By Ogletree Financial
Similar to other professionals that have a family that depends on them for financial security, physicians also need life insurance in order to provide for their family should they die unexpectedly. Purchasing the appropriate type of life insurance and ample life insurance coverage can ensure that the surviving family is still able to achieve their financial goals such as providing for a disabled child or extended family, sending the children to college, or retiring peacefully and comfortably, even if the primary provider passes unexpectedly.
While some doctors may feel that they are in the greatest shape of their life, we never know what the next day may bring in terms of an unexpected cancer diagnosis or tragic accident. Today we have critical and chronic illness insurance riders we can add to life insurance policies. Similar to disability insurance, a life insurance policy replaces an insured’s income if the unforeseen happens.
Unfortunately, purchasing sufficient life insurance coverage can be burdensome due to external factors beyond the insured’s control. Not only does your current financial budget need to be considered, but you will also need to predict what your financial future might possibly look like.
According to a study conducted by LIMRA in 2016, the average insured household could replace approximately 3 years worth of income if they pass now, which is much lower than is recommended by insurance professionals. If you follow Dave Ramsey’s life insurance philosophy
, you will only need ten times your annual earnings in life insurance. We know that physicians don’t fit that mold. Make sure you are getting the right advice when you purchase your life insurance policy. There are also many different types of life insurance to consider. According to LIMRA, 23% of all life insurance purchases in 2018 have been indexed universal life insurance
Many physicians that we work with use 65 as a target retirement age. Life insurance will probably still be needed at that time. Other insurance products such as annuities, long term care insurance and medicare supplement plans
will also need to be considered.
How Much Life Insurance is Recommended for Physicians?
Currently, there are numerous strategies utilized by physicians to help them in arriving at the appropriate coverage amount. While some base this amount on what they can afford, others base it on what they need. The bottom line when it comes to insurance, as with most things - you get what you pay for.
Some consumers decide on a round number that seems to be sufficient coverage, such as $1 million, while others may purchase 8-10 times their current annual salary. As with the average layworker, medical professionals should seek the help of a licensed insurance professiona
l to assist them in both finding the best coverage and determining how much coverage is needed.
More specific methods include the following:
»Human Life Value (Multiple of Income Method)
This method is based on the present net value of a doctor’s after-tax income throughout their working lifetime. Typically, a random multiple of the gross income is used, for example, 10- times or 20-times the gross wages. Naturally, insurance agents prefer this method because it’s quick and easy to use, plus it leads to higher sales and commissions than the other methods.
This method considers the difference between cost of future goals and the financial resources the consumer has at this present time, such as an IRA or college fund. Take for instance, a doctor’s family needs $2 million to fund a comfortable retirement, however, only $200,000 is saved for that. The coverage gap that this consumer would need is about $1.8 million. While some financial planning is needed in order to determine the coverage gap, this method provides a more accurate figure and many times, a lower amount amount needed for actual life insurance coverage.
Important Questions to Ask
»How do I choose the best life insurance company?
An independent life insurance broker
can help you by providing you with several options to choose from. They can also help with the proper amount and type of coverage that will suit your needs.
»How will the bills get paid once I die?
In the event that you are married to someone making a similar-sized income, the amount of life insurance needed might be miniscule or unnecessary all together. However, if the surviving spouse’s earned income is lacking, then the gap can be filled with life insurance coverage.
»How will my spouse afford retirement?
If you happen to currently be retired, then you most likely won’t need additional life insurance. But, if you haven’t had ample time to build your retirement fund, or your spouse isn’t in the position to save appropriately, then a life insurance policy can afford your surviving spouse a comfortable retirement in your absence.
»What happens to my debts once I die?
Physicians typically carry debts, such as a sizable mortgage, auto loans, student loans, and credit card debt. Federal direct student loans are usually forgiven once you die, but private loans and the mortgage are most definitely going to continue to be due. It’s important when planning to include a designation for a portion of the life insurance payout to go toward the paying of all outstanding debts.
»How will my children afford college?
With the rising costs of tuition and higher education, it’s nearly impossible for students to afford paying their own way through school. When planning for your life insurance, be sure to also designate a portion of the benefit towards your children’s college years.
»How long is life insurance coverage needed?
If the life insurance policy is a permanent cash value policy, the longer that a physician keeps his or her coverage, the more money the life insurance agents and companies will make. This provides an incentive for your insurance agent to provide you with the best service and the best life insurance products. To prevent over insuring, match the term of your insurance with the term of your risk. For instance, if your 5-year old son will be attending college at the age of 18, then you would want to purchase at least a 15-year term life insurance policy in order to cover the risk that you may pass away before saving enough for your child’s college fund. If your needs are permanent, you may want to consider a permanent policy. A qualified life insurance broker should be able to guide you as to what types of coverage are available and educate you on the pros and cons of a cash value life insurance policy
How to Adjust for Changing Needs
One way to increase your life insurance coverage as your circumstances change is through what is termed as “laddering”. This involves purchasing two or more different life insurance policies in order to supplement an existing policy without having to completely replace it. Instead of purchasing too much coverage all at once, this method allows you to address your family’s life insurance requirements as they change.
Final Words of Caution
Most Life insurance professionals
and agents are not financial trustees or fiduciaries, meaning that they do not have to act in the best interest of the physician. This is not usually their mode of operations but always make sure you work with a reputable agent. It is recommended to view all product recommendations with some degree of skepticism.
Important to remember still, is that the cost of life insurance is regulated by the individual state and the price for the life insurance product is the same no matter who sells it. However, even though two agents may offer the same products for the same prices, as a physician, you should work with the agent that you feel most comfortable with. If you feel like your agent has gone above and beyond you should recommend that agent to your peers.