So you know you need life insurance… but how much Life insurance do you need? And what type of life insurance should you get?
We’ll be going over the basics of what type of life insurance you should get (specifically for physicians, doctors, residents, medical students, and fellows!).
Let’s Get Started!
When looking at the different types of life insurance, something that seems very simple can get confusing.
What you'll find is that choosing the wrong type of life insurance costs doctors money, so I’m going to go in-depth into the different kinds of life insurance.
Term Life Insurance
The first type is term life insurance, and this is what most people buy — including physicians.
It’s the usual form of recommended life insurance, especially as it’s the easiest to understand and has the lowest prices.
Term life insurance is basically the lowest price type of coverage that you can get and it covers you for a specific period of time.
For example, let’s say that you want to get a million dollars of coverage for the next 20 years, so you might get a 20-year term policy.
What that means is for 20 years you’re essentially going to rent your insurance. You’re going to pay a certain level premium and during that time it’s fairly inexpensive.
Then at the end of the 20 years, the policy expires and you don’t really have anything to show for it.
It’s kind of like renting an apartment in that you don’t build any equity in the policy, but it’s a very inexpensive way to protect yourself over a period of time.
It’s a good choice if you need life insurance for a specific period of time, like if you have children that are going to be in the house for the next 15 years.
It also provides the most affordable coverage, especially if you only need life insurance to replace your income for a certain period of time.
If you want the most affordable coverage and you know there is a time limit for when you need the most coverage, term life insurance is flat out the least expensive and will free up the most liquidity for you to do other things - including investing.
So keep in mind, term life insurance is inexpensive and good if you want it for a specified period of time. So if you are curious what is the best life insurance policy for doctors? This would be a great option to look at!
Just remember that it will expire in the future and could leave you with fewer options as you’ll be older and your health might change between now and then. So it is very important to think about how long you need your coverage to last.
That means if you want to extend your coverage you might be left with either some bad or no options at all, so you’ll want to take that into consideration.
Permanent Cash Value Policy
A permanent cash value policy, on the other hand, never expires.
If you have asked “Is permanent life insurance a good investment?” here is your answer: like owning a home, it does build equity over time—but there is a cost.
If you buy a permanent cash value policy then you’re going to actually own something that can be withdrawn tax-free in retirement.
It is going to be much more expensive than the term insurance, however.
The majority of people should not have a permanent cash value life insurance. While high-income earners most likely to get this type of coverage, it is often not recommended for them as well.
There are four different kinds of permanent cash value life insurance: whole life, universal life, variable life, and index universal life.
Whole Life Insurance
A common question that physicians ask is “should doctors buy whole life insurance” and while most insurance agents will tell you that you NEED a whole life insurance policy, it is not the only option to give you a high amount of coverage and is most likely not the best option!
With whole life insurance, there’s a guaranteed benefit, and they’ll even give you a guaranteed earnings rate.
If you buy a million-dollar whole life policy and there is a 3 percent guaranteed rate of return, that means you will never have a lower return than that.
You will pay a level premium, and you can earn dividends above that minimum.
This is the oldest and most basic permanent life insurance type. In the 1970's when interest rates were in the double digits and you could have got 15 percent dividends from a whole life policy, they were great.
Now, however, you’re looking at much lower returns and with the internal cost of the policy that means your net return is much lower.
Because of that, it’s not typically a good investment of your money, so we tell most young doctors that whole life insurance can be helpful but only if you’re in a position where you feel comfortable that the money going into it will earn returns similar to bond returns.
It is going to be safe and it is guaranteed for your entire life, but you still need to take into account that the cash value is an investment for you and it will not be the most efficient or effective way to grow your wealth if you’re younger.
That’s where some of the other policies come into play.
Universal Life Insurance
Universal life is a bit more flexible than whole life.
Whole life is much more rigid, you could miss one payment and likely lapse the policy.
Universal life is set up so that if you miss a payment the cash value kicks in and pays it for you so you can make up payments or miss payments and it will keep going.
The premiums can change, they’re not level so they can go up or down. It is typically a bit cheaper than whole life, and again the returns resemble bond returns.
Most people who are in their thirties or even forties are probably looking for a higher return than that. While universal life is a step up from whole life because it gives more flexibility and slightly lower prices, it's still not worth pursuing for most doctors.
Variable Life Insurance
Variable life allows you to take those premiums that you’re putting into your policy and invest them.
There can’t be actual mutual funds in it because it’s an insurance product, but they have what are known as sub-accounts that are set up to mirror mutual funds.
Now you can take advantage of higher long-term growth and being able to invest that money while still having permanent life insurance.
You can take advantage of having that money in an account that can be withdrawn tax-free to use for education funding or retirement but that doesn’t have the same penalties that a 401(k) plan would have. However, there are accounts that can also be used for both education funding and retirement that may be a better option.
It is also beneficial because it has some additional protections. It’s hard for people to get at the money inside of a cash value policy so it’s got some protection against lawsuits.
The death benefit value can increase or decrease depending on how much money you’ve put into it.
The downside is that it’s riskier. Another downside is that your monthly or annual insurance costs are determined by the amount of death benefit you have over the amount of cash value you have.
Let’s say you start off with a million-dollar policy and after a few years you have four hundred thousand dollars of the cash value in the policy. Now you will only be paying the insurance cost on six hundred thousand dollars of insurance.
But what happens if the market goes down? That’s a big thing that ruined a lot of variable life contracts all of a sudden in the early 2000's.
If the market goes down and half of your cash value is lost, now you’re back to paying insurance cost on eight hundred thousand dollars of insurance.
Indexed Universal Life Insurance
The last form of insurance, indexed universal life, helped to solve that problem.
Indexed universal life allows you to invest your cash value into market indices.
It lets you invest in the S&P 500 or other market barometers so you’re getting market returns, but with a hedging strategy that prevents you from losing your invested money if the market goes down.
For example, if you have a variable life insurance policy and the market goes up by 20 percent you get that 20 percent but if the market goes down by 20 percent you lose it.
With indexed universal life, if the market goes up by 20 percent you might only get 12 percent, or whichever cap is in place, but if the market goes down 20 percent you won’t lose the entire accrued value. These policies will typically have a floor no lower than 0 percent return.
This could be a way of diversifying where you have some insulation against market losses as well as tax-free retirement income and lawsuit protection.
But for almost all physicians, the best choice is going to be buying all term life insurance. There are some unique cases where a blend of term life with some other cash value product is a reasonable option, but you need to make sure you understand the real costs of doing so.
Make sure you evaluate all of your options and keep all these things in mind to determine which type of policy is best for you. You should be careful if someone is pushing a permanent policy and really determine if that is the best and most cost-effective policy for you.
If you're unsure we are always here to give you a second opinion!