Life Insurance for Physicians: A Guide
If you’re an M.D. and are considering buying life insurance but you’re not sure where to begin, you're not alone. While most physicians know they need some type of coverage, choosing the right type and amount of life insurance can be daunting, especially if you are not familiar with insurance jargon. Of course, you also want to avoid a high-pressure sales pitch from an insurance agent who may not always be looking out for your best interests.
In its most basic form, life insurance provides a payout, called a death benefit, after you pass away. This amount is chosen when you purchase the policy and has a significant impact on the recurring cost, called a premium. Your regular premium payments, often paid monthly, keep the policy active (the term is “in force”) just as you do for auto, homeowners, malpractice and health insurance. If you die while the policy is active, the policy pays the death benefit amount to your beneficiary(ies). If you don’t pay your premiums, the policy “lapses”; then, if the worst happens, there is no payout upon your death.
Why Doctors (And Other People) Need Life Insurance
There are almost as many reasons to buy life insurance as there are companies selling it. Here are some of the most common reasons doctors buy life insurance coverage. This also applies to others who do not have sufficient life insurance provided as an employee benefit:
To ensure there is enough money to cover your family’s living expenses. It’s an unpleasant situation to contemplate, but we need to be upfront about it: when you die, your income stops. If that happens prematurely, life insurance would help to support the people who rely on that income; typically your spouse and any children who are not yet out on their own. Life insurance can be an inexpensive way to ensure that your spouse and other dependents will be able to maintain their current lifestyle, at least for some period of time, without worrying about their finances.
In an ideal world, the benefit amount, and cost, of life insurance would taper off as you approach retirement because less income needs to be replaced. Yet, when deciding how much coverage you need, remember to consider amounts to cover all estimated future expenses, such as retirement savings contributions for your spouse, college savings for your kids, or ongoing care for a special needs child.
To pay off outstanding debts. You intend to pay off your mortgage, your student loans, and any other debts from your income. If you die and your income disappears, those debts must still be paid. Knowing that you have enough life insurance to pay them off can be extremely comforting to you and your loved ones.
To cover estate taxes and burial costs. If your estate will be subject to state or federal estate taxes, life insurance is an inexpensive way to generate liquidity (cash on hand) to pay those taxes after your death. People also use life insurance proceeds to pay burial expenses, so their loved ones do not have to make decisions about exhausting a savings account or selling assets at what will be an emotionally devastating time. Without life insurance, your spouse or adult children might be faced with selling illiquid assets (real estate, jewelry, etc.) from your estate to cover these immediate expenses.
To fund your physician partnership/practice needs. If you are in a private practice with one or more partners, consider using life insurance to fund business continuation in the event one of you dies prematurely. If you are a sole practitioner, a life insurance policy could provide a payout to your staff. This would help them in the event of your death, while they find other employment.
To insure your spouse’s life. Consider the potential financial impact on you and your family if your spouse died prematurely. If your lifestyle partly depends on the income your spouse earns, you may want to have life insurance policies for both of you. Even if your spouse doesn't work outside the home, if he or she has primary responsibility for childcare, meal preparation, housekeeping and other tasks, life insurance could provide money to cover those costs in the event of your spouse's death.
While there are other reasons people buy life insurance, these are some of the most common. Next, we consider different types of life insurance you can buy.
Types of Coverage
Life insurance comes in different forms. Term life insurance is the least expensive type of policy and is a great option for most physicians who expect their need for life insurance to decrease over time. A term policy is designed to provide coverage for a set period of time, which could be 20-25 years or more. An alternative is to go with a one-year renewable term or choose something in between.
Many experts recommend buying term insurance when you are young and healthy, for the longest term possible. Term life insurance premiums are typically low and provide peace of mind since you are covered for the duration of the policy term, even if your health changes for the worse. The risk that you might develop a serious illness is an argument in favor of purchasing a policy that extends many years into the future, rather than buying a policy that you have to renew annually, which may be less expensive in the short-run, but costly if your health deteriorates and you have to renew your policy at a much higher rate.
Likewise, buying more coverage now than you think you need today is also advisable. If your goal is to allow your spouse and children to continue their current standard of living if you die prematurely, you’ll want a policy that pays off your mortgage and replaces your after-tax income until your children are grown. A basic rule of thumb is 10-12 times your annual income.
You should also factor in inflation when determining how much insurance you need; a $2 million policy today may not be enough to cover college costs for your children 10 or 15 years from now.
Another option is called whole life insurance, which provides a death benefit and has a “cash value” that acts like a low-interest savings account. This type of policy never expires, but is much more expensive than term life insurance. Many well-known personal finance experts do not recommend it, pointing out that the money you would have paid out in the form of higher premiums could instead be invested in ways that could generate substantially higher returns. It's almost always a good idea to keep insurance and investing separate because of the extra layer(s) of costs involved.
There are also "permanent" policies, but they can also be expensive and you may end up paying for coverage you don't need in your later years. When your children are grown and your home mortgage is largely paid off, your need for life insurance will most likely decline significantly.
That leads to another important point: you should reassess your life insurance needs every few years, or as your financial or living situation changes. Insurance needs change over time and you will want to adjust your coverage up or down as needed.
How to Buy Life Insurance
There are many options when it comes to purchasing life insurance. You could take a do-it-yourself approach and shop online, but unless you are very comfortable diving into the details, consider working with an independent insurance agent licensed in your state. An independent agent will be able to provide information about various providers and their policies, and can explain policy terms, endorsements and coverage options, along with helping you to compare price quotes.
Choose a reputable insurance company. The lowest cost insurance will turn out to be an expensive mistake if the company gets into financial difficulties over the years you will be insured. You may also want to consider buying more than one policy in different amounts, for different periods of time, from different companies. This gives you additional flexibility to design coverage that meets your specific needs, although you may pay more over time for the same amount of coverage.
When you apply for a policy, you will answer questions about your general health and medical history, and must disclose whether you smoke or use other nicotine products. You will almost certainly have to undergo a physical exam that looks for conditions such as high blood pressure and diabetes, among others. The exam will likely include drug testing. The results can affect the price you will pay for a policy, and if the information you submit on the application does not match the results of your medical exam, you may be denied coverage, or additional testing may be required.
Talk to a financial advisor who can recommend an insurance agent with experience working with doctors to discuss your particular life insurance needs. and come up with a plan to protect what is most important to you.
Gold Medal Waters is a fee-only financial planning firm headquartered in Boulder, Colorado that specializes in serving the unique needs of physicians and high net worth clients. Coordinating a great financial plan isn’t easy. Learn more about what sets us apart or talk to an advisor at no cost to see if we are the right firm for you.