What is Term Life Insurance and Why Doctors Need It
If you are a doctor and you have people that depend on your income to survive, it is critical that you get term life insurance to protect them in case you were to pass away.
Working with so many clients has shown me just how important the subject of life insurance is to physicians. Not only do I see the value of having a great term life policy in place, but it’s clear that it is a topic which many people want to understand before they purchase.
I believe that having the right term life policy is critical to your overall financial well-being. You should have your disability policy in place to protect your income during your working years, and your term life is there in case you were to pass away before your planned retirement.
We know we need some sort of policy, but how do we know how to find the best term life for our needs? And what makes term life so much better than whole life? The answers to these questions – and a lot more – will be covered.
Basics of Why Doctors Need Term Life Insurance
If you visualize your financial journey in terms of a roadmap, you will have various points to mark your financial achievements. Achievements such as paying off your student loans, paying off your mortgage, investing in your first property, and paying for your children’s college. These significant milestones are the various checkpoints on your roadmap.
These checkpoints all lead to where “X marks the spot.” For most of us, we are working towards a comfortable retirement, enjoying time with our families, and hopefully enjoying good health.
But we all need help along this journey. We need a reliable income and smart insurance policies to make sure we are always moving towards our retirement destination. As physicians, you’re already on your way to a steady income. Now you need to make sure you have the right insurance policies in place.
Term life insurance is one of the products which is there to help doctors protect their family’s financial future. It provides a death benefit to our loved ones, in case our journey is cut short.
Term life insurance is a fairly straightforward product. It’s a life insurance policy that pays out a death benefit if you pass away during the specified term. Term life policies are mostly sold in 5-year increments, starting with 5-years, up to 35 years. The 20 and 30-year terms are the most common.
Chances are you will outlive the term you’ve selected, which helps make term life so affordable. Like other insurance’s (such as auto, homeowners, or disability insurance), you pay a premium so the insurance company will take on the risk of insuring you.
While term life isn’t too complicated, there are a lot of common questions surrounding the subject.
Why Doctors Need Term Life Insurance Versus Whole Life Insurance
One of the questions I receive the most about term life is the difference between it and whole life insurance. The products are similar in that they are both insurance policies, but it helps to know the stark differences between the two.
Term life is only paid out upon your death and the money you pay in is only applied towards your premiums.
Whole life insurance is considered permanent insurance – meaning it’s a policy that doesn’t expire upon your death. A whole life policy will remain in effect as long as the premium is paid.
There are other types of insurance under the permanent insurance umbrella, such as universal, variable, and universal variable. Whole life is the most common form of permanent insurance products.
Whole life insurance has an “investment” component to it. The money you pay each month can eventually build up cash value, which you can either cash-out or borrow against up until your death. This may sound like something worth considering, but having this investment component means you will pay significantly more in premiums each month.
Many consumers are attracted to a whole life policy because they feel it’s an investment. Whereas with a product like term life, you may outlive the policy term and your family may never reap the benefit. The truth is that the returns on the investments for a whole life policy are so low that you’ll barely break even if ever. This is especially true in the first 7-10 years of the policy when the returns are the lowest on whole life insurance.
Almost everyone will benefit from selecting a term life policy instead of a whole life policy. There are very few circumstances where I would recommend purchasing a whole life when term life is so widely available.
Why Should Doctors Purchase Term Life Insurance?
Term insurance should be purchased by anyone who has people in their life depending on their income. Whether it’s a spouse, a family member, your children, or a combination of all of these. This is a benefit you will never personally use so the decision should be based on who needs your income.
If you’re single and don’t have any dependents and no one is depending on your income, then you probably don’t need a term life policy right away.
Physicians are in a unique position because they are usually the breadwinners in their households. It’s also quite difficult for others to make up for the loss of a physician’s income. For this reason, a policy should be purchased once you’re married, have children, or someone depends on you financially.
How Much Does Term Life Insurance Cost Typically Cost for a Doctor?
One of the major benefits of a term life policy – especially compared to whole life – is how much coverage you can purchase with an affordable premium. Even though term policies are known for affordability, there are multiple factors that influence how much you’ll pay.
