Long-term readers have heard me recommend term life insurance over permanent life insurance many times over the last couple of years. In this post, I'll discuss four useful strategies for physicians to consider when purchasing term insurance.
#1 Insuring a Non-Working Spouse
As a general rule, life insurance is used to protect the bread-winner(s) of a family. If no one depends on your income, you generally don't need to insure against the loss of that income. However, there are some factors you may want to consider when foregoing life insurance on a non-working spouse or partner.
First, it isn't very expensive to insure a non-working, healthy, 30-year-old male or female. A 10-year level term policy with a $500K face value costs about $12 a month for a female and about $14 a month for a male. That's not necessarily a reason to buy it for a stay-at-home spouse, but it does make it an option to consider.
Insuring Against Loss of Spouse's Unpaid Work
You can assign an economic value (which is what you're insuring) to the unpaid work of a non-working spouse. The spouse may be providing child care, meal preparation, home maintenance, housekeeping, snow removal, laundry service, landscaping, or other chores that you won't have any more time to perform after your spouse's death than you did before. There is a real economic value there which you may wish to insure against. You will either need to pay to have those services performed, cut back on night shifts, call, or time in clinic to do them yourself, eliminate some of your hobbies, vacations and other recreational pursuits, or some combination of the above. It might be easier to buy a few hundred thousand dollars of term insurance.
Temporarily Non-Working Spouse
The loss of income of the non-working spouse may be only temporary. If your spouse is going back to work in a couple of years when Junior starts first grade and your financial plan is counting on that additional income, then you'd better get some insurance to cover the loss of that income.
Transition Period Following Loss of Loved One
Don't underestimate the difficulty of the transition period after the loss of a loved one. You and your children will struggle with the loss. You may not even feel like working for a few months, or perhaps years. It will take time to arrange affairs, and no business or disability insurance is going to cover this. If your practice doesn't make money unless you're there, your overhead will continue to pile up. Cash in hand from the insurance will at least eliminate the financial aspects of this tragedy.
#2 Life Insurance in Residency
Many residents are married with children. They have a net worth of zero, or, more likely, less than zero. Although student loans disappear at your death, consumer and mortgage loans are assessed against the value of your estate and are probably co-signed by your surviving spouse. There is probably never a greater need for large quantities of life insurance. Residency is also the ideal time to lock in long-term life insurance since you are young and healthy and thus premiums are quite low. Ideally, if you expect you'll need $2-4 Million of term insurance later, you should buy it in residency. The problem is that you have a relatively tiny income with which to pay the premiums.
Insurance companies don't like you to be worth more dead than alive. They don't want to sell you life insurance that isn't at least peripherally related to your income. I had an insurance company balk when I tried to buy a $1 Million policy while I was a military physician. They didn't care so much that I was in the military, the issue was the fact that I was in the 15% tax bracket. I was trying to buy a policy which, in addition to my other two policies, would have provided me something like 20 or 25 times my current annual income. The agent eventually was able to convince the company to sell the policy based on the fact that I would soon triple my income. Your agent may have to do something similar for you, but it shouldn't be that hard.
A bigger dilemma is deciding how to structure your life insurance.
Options for Life Insurance Structures in Residency
One option is to actually buy the insurance you need, but for a shorter term. You might think you’d get a great deal buying a 5-year term life policy, but that’s not the case. Because so few carriers sell 5-year term, the price is actually higher than buying a 10-year term policy. Here's an example:
5-Year Level Term $3 Million Policy (30-Yr-Old Female)
Annual Premium: $590
10-Year Level Term $3 Million Policy (30-Yr-Old Female)
Annual Premium: $400-450
5-Year Level Term $3 Million Policy (30-Yr-Old Male)
Annual Premium: $710
10-Year Level Term $3 Million Policy (30-Yr-Old Male)
Annual Premium: $550
$400-$550 seems a reasonable price to pay for a 10-year policy that would keep you insured through your training. You can either build around the policy after residency or cancel it (there are no fees for canceling term life) after you've locked in a more long-term solution.
If you instead decide to get a $3 Million, 30-year level term policy, you would be looking at a little over $1,300 a year for a female and about $1,761 for a male, which you may find to be simply unaffordable even though it is the policy you need.
You could buy $1 Million of 30-year level term for about $630 a year, but then you're running two significant risks.
