By Jarrett Suddarth
During your time as a resident, chances are high that at least one person (or ten) approached you about buying life insurance from them. As we mentioned in a previous article, life insurance is very important to get in place early in your attending career. However, that doesn’t mean you should rush to buy life insurance from the first person that tries to sell it to you. Let’s look at four common types of life insurance and which is best for new attending physicians.
The first three types of life insurance we’ll go over can be categorized as permanent life insurance. This means the coverage stays in place for your entire life (or as long as the premiums are paid). Another feature of permanent life insurance is “cash value.” A portion of the premiums you pay goes toward building up the cash value portion of your life insurance policy. You can use the accumulated cash value in different ways including taking loans against it, paying future premiums, or withdrawing the cash value.
Whole Life Insurance
The first type of permanent life insurance is whole life. With whole life, your death benefit (how much your beneficiaries receive when you pass away) is a fixed amount and the cash value of your policy grows at a fixed rate of interest. The cash value of your policy will grow slowly at first, while more of the premium is used to cover the insurance costs and associated fees (a.k.a. the agent’s commission). The growth rate of the cash value is based on an internal interest rate within your policy. The average annual rate of return on the cash value for whole life insurance is between 1% - 3.5%, according to Quotacy.
Variable Life Insurance
The second type is of permanent life insurance is variable life. Similar to whole life insurance, the death benefit on variable is a fixed amount. However, whereas your cash value within a whole life insurance policy grows at a fixed rate, the cash value of a variable life insurance policy grows depending on the investments chosen within the policy. Each policy has its own investment options, typically mutual funds, for you to choose from. In theory, this would provide a benefit over whole life insurance because your cash value has the chance to grow faster. However, because your cash value is invested, it is important to keep in mind that it can also go down in value.
Universal Life Insurance
The final type of permanent life insurance is universal life. Cash value within a universal life insurance policy grows based on an internal interest rate. These policies have a minimum guaranteed growth rate; however, the rate can be higher depending on the performance of the insurance company’s outside investments.
Universal life insurance allows you to adjust your premiums. Most universal life policies have a minimum premium – a consistent amount that would result in the policy lasting until a certain age. If you pay more, the extra funds are added to your cash value. If you pay less, the policy will stay active but eventually lapse. Some universal life insurance policies allow you to increase or decrease your death benefit during the life of the policy.
Term Life Insurance
Term life insurance is the most straightforward type of life insurance and is the only type of pure insurance (meaning, there are no cash value investment components). You pay a specific premium for a fixed death benefit for a set number of years. For example, if you have a 20-year $1 million term policy, you will pay the same premium amount for 20 years, and if you pass away within those 20 years, your beneficiaries will receive $1 million. If you don’t pass away in those 20 years, the policy ends. That may seem like a bad deal, to pay several years for something you never collect on, but as you’ll see in a moment here, this type of coverage comes at a small fraction of the cost of these other policies, making it more than likely the best coverage for new attending physicians.
Why Term Life Insurance is Best
Term life insurance is the least expensive type of life insurance available. The main reason for this is that the life insurance company isn’t on the hook for the death benefit if you pass away outside of the term of the policy. If you contrast that with a permanent life insurance policy, the insurance company knows that they will eventually pay out a death benefit, so they recoup their cost by charging much higher premiums.
If you didn’t catch that last sentence, I’ll reiterate. Permanent life insurance policies like whole, variable, and universal are much more expensive! In each of these you are paying for life insurance PLUS something else. In whole, variable, and universal life insurance you are paying for the cash value portion of the policy as well. This is always sold as a benefit of permanent life insurance; however, the chances your cash value grows exactly like their sales presentation is very slim. In almost all cases, if you instead buy term insurance and then invest the cost difference between the policy premiums, it will put you way ahead of where the cash value would grow. As illustrated in the previous link, if you are a mid 30’s male, in good health, a 20-year, $500,000 term life insurance policy might cost you around $26/month. The same $500,000 coverage as a whole life insurance policy, might cost you closer to $520/month. Investing the extra $500/month over 20 years would grow to over $296,000 at 8% annualized.* That’s significantly more than the cash value of your whole life insurance policy growing at just 2% ($146,000).
The final reason term life insurance is best is because the need for life insurance is temporary. As a physician, your need for life insurance is typically highest when you are young. In addition to all major life milestones happening and your health being at its best, the beginning of your career is also when your financial future is the most unstable. You are in a new job, a new career, and potentially even in a new state. There’s also a good chance that your net worth is the lowest it will ever be. It’s important to keep in mind that your future income is an opportunity, but it’s not guaranteed. When you haven’t accumulated financial resources, you depend more on life insurance to protect your loved ones’ financial future. That won’t always be the case. As you accumulate assets and self-insure (meaning you have enough money to cover anything an insurance company would pay), life insurance becomes unnecessary.
Hopefully after reading this article, you have a better idea of what kind of life insurance is best for you and can avoid being taken advantage of by the first (or tenth) life insurance salesman that approaches you.
Panoramic Financial helps new attending physicians make sure that they have proper life insurance coverage in place. Please click “Work With Us” at the top of the page to learn more.
*Investment returns are not guaranteed. Investing in securities involves risks, including the potential for loss of principal. Estimate is for illustration purposes only, is based on annualized returns of 8% and is not intended to be representative of any specific investment or strategy.
