your standard life insurance does not. Riders are worth considering because they can provide benefits for critical illness and other events while you’re still alive. Life insurance riders also let you customize your policy and create more protection based on you and your family’s needs. They are mostly available on permanent policies, but some are available on some term policies. Unlike disability insurance, most life insurance policies are bought without any riders at all.
While not every life insurance rider might be worth it for physicians, here are a few to consider:
Guaranteed Insurability Rider
A guaranteed insurability rider allows you to increase your life insurance policy coverage without having to take another medical exam.
Who Should Consider
This rider could be beneficial if you believe your life insurance coverage might need to change in the future (increasing your policy’s death benefit for example) and you’re not sure you’d qualify after another exam later in life. Depending on your policy change, you could end up paying a higher premium, however. Physicians in training might find themselves in this situation.
Waiver of Premium Rider
This rider would allow you to forgo your insurance premium payments in the event you become critically ill, injured, or disabled and cannot earn income. If you return to work, your premium would be reinstated. Generally, disability insurance is a better way to provide this protection.
Who Should Consider
This is a rider designed to be sold, not bought. Cover this risk with disability insurance if you can. But if you somehow can qualify for life insurance but not disability insurance (or enough disability insurance), you might consider this one.
Accidental Death Rider
An accidental death benefit rider would extend your life insurance policy benefits so it includes an extra payout if you die because of a covered accident—or within 90 days of that accident. In this scenario, your beneficiaries would receive a death benefit that includes your policy’s agreed upon coverage and that of the accidental death rider.
Who Should Consider
Unless you're a lot more likely than the average person to die an accidental death, skip this. Use the saved money to buy a larger base policy.
Accelerated Death Benefit Rider
This special provision would gain you access to a part of your policy’s death benefits while you’re still alive if you were diagnosed with a terminal illness.
Who Should Consider
With a permanent policy, you could just borrow against the death benefit instead of doing this, but this would save some interest. It could be a useful addition to a term policy if the additional cost is not significant.
Long-Term Care Rider
If you prefer to tie your long-term care coverage to your life insurance policy, you could with this rider. The long-term care rider provides accelerated payouts from the death benefit to help with long-term care for daily activities like bathing, eating, or getting around your home.
Who Should Consider
It might be worth considering a long-term care life insurance rider as you age. Long-term care costs can add up, but this rider might not be necessary depending on how much money you’ve saved over the course of your career. Like with the accelerated death benefit rider, any funds pulled from your life insurance policy to pay for long-term care would decrease the death benefit amount for your beneficiaries. Long-term care insurance has lots of issues and this might solve some of them for some people with a long-term care insurance need.
Child Term Rider
A child term rider would help pay for funeral expenses, hospital bills, etc., in the unfortunate event that your child passes away. Biological, step, and legally adopted children are covered under this rider.
Who Should Consider
This one is primarily a product designed to be sold, not bought. Very few physicians will need life insurance of any kind on their children.
When Should Doctors Buy Life Insurance?
Assuming you have a need for life insurance, the best time to get term life insurance is when you’re a young resident, fresh out of medical school. Life insurance costs tend to go up with age, so you’re best off locking in a lengthy term life insurance policy when you’re as young as possible. You could even buy some during school if you wish, but it's hard to justify buying insurance using borrowed money.
How to Buy Life Insurance
As a physician, you want to buy the cheapest, long-term, level-premium term life insurance policy from a reasonably reputable company that you can find.
Term life insurance should be your first choice for a life insurance policy. A financial advisor/salesperson might try to talk you into buying any type of permanent life insurance such as whole life, variable life, universal life, variable universal life, etc. Keep in mind that only in rare situations is buying permanent life insurance the right move. 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.