- You actually die during residency and your family only gets $1 Million of the $3 Million they need or want.
- You become less insurable, or even uninsurable, due to illness or the acquiring of dangerous hobbies during your training. There is no great option here, and each resident will need to decide what they are most comfortable with.
Another option is to not get a level term policy, but simply to use an Annually Renewable Term policy. It's cheap now but more expensive later. But it might be a way to get all the coverage you need for a price you can afford right now.
What I would not do, however, is avoid the issue. If you have someone depending on your income, buy something. $1 Million is better than nothing. $3 Million for 10 years is also better than nothing.
#3 Buying Life Insurance upon Residency Graduation
Due to affordability issues during residency, or simply due to marrying or having children at that stage of life, many new attendings will have a need to buy insurance. The purchase of life insurance, done properly, really only needs to be done once or twice in your life, but this is one of those times. What you choose to do at this stage depends on what life insurance you already have in place. If you are still healthy and haven't picked up any bad habits, like smoking or rock climbing, you still have lots of options.
If you sucked it up and just bought a huge, long-term policy as a resident, well, at least that is now a tiny percentage of your income.
If you decided to partially insure yourself with a smaller, 30-year policy, you now have the option to buy an additional policy or two and keep the old one in place.
If you bought a shorter-term large policy, now is probably the time to replace it with a longer-term policy.
If you have become ill, or become SCUBA certified, then you have more of a dilemma. You can wait until you are more insurable (being cancer-free for a few years may lower your premiums for instance or you can stop going SCUBA diving for a while). You can also simply pay more for a policy since you now have the means to pay the premiums.
#4 Laddering Life Insurance
The point of the “Buy Term and Invest the Difference” strategy is that your need for life insurance gradually decreases and eventually disappears as your portfolio grows. If, after 20 years, you have a $2 Million portfolio, it seems silly to keep the same 30-year level term $3 Million policy you bought upon residency graduation when you had a negative net worth. But you don't necessarily want to cancel that policy and buy a $1 Million policy. A $3 Million 30-year policy on a 30-year-old male is $1761 per year (10/2020). A $1 Million 10-year policy on a 50-year-old male is $830 per year.
A better strategy might be to ladder a policy, just like a retiree might ladder treasury bonds or CDs. Instead of buying one 30-year $1 Million policy, you could buy a 10-year $1 Million policy, a 20-year $1 Million policy, and a 30-year $1 Million policy.
Since the shorter policies are much cheaper, you can save a lot of money on premiums while still covering your insurance needs. It helps you to avoid over-insuring.
Using a healthy 30-year-old male as an example, with the lowest cost carriers available in the marketplace:
30-Year Level Term $3 Million Policy (Male)
Annual Premium: $1761 (life cycle cost = $52,830)
Laddered 30/20/10 Level Term Policy
Annual Premium for a 30-year level term $1 Million: $624 (life cycle cost = $18,720)
Annual Premium for a 20-year level term $1 Million: $370 (life cycle cost = $ 7,400)
Annual Premium for a 10-year level term $1 Million: $235 (life cycle cost = $ 2,350)
Total: $1229 (total life cycle cost of this life insurance portfolio over 30 years = $28,470)
Notice how big the savings are for laddering a policy, rather than overinsuring with the 30-year $3 Million policy – over $500 per year and over $24,360 over the products’ lifecycle!
$60-$90 of the annual policy cost. For a three-tiered laddered policy, that adds up to $180-$270 just in fees each year. Joe Capone of Insuring Income (A WCI Recommended Insurance Agent) tells me that Banner Insurance sells a unique product that charges just one policy fee and uses riders to ladder a policy. That would save someone at least $120 in annual fees. The problem is that Banner's product pricing can be more expensive than its competitors — even when considering lower policy fees. Joe tells me that Lincoln, Protective, American General, Principal, and North American are often more competitively priced so be sure to shop around to get the best deal.
You should also keep in mind the effects of inflation. Although inflation makes the dollars you pay premiums with worth less each year, it also makes the dollars paid out in benefits worth less. A $1 Million policy right now might only be the equivalent of $553K in 20 years. This, in essence, has the effect of automatically laddering a policy, since it costs less and is worth less over time.
What strategies have you used for your term insurance? Vote in the polls and comment below!