The premium will be based on your gender, height, weight, and medical history. Your prescription medication and immediate family medical history will also be factored in. Don’t worry, if you could lose a few pounds it won’t automatically disqualify you from getting a policy. However, some insurance companies are more generous than others when it comes to weight guidelines.
A family history of cancer and cardiac issues can also have a strong determination of which category you’ll be rated in. Depending on the category the insurance company classifies you in will determine how much in premiums you’ll pay.
Smokers are going to pay higher premiums. But if you happen to have quit smoking more than two years ago, then you no longer have the smoker’s rate. If you end up quitting smoking after you’ve taken out a policy, you can apply for a non-smokers rate after you’ve quit for at least two years.
Whatever family history you have, make sure you disclose it to your insurance agent. Not only is omitting health information misleading, but it could mean your policy gets canceled, either before or after your death. Just answer the questions as honestly as possible.
Overall, you can expect to pay the smallest premiums the younger and healthier you are. While you can’t help your immediate family’s medical history, you can help yourself by buying a policy as soon as possible, once people are depending on your income. Buying it while you’re young means you’ll lock in the lower rate for the length of your policy.
Where Should a Physician Purchase a Term Life Policy?
When it comes to finding an insurance agent you trust, I highly recommend you start by asking your fee-only financial advisor who they would recommend. If you know other colleagues who have purchased term life, then you could ask for their recommendation.
Your hospital or employer may also have an option for term life, so this is another resource for you to consider.
You can purchase your policies directly with the insurance companies. In order to find the best carrier, you’ll need to research the ratings of each company. You can find the financial ratings through sites such as A. M. Best, Standard & Poor’s, Fitch, Moody’s, and Weiss.
Another possibility is through your existing homeowners or auto policy. They may be able to offer a term life policy and you could ask about a bundling discount while you’re working with them.
Working with an Agent
Let’s assume you go down the path of working with an agent. As you’re working with them, you’ll begin to notice them using terms such as “Preferred Plus” or “Preferred” when describing your health. These are the categories the insurance company will lump you in as they determine what you pay for your premiums. You may also hear it referred to as Tier 1, 2, 3, etc..
Preferred Plus (as the name implies) is the highest rating, which means you have excellent health. Many agents will automatically give you quotes based on this Preferred Plus rating, but your rating could change as you go through the underwriting process.
Where you have to be really careful is when you have filled out your complete application and you’ve submitted all your paperwork. It’s not uncommon for you to have been quoted the Preferred Plus rate from your agent beforehand, only to have the underwriter say no, you’re actually a Tier 2 or Tier 3. This will mean your rates double or triple.
The rub comes in because your rate has increased drastically and you’re suffering from underwriting fatigue. The last thing you want to do is find another agent and fill out another application. You’re tempted to just go with the higher quote, even though it’s nowhere near what you discussed. If this happens to you, make sure you’re working with an agent who can help get you discounts.
It’s important to get the details on the quotes upfront and make sure you have every discount available to you.
Get Multiple Quotes
The good news for you as a consumer is term life insurance is cheap. The even better news? There’s so much competition to sell these policies, which means you benefit from better pricing.
The best strategy for purchasing a policy is to get multiple quotes. Sure, it can be a hassle to have to deal with multiple people at once. But getting multiple quotes means you’ll get the best coverage with a competitive premium.
Additional Resources for Costs
You don’t have to use an insurance agent to purchase term life, even though I recommend using one you trust.
One resource you can use to purchase or to double-check your agent is the website term4sale.com. This site ranks the cost of insurance from least to most expensive, for the term you select, and with the amount of the death benefit you need. Plus you can put in your general health info to help narrow down the cost even more.
One last thing, make sure you ask your agent about potential discounts. You may assume your agent will bring this up without you asking, but it’s not always the case – especially if you’re working with someone who is just starting out.
Choosing the Best Carrier for Doctor Term Life Insurance
Whether you choose to work with an agent or purchase a policy on your own, you need to know how to purchase from an insurance carrier with a strong financial rating.
You’ll first want to have a clear understanding of your goals for your policy before you choose the carrier. If you think you will need a policy where you will need multiple options (referred to as riders) then you need to select a carrier based on this goal.
If you’re simply wanting the most low-cost term-life policy, without too many options then you should choose a carrier based on being a low-cost provider. Whatever you need, knowing what your goal is can help you narrow down your choices of carriers.
