What is term life insurance and why doctors need it
Fair warning: we may not agree why doctors need term life insurance, so let’s try to work together in understanding our differences of opinion. If you want to join the debate or express your perspective, please be sure to find and join our Financial Residency Facebook community. We’d love to have you with us!
Life insurance is a tough sell for anyone. Can you think of another product that doesn’t kick in until you’re not around to enjoy it? Beyond that, no one wants to think about the inevitability of their own death. Some people think even talking about life insurance is jinxing death.
But if you work in the medical industry, you’re probably more than aware of how devastating the loss of a loved one can be. If that loved one was also the breadwinner for the family, it can lead to a destructive spiral of debt and depression.
Life insurance is the buoy that will keep your family afloat after the storm passes. Here’s why every doctor should consider it – and why term is the best option.
What is Term Life Insurance?
There are two types of life insurance: term and whole. Whole life insurance policies protect consumers for their entire life, while term life policies provide coverage for a specific time frame. Term life policies are usually sold in five or 10-year increments, with 20-year and 30-year policies being the most common.
Policies should cover funeral expenses, outstanding debts (including your mortgage) and long-term savings goals, such as a child’s college education. Once you have that figure, add up how many years of lost income you want to cover. Most people say your term life policy should be enough to replace your income for 10 years or more. A more general rule of thumb is to multiply your current income by 25 to get your total policy figure.
Most doctors are the breadwinners, with families depending on their income. The goal of term life insurance is simple: to provide a safety net for your family in case you die and they have to live without that income. Unless your spouse completely out-earns you and can support themselves on their income, you need to buy life insurance. Otherwise, your family is going to struggle financially.
That being said, not all life insurance is created equal. Term life insurance is more popular than whole life because it’s significantly more affordable. Companies can charge less for term life than whole life because there’s a very small likelihood they’ll have to pay out a benefit. A 20-year term life policy for $1 million could cost as little as $27 a month for a non-smoking 30 year-old. A $1 million whole life policy will likely be twice that amount or more.
Premium costs vary depending on the policy’s length, the total payout, the age of the consumer and their health. In general, the younger you are when you buy the policy, the cheaper it will be. Term life premiums never change, so buying it while you’re young locks in a lower rate for the entire term.
Smokers, those with chronic health conditions and people with first-degree relatives who died early will pay higher rates. Consumers who quit smoking within the past two years will still be charged a smoker’s rate, but can apply for a new policy once they reach the two-year mark of smoking cessation.
Have a family history of heart attacks that could increase your rates? Don’t forget to mention it to your insurance agent. Omitting relevant health information could be grounds for having your policy canceled, both before and after your death. Answer their medical questions as honestly and thoroughly as you’d want a patient to answer yours.
Common Life Insurance Mistakes
Buying Too Little Life Insurance
When you’re buying life insurance, the most important question is what kind of policy you want to get. Most people will opt for a 20 or 30-year policy that will cover the length of their mortgage. Deciding how much to buy is the next question. The maximum amount you can purchase is normally $5 million, with most doctors needing between $2 to $3 million worth of coverage.
If you buy too little life insurance, you run the risk of your family struggling financially after your passing. Let’s say you get a $1 million policy and pass away at 40. Unfortunately, your mortgage has a current balance of $500,000, and your spouse only works part-time making $40,000 a year. Even with the $1 million policy, she can’t afford to keep up with the bills and decides to sell the house.
In an alternate timeline, you buy a $3 million policy and pass away at 40. It’s not easy for your spouse – losing a loved one never is – but they can afford to keep the house and maintain a similar lifestyle. Grieving is one of the hardest things a person can go through, and it’s only made worse by needing to worry about unpaid bills and unsustainable expenses.
Even if buying a $3 million policy seems indulgent and unnecessary, consider whether or not you’d be comfortable leaving your family to fend for themselves. If you really want to make sure your loved ones are taken care of, a term life insurance policy will give you peace of mind.
Setting Your Beneficiary
When you sign up for a life insurance policy, you have the option of designating a beneficiary. Most people choose their spouse, children or a mix of both. You can also pick a back-up beneficiary in case your first choice dies before you. You should also consider whether you want the life insurance payout to be split evenly between your spouse and your children or if you want your spouse to inherit all of it.
Whoever you designate as your beneficiary will stay your beneficiary, no matter what is written in your will. If you get divorced or remarry, don’t forget to change your life insurance beneficiary. It’s not uncommon for a person to get divorced, forget to change the beneficiary on their life insurance and leave their second spouse shafted.
Buying from the Wrong Company
Can you imagine buying a life insurance policy from a company, passing away and then the company not paying out your policy? Unfortunately, it happens and it can be devastating.
Before you buy a life insurance policy, look up its track record (A.M. Best is good for reviews). Even if a company seems like it has the best price, read the reviews and see if there are any from people who claim the company didn’t pay out a policy.
Where to Buy Term Life Insurance
Your employer will sometimes offer you a term life policy as a benefit, but the policy usually isn’t enough to cover all of your life insurance needs. They may allow you to buy extra coverage through the company, but it’s usually more expensive than what you’d find on the open market.
Contact an insurance broker to get a list of available rates from various companies, then ask your current insurance company for their term life pricing sheet. Most term life policies have similar exemptions and rules, so the only real comparison to be made is cost.
Don’t forget to insure your spouse, even if they don’t earn as much as you. If they pass away, you’ll still be on the hook for covering their household contributions, monetary or otherwise. Remember, term life insurance is usually incredibly affordable so there’s no reason not to get one.
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