- Buy long-term, level-premium term life insurance
- Buy a lot of long-term, level-premium term life insurance
- Buy a lot of long-term, level-premium term life insurance from a reasonably reputable company
- Buy multiple policies (laddering)
- Buy the cheapest long-term, level-premium, term life insurance policy from a reasonably reputable company that you can find
Life Insurance Eligibility and Health Exams
Any type of insurance—whether it’s for your car, home, or some sort of valuable item—comes with a risk, and an insurance company is going to charge you accordingly. The riskier it is to insure you, the higher your premium might be. That’s why car insurance companies want to know about your driving history before they write your policy, and it's why life insurance companies want to give you a medical exam.
While it is possible to get life insurance without a medical exam, your policy might be more expensive than it would have been if you had gotten one. It’s not a dealbreaker, however. On the other hand, if you feel like you are in good health and want to be eligible for the most amount of coverage possible, you should consider getting a policy that requires a medical exam. Doing so and getting good results could lower your life insurance premium.
But if you’re concerned that your current health standing or prior medical history will get you denied for life insurance or lead to higher premiums, take a look at your “no medical” life insurance options, like simplified or guaranteed issue life insurance. Your agent can help guide you as to whether your particular medical condition is going to cause you an issue.
Where to Buy Life Insurance
There’s no shortage of companies that are willing to sell you a life insurance policy, but here is a list of recommended insurance agents that have been serving your fellow white coat investors for years. All of the agents listed on this page are paid advertisers on the site but have been vetted by us and in an ongoing way by our readers.
Please do not contact every single one of them for quotes. While it only takes you a few seconds to CC them all on a single email, they may each spend two to three hours compiling quotes and running illustrations for you from various companies. It might be reasonable to check out two or maybe even three of them and then go with one that seems the best fit, but you are likely to end up with the same policy in the end as if you contacted just one of them. Be sure, of course, to ask if you would be eligible for any discounts from other agents that they themselves can't provide, but these are far more common on disability insurance than life insurance. Each of these agents serves hundreds of you each year. They are not starving and can afford to do the right thing for you even if it means referring a white coat investor to another agent occasionally.
Is Life Insurance Taxable?
Typically, life insurance proceeds paid out to beneficiaries in the event of the policyholder’s death don’t count as gross income. That means the proceeds don’t have to be reported, according to the Internal Revenue Service (IRS). So, if your life insurance policy face amount was $500,000, your beneficiaries would receive $500,000 in death benefit proceeds, and $0 of it would count as gross income. They would owe nothing in taxes on that money.
There are exceptions, however. For example, any interest gained on a surrendered policy is taxable and should be reported to the IRS as such. Additionally, the IRS notes on its website:
“If the policy was transferred to you for cash or other valuable consideration, the exclusion for the proceeds is limited to the sum of the consideration you paid, additional premiums you paid, and certain other amounts. There are some exceptions to this rule. Generally, you report the taxable amount based on the type of income document you receive, such as a Form 1099-INT or Form 1099-R.”
While we recommend purchasing a term life insurance policy, if you opt for variable universal life as an investment, be sure that the tax savings are more than your insurance costs. Be sure to max out all of your tax-advantaged accounts before buying a permanent life insurance policy as a retirement savings vehicle.
How Do Life Insurance Companies and Agents Make Money?
Insurance agents receive their training primarily from their insurance company, and that training is mostly in sales, not financial planning or investment management. They have no fiduciary duty to you and receive huge commissions if they successfully convince you to purchase a policy, particularly a cash value one such as whole life insurance. A typical commission for a cash value life insurance policy ranges from 50%-110% of the first year's premium. So, if you buy a policy with a $4,000 monthly premium, the agent was paid something like $25,000-$50,000 to sell it to you. In short, you cannot trust the recommendation of an insurance agent about whether you should purchase a whole life policy.
All the questions surrounding life insurance (whether to buy, what kind to buy, how much to buy) are surprisingly simple for 98% of doctors. Remember, most docs and their families will be just fine if they buy the cheapest long-term, level-premium term life insurance policy from a reasonably reputable company that they can find.
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.
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