By Eric Rosenberg, WCI Contributor
Life insurance is an important financial protection for anyone who relies on you and your income. If your spouse or partner, kids, parents, or anyone else depends on your income, you probably need life insurance. But how do you pick the best life insurance for your needs?
The two main types of life insurance you’re likely to encounter are term life and whole life. For the vast majority of people and most physicians, term life is the best choice. You're most likely going to want to stick with that one. Whole life insurance, meanwhile, is a product that is meant to be sold (rather than bought), and most people who buy whole life insurance eventually regret doing so.
Keep reading to learn more about term life vs. whole life insurance and which may be suitable for your unique financial needs.
What Is Term Life Insurance?
Term life insurance is a popular type of life insurance that gives you extensive coverage for a relatively low cost. With term life, you make a regular premium payment throughout the policy’s term. If you die during that term, your beneficiaries get a payment for the policy’s value.
If you outlive the term—commonly 10, 20, or 30 years—your policy effectively expires, and you don’t get anything back. But you were able to rest easy for those years that your loved ones would be financially secure even if your paychecks stopped rolling in.
For example, let’s say you estimate your family’s life insurance need to be $3 million. You apply for 30-year term life insurance and get a quote for $200 per month. You should plan on paying that $200 per month for the next 30 years if you remain healthy and alive. If you die during that covered 30-year period, your beneficiaries get a $3 million payment.
Like other life insurance, the cost of coverage tends to go up with age. Your age, medical history, family medical history, and lifestyle are significant factors in your rates. As a general rule, life insurance costs only go up as you get older, so the best deal you’ll ever find is right now.
With term life insurance, you’re paying a monthly or annual cost to protect your beneficiaries. It’s straightforward and a very cost-effective way to get a long-term life insurance policy.
Term Life Insurance Strategies for Physicians
No Medical Exam Life Insurance
What Is Whole Life Insurance?
Whole life insurance, sometimes called permanent life insurance, combines the protection benefits of term life insurance with an investment feature. While insurance salespeople love to target doctors and other high-income professionals with this type of insurance coverage, it’s usually a bad deal.
If you’re looking to protect your family in case you die, term life insurance is a much more economical way to get extensive coverage. The average monthly cost of a whole life insurance policy is much higher for a comparable death benefit.
The biggest selling points of whole life insurance are that you’re guaranteed to get a benefit of some kind even if you don’t die, and the contributions you make are partially allocated to an investment that grows in value over time. Other reasons to potentially buy whole life insurance include reducing your estate tax, providing liquidity to your family at death, or protecting your assets as a super high earner.
The problem with the investment side of whole life insurance is that it will likely underperform a low-cost, diverse stock market investment significantly over time, and you’re paying a lot of money for that mediocre performance.
Most doctors, and most people in general, are likely better off skipping whole life insurance and focusing their life insurance needs on term life.
Difference Between Whole Life and Term Life
If you’re still deciding between whole life and term life insurance, these differences may help you choose one over the other:
What to Consider Before Buying Term or Whole Life Policy
Before applying and signing up for term or whole life insurance you should understand how much life insurance coverage you need. it’s essential to consider your current financial situation, long-term financial goals, and your dependents’ long-term expenses. If you’re buying life insurance with a plan that your partner would not have to work in the future if you die, it’s a good idea to add up your regular expenses and any major planned future expenses to determine your insurance coverage needs.
Don’t buy life insurance until you’ve considered the following:
- Average Monthly Expenses: In the worst-case scenario that you pass away, you likely want your family to maintain the same standard of living and stay in the same home. Knowing your monthly expenses and getting a big enough insurance policy to cover them is essential to this end.
- Major Future Expenses: If you have kids you want to send to college or other significant expenses in the future, consider adding that to your life insurance policy value as well.
- Plans for Spouse or Partner to Work: If your spouse has an income, you may need less coverage than if you have a stay-at-home partner who intends to stay out of the workforce long-term.
- Future Income and Expenses: As your income rises during your career, your costs may rise too, such as a higher mortgage payment and utilities if you move to a bigger home. Consider buying an insurance policy with your future potential expenses in mind, not only your current expenses.
- Current Savings and Investments: Some households have enough savings and investments that they don’t really need life insurance. This is called self-insuring. If you get term life insurance, it's mandatory that you have the ability to self-insure by the time the policy term ends.
Should I Buy Term or Whole Life Insurance?
For most people, term life insurance is the best choice. The relatively low cost for a high level of coverage makes term life insurance an excellent deal for many people. In contrast, whole life insurance is almost always an expensive, low-return proposition.
In case that wasn’t clear enough for you, outside of certain wealthy families looking for tax savings with their estate plan, you should probably not get whole life insurance. Even still, you can get the exact same estate tax advances from a term policy that you would from a whole life policy . . . as long as you die during the term. Either way, term life insurance is almost always the best choice.
Can You Buy Both Whole and Term Life Insurance?
When debating term life vs. whole life, you may wonder about buying both. No rule says you can’t have multiple insurance policies. It’s not uncommon for someone to get a term life insurance policy and decide they need more coverage later on when they add on a second term life insurance policy.
You can mix and match term and whole life insurance policies any way you want. However, you should also be cautious not to over insure, as there’s no need to spend more on life insurance every month than required to cover your family’s financial future.
Where to Buy Life Insurance
You can find life insurance through online search tools or with the help of a trusted insurance agent. Remember, insurance agents are paid on commission and may not have a fiduciary duty to put your best financial needs first, so it’s good to have an idea of what you want going into discussions with an agent.
If you’re not sure where to start, The White Coast Investor has vetted a group of high-quality insurance agents perfect for the needs of a medical professional. Get started on the path to life insurance with one of the excellent insurance agents listed here.
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