If there is anybody in your life who depends on your income besides you, you need life insurance. Even if you have a life insurance policy already, you should confirm it’s the kind and amount of life insurance that you really need.
Doctors should buy term life insurance for the longest term you need (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.
Protect those who depend on your income.
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Important Medical Notice for Life Insurance Applicants
The quotes you've seen are estimates. Your [coverage amount] in coverage could cost as little as [quoted cost] a month. Your final price will depend on your current and past health history, including medical conditions, medications, and treatments. Tobacco or nicotine use and other lifestyle factors can also affect your eligibility and pricing.
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 “independent” agent that can sell you a policy from any insurance company. WCI has partnered with agents where you can get a life insurance quote from multiple reputable carriers. They are trusted partners and have worked with thousands of white coat investors over the years.
Deciding how much life insurance to buy requires you to do some rudimentary math, but most doctors end up with between $1 million and $5 million.
Follow these steps to figure out how much you need:
That’s how much term life insurance you should buy.
Is the number between $1 million and $5 million? Good. Don’t worry about buying a little too much. Term life is cheap, and it’s better to have a little too much (especially when future inflation comes into play) than not enough.
There is only a limited period of time where you will need life insurance, and the least expensive way to pay for that need is to buy what is called “term” insurance.
Term insurance only pays out if the policyholder dies during a specific term. There are other types of insurance, collectively called “permanent” insurance, that will pay out whenever the insured dies, whether that is at age 30 or age 90.
You’ve likely heard of “Whole Life Insurance” before. That’s a type of permanent life insurance.
Most doctors should not buy whole life insurance.
Permanent insurance costs a lot more than term insurance (often up to 10x more) because it guarantees that if you keep paying the premiums, your heirs will get the death benefit eventually.
To make matters worse, permanent insurance has an almost endless number of variations and has a veritable army of salespeople working their tails off to sell as much of it to you as you will buy, using dozens of well-honed sales techniques.
For the vast majority of doctors and other high-income professionals, buying any permanent insurance policy is optional at best—and probably a financial error. It may make sense in a few special situations, such as estate planning, business needs, or caring for a dependent with special needs. Even then, compare it with other reasonable options—not just those offered by the agent selling it. Being a physician or earning a high income is not, by itself, a good reason to buy it.
If you wish to add on a permanent life insurance policy at some point down the road, be sure you understand exactly what you are buying and that you are committed to holding it until death.
Either way, you need some term insurance.
The idea with buying term life insurance is that you need to save and invest enough money every year to eventually become financially independent. In order to decide how long of a term you need, you need to know roughly when you expect to be financially independent.
This will require another financial calculation. If you don’t have the ability or desire to make this calculation, buy a 30-year level-term policy.
That gives you 30 years to learn how to make this calculation, and hopefully, you’ll learn it a lot sooner than that. It might cost you a little extra, but since you can’t really buy a term longer than 30 years, at least you won’t come up short.
If you would like to learn how to do this calculation, it’s not that hard. Open a spreadsheet, such as Microsoft Excel, and input a calculation called “NPER.” You will need to input a few variables.
Here’s how to do it:
NPER is the “number of periods,” i.e., number of years, until you reach your financial goal. This is the solution of the equation.
RATE is the first variable and is the annualized rate of return on your investments. Adjusted for inflation, we think 5% is a reasonably conservative number, and that’s what we would recommend using in this calculation.
PMT is the second variable and is the payment, or the amount of money, you intend to save for retirement each year. When you enter it into this calculation, this is a negative number, so put a minus sign in front of it.
PV is the present value, i.e., the current size of your nest egg. It is also a negative number.
FV is the future value, i.e., the amount of money in today’s dollars you need to retire. To get this, estimate how much income you will need per year in retirement and multiply it by 25. This is a positive number in the equation.
Type is either a 1 or a 0, depending on whether you will be adding the payment at the beginning of the period (a 1) or at the end (a 0). It doesn’t matter all that much for the purposes of this equation.
So, let’s say you want $100,000 per year to live on in retirement, and you are saving $40,000 per year toward retirement. How long will it take you to get there? Here is what you would put into the spreadsheet:
=NPER(5%,-40000,0,100000*25,0)
The solution is 29 years. So if that is you, buy a 30-year term policy.
However, let’s say you are a bit more frugal and you already have $100,000 saved for retirement. You plan to save $60,000 per year and can live on $80,000 per year in retirement. What would your equation look like?
=NPER(5%,-60000,-100000,80000*25,0)
The solution here is 22 years. A 25-year term policy ought to be adequate.
What if someone is already well into their career but still needs life insurance? Let’s imagine someone who already has $1 million and is saving $50,000 per year but wants $100,000 in retirement income. How long should their life insurance term be?
=NPER(5%,-50000,-1000000,100000*25,0)
The solution here is 11 years, so a 10- or 15-year term is probably adequate.
As you can see, these equations don’t require a precise calculation. If you’re not sure about a variable, just guess and then round up. These are not irrevocable decisions.
Term life insurance is essentially a commodity. For the most part, it is a simple product. You pay a premium once a year, and if you die during that year, your beneficiaries receive the face value of the insurance policy from the insurance company. If you don’t die, your beneficiaries don’t get anything.
Any reasonably financially secure insurance company is going to be able to pay out if you die, so you shouldn’t spend a great deal of time, effort, and money trying to get a policy from a “better” company. It all works fine.
You want the cheapest policy for the money.
If you are very healthy, this is a simple process. You simply go to an online site using software such as Compulife which will provide you quotes from dozens of insurance companies without requiring any personal information. You then print out the list of quotes, go to an independent agent (i.e., one who can sell you a policy from any company), and ask them to sell you the least expensive policy for the face amount and term you have already decided on. It is that simple.
You can also get a quote through WCI and compare estimated prices from multiple top life insurance companies, including how rates may vary based on health rating. You will then be matched with a WCI-recommended and vetted independent agent who can help you apply for the policy you choose. They are sure to treat you well and will help you compare your options. Your final rate and approval depend on the insurance company’s underwriting review.
If you are not healthy or you engage in dangerous hobbies (such as flying, skydiving, scuba diving, or climbing), it gets a little more complicated. Here is where the independent insurance agent really earns their commission. They will have to informally “shop you around” to the various companies to see which one will give you the best price.
See Recommended Agents
Most, if not all, insurance agents who you go to for term life insurance will attempt, at least briefly, to sell you a permanent life insurance policy. It is best to be politely persistent.
A phrase like, “I am here today to buy term life insurance only. If you treat me well today, I may be back at a later date to purchase permanent life insurance from you. But that date is not today.”
Better yet, just use an agent off our recommended list and you won’t have that pressure.
If you do not have life insurance (and are not financially independent), take action today. You’ve got this!
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