What is Whole Life Insurance and Why Doctors Should Avoid It
Whole Life Insurance isn’t needed and this is why.
Buying insurance is like hedging your bets against the gamble of life. If something can go wrong, it generally does – and purchasing an insurance policy is how you keep those little mishaps from turning into huge problems. If you get in an automobile accident, for example, the car and medical insurance you’ve been paying for exists to soften the financial blow.
But life insurance is a little different, because it doesn’t really exist to benefit you. It’s there to make sure your loved ones are protected financially in the case of your death, which can lead some well-meaning consumers to purchase the wrong policy out of guilt and fear. Life insurance salesmen make their living off people like this.
Medical professionals are especially targeted by insurance companies looking to sell whole life policies and make a quick buck. Here’s why you should turn them down.
What is Whole Life Insurance?
Whole life insurance covers you for your entire life. A term life policy provides coverage for a specific period of time, while whole life is designed to last until you pass away.
It also comes with an added investment component. The insurance company invests part of your premiums so they earn interest while you pay for the policy. Customers can even borrow against that invested part, which is known as the cash value. This is another reason why policies are so expensive. Insurance companies charge extra so they can invest part of that premium.
Unfortunately, investment returns on a whole life policy are low, and the return-on-investment is the lowest during the first seven to 10 years of the policy. If you try to cash out a policy early on, you’ll get back less than what you paid in.
Whole life insurance is often twice the cost of term life because insurers take a big risk in providing coverage for someone’s entire life. The likelihood of someone with a 20-year term life policy dying while their coverage is in effect is small, so premium costs are cheap. But if you keep a whole life policy, the insurance company will have to pay out when you pass away eventually – or when you decide to cash in the policy.
What Does Cash Value Mean?
Insurance agents promote whole life because of its cash value, which will be added to your total benefits when you pass away. You can also borrow against the policy’s cash value to use for debt consolidation, home renovation, a child’s wedding or other big expenses.
That may sound like a great option, but there are better ways to invest. The average return on the cash value portion of a whole life policy is somewhere between 3-4% – far below the S&P 500, which has earned 10% since its inception. Customers who buy whole life insurance often like the idea of using it as an investment, but they usually don’t realize how much money they’re giving up.
Consider this scenario: You have $100 to spend on life insurance each month, with the choice between buying a $1 million term life policy for $50 a month and a $1 million whole life policy for $100 a month. You decide to purchase the term life coverage and invest the $50 you save each month in an index fund with an average return of 7% adjusted for inflation. After 40 years, you have $133,166.86. If you chose the whole life policy instead, the cash value would only equal $59,536.60 after the same amount of time.
Some people turn to whole life because it seems like an easier alternative to investing, but learning to invest legitimately doesn’t have to be difficult. You can use a robo advisor like Betterment or a fee-only financial planner who will pick the best investments for your desired retirement age. Your returns will almost always win out over the whole life policy, and you’ll save hundreds by choosing a term policy instead.
Why Doctors Don’t Need a Whole Life Policy
The goal of life insurance is to cover your family’s expenses in the event of your death. People who are married, have children or own a home need a life insurance policy to protect their family if they pass away early. A life insurance policy provides enough money to replace their income for a few years and handle any outstanding debts. That’s why single people with no dependents don’t need life insurance – there’s no one relying on their income.
The life insurance policy only needs to last as long as there are significant financial obligations the remaining spouse couldn’t handle by themselves. If you earn $200,000 a year, have a mortgage of $400,000 and are married to someone who earns $45,000 a year, your life insurance policy will prevent your partner from having to sell the house in the event of your death.
Chances are if you’re a doctor and are reasonably responsible with your finances, you won’t need life insurance when you’re 85. Your mortgage will be paid off, your kids will be adults and you’ll be living off your retirement account. You won’t have any income that needs to be replaced if you pass away.
That’s the crux of why doctors don’t need whole life policies. By the time you’re 70, retired and have no debts, you don’t really need to be covered at all. At that point in your life, your death would not catapult your family into a financial tailspin. There’s only a 20-30 year stretch of your life when you need a policy, and after that, you can prepare in other ways.
Once your term life policy has reached its end date and your financial obligations have decreased, you can use a regular savings account to do the same job. Just save enough to cover funeral expenses, make sure your will and other arrangements are finalized and rest easy.
Why Are You Being Sold a Whole Life Policy?
Insurance agents who sell whole life typically make most of their money through commissions, usually based on a percentage of the total premium. An average life insurance agent who sells whole life will earn between 80-100% of the first year’s premium as their commission. Higher-ranking agents can sometimes earn a portion of the premium for later years as well. If you pay $1,200 a year for a whole life policy, your agent could earn between $960 and $1,200 that year.
Most life insurance agents rely solely on a commission to earn a living, like waiters working in a restaurant who get the bulk of their income from tips. Unfortunately, insurance agents are not required to disclose how they make money. Some even call themselves financial representatives, pretending to act as objective advisors.
A life insurance agent does not have a fiduciary obligation like a financial planner. They’re not required to only sell products that are in your best interest, even if their sales pitch sounds full of concern for your financial health. Many agents will use emotions to woo you into buying a whole life policy but don’t fall for their scams. You can protect your family with a term life policy and save money at the same time.