Not all carriers are created equally, so you will need to do your homework to find the one which fits your insurance goals and also has a strong financial rating.
Financial Ratings for Term Life Carriers
Fortunately, we don’t hear too often about insurance companies going under. But anything is possible. When picking a company, you’re probably better off choosing one which has been around a long time.
Researching a carrier may sound exhausting, but lucky for us, in today’s digital world, we can get the information right at our fingertips. We can find insurance-rating services online so we can breeze through the information. You can use sites such as A. M. Best, Standard & Poor’s, Fitch, Moody’s, and Weiss.
The financial ratings are based on opinions from financial experts, as well as insurance industry data.
Another way to review a company’s financial information is to look at its Comdex score. A Comdex score is a number from 1 to 100, and you want as high a number as possible. It’s a very simple view which combines a number of complex factors.
The Comdex score is a composite of all the ratings of a company. For instance, if you find a company with a score of 80, it means it’s scoring higher than 80% of its competitors with multiple ratings. An insurance company must have ratings from two or more insurance rating organizations (such as Moody’s and Weiss, for example) in order to receive a Comdex score.
These are just a couple of ways to quickly find out information on the carriers you are considering. While your free-time as a physician is limited, this is where an experienced insurance agent will be able to point you in the right direction.
How Much Term Life Insurance Does a Doctor Need
You now know who you’re going to purchase from but how do you know how much you need to purchase?
Knowing how much to purchase can be a bit of a conundrum. If you purchase too little insurance, then your family won’t have the funds they need. If you purchase too much, then it’s money you could have spent elsewhere.
The answer to the question is made more difficult when you factor in your family’s personal needs. But luckily, there is a way to determine the amount of coverage needed.
The first calculation you want to consider is how much it would take for your family to continue to live in your home, pay for the big expenses, and pay for a college education for your children.
A good rule of thumb when it comes to term life insurance is to purchase seven to ten times your gross income. But this isn’t only factoring in your current income. You also have to use your future income potential when you’re calculating your numbers. For physicians, this can make your death benefit much more robust.
It’s not uncommon to need a $2 or $3 Million policy once you determine the amount of your expenses. But you may find your numbers are even higher.
Most insurance companies are not willing to put together a policy based on twenty to thirty times your current gross income. If you do find yourself in the position where you need a substantial amount for a death payout but it exceeds the “rule of thumb” then you will need the help of your insurance agent. A good insurance agent will be able to present your information to the carrier to explain why you need additional coverage.
Your agent can explain to the carrier if you have multiple children or a very large mortgage. Perhaps you have a special needs child or another family member who would need a significant income.
The Typical Length of a Term Life Insurance Policy a Doctor Needs
An agent can help you determine your carrier, the amount of your policy, as well as the length of term to choose.
The reason why length is an important factor in a policy is that the longer the term, the higher your premium will be. This makes sense because you will be older and potentially at greater risk for health problems. The longer the term, the more of a risk the insurance carrier is taking with you.
As you contemplate the length of the policy you need, you should think about the expenses you’ll have later in life. What kind of expenses do you imagine having at the 20-year mark or in 30 years? Refer back to the financial roadmap we discussed earlier. Think about the timeframe you’ve assigned to your financial goals.
Your financial picture can look quite different at the 15, 20, or 30-year mark. While you may not have it all figured out at this moment, you can get a general idea of what you can accomplish by a certain time.
Even without us knowing our entire future, picking a term for term life insurance is pretty straightforward. You can choose an annual renewal or you can purchase in 5-year increments. Most companies offer policies from 5 years up to 35 years.
Having your financial roadmap laid out will help you determine the length of your term life policy. If you don’t have everything figured out just yet, that’s ok too. The goal of the term life policy is for your dependents to be covered in case your income is no longer coming in.
When Should a Physician Purchase Term Life Insurance?
Like disability insurance, the best time to purchase your term life policy is when you’re younger and (presumably) healthier. Since you will be subject to medical underwriting, it’s best to start the process earlier in your career, versus later.
