By Dan Miller, WCI Contributor
Like many high-income individuals, most physicians will benefit from term life insurance to protect their income. This is especially true for physicians with dependents and/or a non-working spouse. Term life insurance is a relatively inexpensive purchase that can protect you and your loved ones in case the worst were to happen. Let's take a look at what physicians need to understand about term life insurance and help you decide what makes the most sense for you.
What Is Term Life Insurance and How Does It Work?
Term life insurance is what most people think about when they think about life insurance. You pay your insurance premium over the course of several years (the “term” in term life insurance), and if you die before the end of the term, you receive the listed death benefit.
As one example, you might purchase a $1 million life insurance policy with a 20-year term. You will pay monthly premiums (determined by your age, gender, and sometimes health conditions) each month for 20 years. If you die before the end of the 20-year term, your beneficiary will receive $1 million. If you don't die before the end of your term, you will receive nothing.
You might also be aware of a different type of life insurance called whole life insurance. Term life insurance and whole life insurance share some similarities, but they're also different in a few important areas. There are pros and cons (mostly cons) to whole life insurance vs. term life insurance, but an easy way to think of the difference is that term life insurance is just life insurance while you actually need life insurance, and whole life insurance is a life-long insurance policy that accumulates cash value that you can borrow against. Think of whole life insurance as lousy insurance combined with a lousy investment. Only a tiny minority of doctors need a whole life insurance policy.
Who Should Buy Term Life Insurance?
There are a few things that you'll want to know before you decide to buy term life insurance. Term life insurance makes the most sense for people who are the primary breadwinners for their family. It's an especially valuable strategy for younger physicians who are just beginning their careers. Buying term life insurance can help protect your beneficiaries at a time when you may not have significant retirement assets yet. Plus, when you are young and relatively healthy, term life insurance is very affordable.
What Does Life Insurance Cover and How Much Life Insurance Coverage Do Physicians Need?
Unlike whole life insurance, term life insurance typically only covers you for actual death. Disability or long-term care needs would not be covered under most term life insurances (without additional riders). If you die during the term of your insurance policy and are current on your premiums, your beneficiaries will receive the listed death benefit amount.
Deciding how much life insurance coverage you need will depend on your unique life situation and how much risk you are willing to take. There are several life insurance strategies for physicians to maximize their returns and minimize risk. Many people look to get sufficient life insurance so that their spouse and/or children will not be financially impacted in the case of their death. If you are a dual-income household with no kids, you may not need much in the way of life insurance. On the other hand, if you are the sole breadwinner to a stay-at-home spouse and several children, you might want several million dollars in life insurance.
How Much Does Term Life Insurance Cost?
The cost of term life insurance is fairly inexpensive and depends mostly on your age, gender, and health history. A healthy 30-year-old man is looking at around $200-$300 for a 20-year term with a $500,000 death benefit. There isn't a magic dollar amount that works for every situation—instead, the cost of insurance rises fairly gradually as the amount of death benefit goes up.
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
When Should Doctors Buy Term Life Insurance?
One of the beauties of term life insurance is that the premiums are relatively inexpensive, and it's fairly straightforward to buy different policies of different lengths over time. You should definitely buy term life when someone else is depending on your income. That could be as early as medical school, where you could even use loan money to buy a policy if you have kids and a stay-at-home spouse. You might buy a smaller policy during residency and then a larger policy once you graduate. Depending on your financial situation, you might even buy a different policy a few years further down the road. Staggering the amounts and expirations of your life insurance policies can make a lot of financial sense.
How to Buy Term Life Insurance
Term life insurance is a commodity, which means that there are many providers offering pretty much exactly the same policy. If you're wondering how to buy life insurance, our recommendation is to buy term life insurance from a reputable company. How much insurance coverage you want to buy will depend on your unique situation and risk appetite.
Life Insurance Eligibility and Health Exams
In many cases, buying life insurance will require you to submit to a basic health exam. Many companies price their premium on your health history and condition, in addition to your age and gender. Insurance companies use all of this information to accurately calculate how likely you are to live through the end of your term and therefore how much to charge as a monthly premium.
No Medical Exam Life Insurance Options
There are some companies that offer life insurance without a medical exam. These companies price solely on factors like your age, gender, and location without regard to your personal medical history. If you don't want to get a medical exam or if you have a medical history that you worry might disqualify you from getting a life insurance policy, you might consider one of these options. Be aware that a no-medical-exam policy will generally be more expensive than a policy for a similarly aged healthy individual.
Where to Buy Term Life Insurance
There are many places to buy term life insurance. You might find local recommendations from friends and family or read reviews of companies that promote themselves online. The White Coat Investor maintains a list of recommended insurance agents. Many of those agents cater specifically to those in the medical field. Look through that list of agents, and contact a few to see which agent might be right for you.
How and When to Cancel Your Term Life Policy
In most cases, there's no need to cancel a term life policy. Term life insurance runs for the predetermined term of the policy, as long as you are paying the monthly premiums. One scenario where it might make sense to cancel your term life policy is if your total income drastically decreases. That could lead to a scenario where your total amount of insurance is significantly more than your heirs might need. If that's the case for you and you need to cancel your term life insurance policy, contact your insurance agent. They can take care of canceling the policy.
But if you're not sure whether you have a so-called “good” term life policy and therefore should cancel it and look for another one, here's one way to review it.
Term Life FAQs
Are My Life Insurance Premiums Tax Deductible?
In almost all cases, life insurance premiums are considered personal expenses and are not tax-deductible. But in specific circumstances, they could be. If, for instance, an employer paid for some of your premiums with pre-tax money.
Is the Life Insurance Benefit Taxed?
Generally speaking for term life insurance, the death benefit that your beneficiaries receive after your death is not considered taxable income.
How Do Life Insurance Companies and Agents Make Money?
Life insurance companies use actuarial science to determine how likely you are to die during the term of your insurance policy, given your age, gender, and health history. They then price the monthly premiums in such a way, so that over a large number of policies, they will come out ahead, even knowing that they will have to pay out some death benefits. Life insurance agents make a percentage of the total premium as their commission.
Is Term Life Insurance Worth It?
From a purely financial perspective, term life insurance is one of those purchases that are only “worth it” if you actually die. While that may sound like a morbid way to “win,” many people find that term life insurance gives them peace of mind knowing that their loved ones will be protected if they pass away. But really, it's not only about the money that your loved ones would receive if they have to use the policy. If you own term life insurance, you're transferring risk. Instead of your family facing a huge loss of income, that risk is being taken on by the insurance company that's providing the insurance.
Can I Buy Multiple Term Life Insurance Policies?
Yes, generally you can buy multiple term life insurance policies, and it's often a sound financial decision to do so. You may want to buy additional life insurance as your income increases and you have more income to protect. Another reason to buy multiple term life insurance policies is to stagger your total amount of coverage. You might set it up so that you have the most coverage in place when your children are younger, with coverage tapering down as they reach adulthood.
The White Coat Investor is filled with posts like this, whether it’s increasing your financial literacy, showing you the best strategies on your path to financial success, or discussing the topic of mental wellness. To discover just how much The White Coat Investor can help you in your financial journey, start here to read some of our most popular posts and to see everything else WCI has to offer. And make sure to sign up for our newsletters to keep up with our newest content.
