As a physician, you understand more than anyone that human life can be fragile and is certainly not guaranteed. That’s why life insurance is so important to have.
A life insurance policy gives you the peace of mind of knowing that if something unexpected happens to you, your spouse and your children will be taken care of financially.
Before continuing, the first question you should probably ask is whether or not you need life insurance. If you don’t have a partner or spouse, children, others reliant on your income, debts not forgiven upon your death, or unique needs, it may not be necessary yet. There is certainly value to buying life insurance while you’re young and healthy, even if you only anticipate these characteristics in the future. But you may not need it until then.
Assuming you have a need, let’s take a look at the different options you have.
How much insurance coverage do I need?
This is the first question most people ask when buying life insurance. And while there is no one right answer, many brokers recommend that your coverage equals 10 to 12 times your annual income. Your specific insurance needs may vary, but when you’re deciding on an amount, you should consider income replacement, debt satisfaction, and posterity planning.
Income replacement
To determine your income replacement needs, simply take your household expenses and multiply them by the number of years you would like your family to be covered, plus inflation and other cost of living adjustments.
A simpler approach is to multiply 80% of your annual income by the number of years of income replacement you want. Why 80%? Because when your family replaces your income contribution to the household finances they won’t have to account for your expenses.
Debt satisfaction
The amount of insurance you buy should cover these all your outstanding debts, such as mortgages, student loans, credit cards, and car loans. It’s also important to note that certain debts may be forgiven after your death, so be sure you understand your debt terms, and plan accordingly.
Posterity planning
If you would like to leave behind a philanthropic legacy such as an endowed scholarship at your alma mater or commit funds from your estate to a charity or institution, your life insurance policy should account for it.
You may also want to provide for the education of loved ones. If so, you’ll need to determine the current cost of education and the number of years until the funds will be used. Also consider inflation at a rate of 8% annually for university tuition.
Student debt
Most federal student loans are forgiven in the event of death. If your loan does not have this provision, then outstanding personal or private student loans will need to be repaid. It’s worth researching this question with the servicer of each of your student loans to know whether these debts should be addressed through your estate and life insurance planning. If you carry large student loan balances that are not forgiven on death, you may want to consider obtaining life insurance to cover these amounts.
Types of insurance
After you determine how much life insurance coverage you need, you will then have to decide what type of insurance to purchase. The most common types of life insurance are term and whole life policies.
Term life insurance
Term life insurance policies provide a set death benefit amount for a specific period of time. Term life insurance is often referred to as temporary insurance, as it only pays in the event of your death during the term of the policy. If you outlive the term, you will not receive a payout.
Term policies are commonly sold in ten-year increments with 20 and 30-year options being the most common. For early-career physicians in good health, term policies are often viewed as affordable protection for an unanticipated passing.
Whole life insurance
Whole life insurance is a permanent insurance policy that provides lifelong coverage for the insured.
Whole life policies are significantly more expensive than term life insurance policies and are often less popular as a result.
One attractive benefit of whole life insurance is that it allows you to draw funds from the policy during your lifetime through drawdowns or loans. This is possible because whole life policies have a cash-value. While there are usually fees and penalties associated with drawdowns and loans, the ability to access these funds quickly and without loan underwriting approval can be helpful.
When the policy matures, you can surrender the benefit in exchange for a cash value. This allows retirees and late-career physicians to have money for loved ones, investments, or any other reason.
What about life insurance through my employer?
Many employers offer life insurance to their employees, but many self-employed and contract physicians are unable to take advantage of these coverage opportunities.
If you’re a self-employed physician, you’ll likely have to work with a business or professional insurance agency to secure group policies for you and your employees.
If you’re a contract physician, you will need to understand your employer’s life insurance policy coverage availability to identify coverage needs.
Self-insuring
Many high-income professionals, like physicians, find it attractive to create an investment fund for self-insurance.
While this option may work for individuals with large salaries and little debt, it certainly isn’t for everyone. If you’re a resident or early-career attending, self-insuring can present a financial strain in the short term, especially if you’re still paying off hefty student loans.
If you can afford to self-insure, it’s important to consider that rates of return are subject to market conditions and that the potential for capital gains is reduced with each draw from your portfolio.
In summary
Life insurance is one of the most important investments you can make to protect you and your family. By calculating your financial needs and by examining what types of insurance meet your current financial situation, you can determine what type of policy is best for you.
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