By purchasing your term life policy when you’re younger, you will have access to the lowest rates possible. The longer you wait to purchase, then the higher your premiums will be. One of the
If you are married or married with children, then you’ll want to get your policy completed as soon as possible. If you’re single, it doesn’t mean you shouldn’t consider purchasing term life insurance. You will have to pick a beneficiary (or beneficiaries) which might look different from someone who is married.
The Different Types of Term Life Insurance a Doctor Could Purchase
Like other insurance and financial products, there are different versions of a policy under the term life umbrella. Let’s take a look at your options for term life.
Level term is the most popular of the term life insurance varieties. Level term simply means your death benefit will be the same during the term of your policy. Whether your payout is in 5 years or 25 years, the death benefit would be the same should you pass away during your selected term.
Level term is popular because your premium should remain the same during your selected term.
Where a Level Term policy means your death benefit remains the same, there’s another option available called the decreasing term. A decreasing term means your death benefit reduces each year of your policy.
A decreasing term policy generally means you’ll have much lower premiums. It’s designed to help your loved ones with one or two specific expenses – such as paying off a mortgage.
Annual Renewable Term
An annual renewable term means you renew your policy every year, instead of the 5-year increments. This type of policy is not very popular but it is available through some insurance companies.
Return of Premium
A handful of term life insurance companies offer the option for you to purchase a “return of premium” policy. The idea behind this is if you do not end up having a payout (because you outlived your policy) then a portion of your premiums would be returned to you.
Think of this option as being similar to the auto and homeowners’ policies where you are eligible for a refund if you don’t have any claims. As you can probably guess, choosing this kind of term life insurance will make your annual premium much higher versus a level term policy.
Available Riders for Doctors for Their Term Life Insurance Policy
If you have purchased long-term disability insurance before, then you might be familiar with the concept of riders already. A rider is the insurance-speak for an option in your policy. As with a disability policy, there are riders available to further customize your term life policies.
Riders do make your premiums more expensive, but in some cases, they can make your policy more comprehensive. Here are a few riders you may come across.
Accelerated Death Benefit
A common no-cost rider with a term life policy is an Accelerated Death Benefit. This allows you to access part of your death benefit, should you be diagnosed with a qualifying terminal illness. Each carrier has their own definition of a terminal illness, but usually, it’s if you have less than a year to live.
Basically the accelerated death benefit acts as a lien on your policy, and it also accrues interest. Upon the death of the insured, the death benefits would be reduced by the total accelerated death benefit (the lien).
There is usually an administrative fee involved if the accelerated death benefit is accessed. Overall though, it’s a benefit you want to be included in your term life policy, and most will. In the unfortunate scenario where you would need to access your death benefit sooner, this could be a helpful option to utilize.
Waiver of Premium
This is a rider available to you if you were to become disabled during the term of your life insurance policy. It would cover the cost of the premium while you were unable to work. If you already have a long-term disability policy in place (which all physicians should) then this is probably not necessary.
A popular option for policies is what’s known as the Conversion Option or rider. This option allows you to change your term life policy into a permanent, cash-value policy. With this option, you would be able to convert your policy when you’re older, regardless of your health status, without going through the medical underwriting process again.
With a conversion option, you’ll be able to maintain the same underwriting classification when you convert your policy. You’ll be classified the exact same way as you were when you bought your policy initially when you were presumably younger and healthier.
This can be an advantage with your rates because your premium will be based on the age you were when you first took on the policy.
If you do choose this option, make sure you understand the differences upfront. This is converting to a permanent policy, which means it will become quite a bit more complicated.
Some carriers will allow you to convert at any time during the life of your policy. Other carriers will limit your conversion option to a specified time period – perhaps to the first five or ten years of your policy. Your best bet is to choose this option with a carrier that allows you to convert at any point in the life of your policy. And again, you’ll need to know all of this information upfront.
Why Doctors Should Consider Laddering Term Life Insurance Policies
Knowing your options with term policy lengths, the death benefit, and riders are essential when choosing a policy. But there is one more option you may want to consider as you’re purchasing your term life policy.
There are approaches physicians can take when purchasing and it’s referred to as laddering. Laddering is simply purchasing two policies at once, which end at different terms.
Why would you consider laddering? Physicians have a unique advantage versus other professions. Since you earn an above-average salary throughout your career, you have the opportunity to invest, save, pay off debt, and cash flow your expenses.
