This action isn’t just about your current assets or even your retirement planning. Taking care of your finances after you’re gone matters, too. Where do your assets go, and how will your expenses be covered?
That’s when you start thinking about life insurance.
But as you research your options, you discover that this type of protection isn’t a one-size-fits-all coverage, especially for doctors. How do you know which policy best suits you and your loved ones?
This guide covers everything you need to know about physician life insurance to help you decide which policy may work best for you.
Understanding Your Options: Term vs. Permanent
Consumers generally buy life insurance to cover their burial and other final expenses and transfer some wealth to their loved ones as an inheritance. Two types of policies meet this goal: temporary (term) and permanent (cash value).
If you work for an employer that provides a spectrum of benefits, chances are, they offer term life insurance. This type of coverage is provided across the board — partly because it’s more affordable for the employer, but also because when you leave the job, the coverage ends.
The downsides to this “free” policy are that it isn’t transferrable, and that the terms may not be enough for what you need. When your goal is to ensure your expenses are covered and your policy remains consistent until your death, permanent insurance is the way to go.
But if term has such drawbacks, why is it such a popular type of coverage?
The answer isn’t clear-cut. It’s a combination of the purchaser’s stage in life, goals, income, and many other factors. Let’s look at the pros and cons of term and permanent insurance here.
Term Life Insurance
Typically the most affordable coverage, term insurance offers easy approval and peace of mind—for a limited time. For those nervous about investing in something that follows them through the rest of their lives — an understandably daunting aspect — term insurance offers a compromise between having something versus nothing for their loved ones in the event of death.
As the name implies, term coverage lasts a finite time (usually between 10 and 30 years), with the average policy being a 20-year term.
During this time, your premiums are an expense that doesn’t accrue any value. But should you or your covered family members pass while the policy is active, the beneficiaries receive a payout.
For physicians, this can be a cost-effective way to ensure that if they die, their families receive a short- or long-term (depending on the payout amount) income replacement. This gives the beneficiaries the time they need to mourn and regroup without worrying about finances.
Term insurance is also beneficial because its affordability lets you invest the extra money in other options. But, as mentioned, once the policy period ends, if you haven’t used it (which is the best-case scenario), it was an unused expense.
Permanent Life Insurance
Looking at life insurance as an investment instead of a potentially unusable monthly payment opens you up to a plethora of other long-term options that fall under the umbrella of “permanent” life insurance.
Similar to term insurance, permanent life insurance policies offer a payout to the beneficiaries in the event of the covered person’s passing. However, this category of insurance also carries cash value along with the death benefits. Provided the premiums are paid regularly, this insurance can last for the policyholder’s entire life.
Although permanent life insurance premiums are higher, this type of coverage will eventually move from an expense to an investment.
Once you pay your premiums regularly, your policy should begin to accrue tax-free cash value, which is attractive to physicians. After a pre-determined period (covered in your policy terms), you can access this cash value if you need funds.
Within the permanent life insurance umbrella are five different types of policies, but only three are commonly used:
Whole-Life Insurance
In the discussion of life insurance, term’s competitor is usually whole-life (WL). This coverage type has existed for decades, becoming the preferred policy in the 1940s and beyond. Since its inception, it has evolved, but the original “til-death” policy continues to remain popular.
Whole-life insurance premiums are fixed and can’t increase throughout your lifetime as long as you pay them timely. The coverage pays a death benefit to the policy’s beneficiary (named by you) and provides a cash value account into which you can invest part of your income while ensuring tax-deferred cash accumulation.
WL coverage is frequently used to complement a savings account once your emergency safety net is covered. If you don’t need to access your funds and want them to grow faster than in savings, the WL premium does the work for you, typically increasing with the insurance company’s annual dividends.
