Life Insurance: What Doctors Need to Know

How will you protect your biggest asset – YOU – in the event of death? Your family would lose all your future income that you were counting on to educate your children, go on vacations, and live the lifestyle you wanted for your family. Life insurance is one of the most effective ways to prepare for your family’s continued support after your death. Most physicians and dentists in training want to think through two important questions when considering life insurance:

• How much life insurance do I need?

• What type of life insurance do I need?

To address the first question: you don’t need it. People die every day with no life insurance in place. And somehow the earth keeps spinning on its axis and the sun keeps rising in the east. Families go on. But what life insurance does is it gives options to survivors.

life insurance gives options to survivors

Sure you don’t need it. In the event of your death, your spouse can move back in with his or her parents, they can take the kids there, they can downsize the house, take the kids out of school, go back to work themselves. This way of protection gives you the option of keeping your kids in the same school, the option of staying in the same house, the option of being able to continue to live independently, and the option of not having to go and look for help wanted signs, or to get re-married.

The question you should consider is not how much you need, but what choices do you want your family to have? This answer is different for everyone, but consider the following example and two common ways life insurance needs are determined.

life insurance case study

There are two common ways to determine the amount of life protection you may want: calculating your lifetime economic value, or completing a needs analysis. For this example, we will do a needs analysis on Dr. Sarah.

Life Insurance needs analysis

So, Dr. Sarah needs about $716,000 of coverage if she wants her family to be taken care of in the event of her death. She now needs to determine which type of insurance best fits her needs: term or whole life.

While in training, most physicians and dentists should have some type of term insurance. You can get a lot of coverage for a low premium while you are young and healthy. Some policies allow you to change your term policy to whole life without going through medical underwriting.

“I’m single; do I need life insurance?”

If you are single and have no dependents, this type of insurance may not seem important to you. But a few things to consider before writing it off completely are:

• Future insurability: If you go through underwriting for this insurance while you are young and healthy, you can lock in your insurability for your future, which may include a spouse and children, regardless of any changes in your health.

• Family: While you may not have a spouse and children, in the event of your death, would you want your parents or siblings to receive some money? If your parents helped you pay for medical or dental school, or maybe one of your siblings has special needs, there are a host of reasons you may want to take care of your family if you should die.

“My spouse doesn’t work; does he/she need insurance?”

The short answer is most likely yes. Often times, if the non-working spouse dies, the surviving spouse is rarely able to continue working fulltime, especially if there are children involved. While working part-time, caring for children and juggling other responsibilities that used to fall on the non-working spouse, the surviving spouse is left with a diminished income and increased responsibilities. When deciding to purchase life insurance…

• Determine how much insurance you need and why.

• Once you determine how much, then decide what type of insurance makes the most sense for you and your family.

• There are lots of different names for these types of policies, but typically it all boils down to term insurance and whole life insurance.

• Consider adding an optional waiver of premium rider at additional cost. NOTE: Most student loan debts are forgiven in the event of death.

Term Insurance vs Whole Life Insurance

There are two basic categories of the insurance at hand:

(1) Term life insurance = temporary

Term life insurance is often the most affordable option, but it is designed to provide coverage for only a specific period of time, such as 10, 20, or even 30 years in some cases. It’s like renting a house or apartment, term life insurance is similar to signing a lease with the landlord. Term insurance is flexible for physicians in training or new to practice who have tight cash flow.

(2) Whole life insurance = permanent

Permanent insurance policies are generally more expensive premiums than term life policies. All of the premiums you will be paying will be going into the equity portion which is available to you not just when you die. That means you could eventually borrow from your policy for many different reasons, including to help pay for college, supplement your retirement income, or provide cash for emergencies. This is a great option for emergencies, but it’s important to understand the consequences of borrowing.

Within cash value life insurance label there are specific product types including whole life, universal life, variable life, adjustable life insurance, indexed universal life insurance, ordinary life insurance. Sometimes people refer to cash value life insurance as whole life, but whole life is just one of the types of insurance under the category of cash value life insurance. Understanding the difference between these types of life insurance is very useful.

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1 Assumes $50,000 for 15 years adjusted for inflation at 3.8%. Note that Dr. Sarah would be earning more than this after she graduates, but this is an analysis based on her current needs, not projected future income. 2 Guarantees are based upon the claims paying ability of the issuing company. 3 Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured. CRN202109-252934

John Dameron

John Dameron | Financial Planner and Partner with Spaugh Dameron Tenny since 2002. With the help of his team, John created a lecture series called Physicians Financial Focus, authored a book call The Residents Survival Guide and has coached hundreds and hundreds of physicians from residency/fellowship into practice. His expertise has also been featured on KevinMD.