Going back to your roadmap, you can achieve specific goals by specific times. Some will occur in 10 years, other achievements will take longer. The further along you are on your roadmap, the less likely you’ll need term life insurance.
For example, you could purchase a $2M policy with a 20-year term. You could add a second $1M policy with a 30-year term. Naturally, the $2M will be more expensive than the $1M.
Once you’ve had twenty years on your financial journey, then you should have growth in your investments, savings, paying down debts. Once you’ve achieved what you’ve wanted to, then you might not need any of the insurance. You could cancel the last million dollars and save by not paying the premium.
Even if you don’t cancel your policy and you still need the last million, you’ll have it for ten more years. The good news is, you’ll be saving on the premium because you purchased it so early.
If you have an insurance agent you’re working with, then they should be able to help you run the numbers for the laddering scenario. There are even some policies that can offer the same benefit in one, singular policy.
What Doctors Should Expect When Applying for Term Life Insurance
You’ve spent all this time preparing to purchase the right term life policy, but unfortunately, you’re not quite done. Now it’s time to find out what to expect during the application process.
The Medical Paperwork
Once you start working with an agent, be prepared to fill out a ton of paperwork. It’s time-consuming, but a necessary part of the process.
Be prepared to answer questions related to your weight, height, medical history, prescriptions, and where you live. Don’t be surprised if you have to discuss your driving record, including any tickets you’ve had.
Again, all this information is necessary and you want to be truthful.
The Medical Exam
Some term life policies will require you to get a medical exam, as part of the underwriting process. The questions you’ll be asked during the exam are similar to your paperwork. You may be asked to expand on your driving record and your travel habits.
In addition to the questions, you can expect your cholesterol to be checked, as well as your blood pressure. All of this is so the carrier can determine which health rating you will be placed under. And your rating determines your premium.
If the idea of a medical exam makes your skin crawl, then you can purchase a policy without the requirement. But there’s always a catch – if you go this route, you can expect your premiums to be higher than if you were to get a policy where you’re subject to an exam. Unless you have a major compelling reason, then you’re better off getting the exam.
Other Items Physicians Need to Consider When Purchasing Term Life Insurance
If you’ve made it this far and have gone through the process of purchasing the term life, there are a couple of other points to keep in mind.
Insuring Your Spouse
Your spouse may not currently work outside the home or may earn their own salary. Either way, it’s a good idea to purchase a separate term life policy for them. There’s no doubt your spouse contributes a great deal to the household, and this needs to be considered when thinking about insurance needs.
If your spouse were to pass away, a term life policy would allow you to take time away from practicing while your family is going through the grieving process. When you’re choosing the length and amount of the policy, it’s necessary to factor in you taking time away from work, in addition to covering the costs of the household contributions.
Choosing Your Beneficiaries
For some of you, there is no question who you want as beneficiaries of your policy. For others, you may have to put additional thought into it. Here are a few things to consider as you’re contemplating who would receive a payout.
You won’t be able to stipulate with the insurance company what the beneficiary uses the payout towards. If you want stipulations in place, you will need to specify this information in your will.
You can choose multiple beneficiaries. You are not limited to one person. You can have your payout split among multiple recipients. Whoever you choose, it’s smart to communicate this information with the beneficiary (if they’re old enough) so they know it’s available should something happen to you.
One last note regarding beneficiaries, you need to keep up with the information throughout the years. A lot can happen in 20 or 30 years, so make sure you update the recipients as needed. If you have an ex-husband or ex-wife, you probably don’t want them receiving your payout because you forgot to update your beneficiaries. Don’t think it couldn’t happen!
Term Life Insurance is a Must for Physicians
You have many, many choices to make as you’re working your way through your financial roadmap. There are multiple options available to you as meander towards your retirement goal. Getting your term life policy in place is one step to help you along your journey.
Purchasing a term life policy is affordable, easy, and should provide all the coverage you’ll ever need. Making sure your family is cared for – should the worst happen – will provide you with greater peace of mind.
Term life insurance is straightforward. And even though it’s not complicated, it’s important enough to be one of your pillars of financial success. If you are looking for a way to make better financial decisions starting today, you can start by purchasing a good term life policy.