If you need to borrow from the cash value of your policy, you can. Provided you’ve structured it correctly, the earnings are accessible tax-free. This policy is ideal for those looking for benefits such as:
- Tax reduction
- Asset protection
- Estate planning
- Wealth accumulation
- Asset class tax diversification
However, WL insurance is tied to the insurance company’s investments. You don’t get to diversify where your premium goes or move it between accounts. And once you’ve chosen a death benefit amount, you can’t change it.
If these factors are important to you, WL’s evolution, universal coverage, may be a better fit.
Universal Life Insurance
Universal life insurance (UL) works similarly to whole life coverage. The major difference lies in UL’s flexibility in premium and death benefit choices.
With UL, your cash value should grow as interest paid by the insurance company. If the company’s investments do well, you’ll reap the benefits of your policy’s cash accumulation.
On the other hand, should the company’s investments do poorly, your interest return will most likely reflect this. When that happens, less money is available to cover your chosen death benefits, and you’ll need to pay more premiums to meet this gap.
Equity-Indexed Universal Life Insurance
Similar to UL coverage, equity-indexed universal life insurance (EIUL) provides the policyholder with premium and policy flexibility.
You can choose from a list of stock market indices in which the insurance company will invest your premium and grow your cash value at the same rate as stock market returns – with a cap and a floor. There are numerous investment options, and elements to select with EIUL policies and they need to be managed closely. As such, it’s vital to work with an insurance specialist when investing in this type of policy.
Hybrid Life Insurance
A third, lesser-known type of life insurance coverage is a hybrid policy. These are similar to permanent insurance policies but have the added benefit of long-term care.
As we age, the need for long-term care becomes more likely, but Medicare and Medicaid don’t always cover this expense. Long-term care, added in as a rider on your life insurance policy, takes care of this concern and pays a lump sum to the beneficiaries upon the covered person’s passing.
Related: Doctor Benefits Starter Guide
Tax Benefits of Life Insurance
Doctors and nurse practitioners often face the unusual problem of making too much money and, therefore, paying high taxes. Strategically investing assets is a wise way to reduce this issue.
Permanent and term life insurance can help by offering a tax-free death benefit for the beneficiary, letting them avoid paying federal income tax on their bequeathment.
Permanent policies also provide cash value growth that is tax-deferred until a withdrawal is made. As long as you don’t dip into these funds, you won’t pay taxes on that cash.
If you’ve structured your policy correctly with the help of a specialist, you may not need to pay taxes on that money. Accessing the cash value of a permanent life insurance policy can be done tax-free through accessing basis and policy loans. If managed properly, then, such tax-free growth and access can mirror Roth IRAs. (More about IRAs here.)
How to Choose Your Life Insurance Coverage
Employers frequently offer a basic life insurance policy. Before accepting this as your only coverage, read the fine print and understand what it includes. This is usually a bare minimum benefit. As a physician, you may have a higher cost of living and more expenses left behind.
Things to Consider When Adding On Coverage or Investing in a Private Policy
Should you decide to take out another policy on top of your employer’s coverage or on your own, the first step is to decide whether you want term or one of the various permanent coverage options.
From there, consider the premium amount you want to pay. Work with your insurance specialist to determine how much life insurance you can get with that premium amount, as well as the benefits and drawbacks of those terms, then adjust as necessary.
At a minimum, you should ensure the amount of coverage of your benefit takes care of your funeral/passing expenses. If you’re leaving behind loved ones, consider increasing the coverage to take care of your loss of income until your dependents are adults.
Other factors to keep in mind are your private student loans and other debts that are not forgiven after your death. Your benefits should cover these expenses to protect your family from financial liability.
Exclusions and Add-Ons
Exclusions in life insurance policies eliminate the insurer’s responsibility to pay the benefit if certain terms are met. For instance, it’s not uncommon for an insurance company to deny coverage if they find out you misrepresented your personal health information or switched jobs to a high-risk occupation (more on that shortly).
However, many insurance companies allow you to add on a rider at an additional premium that covers these excluded situations.
Commonly excluded terms include:
- Suicide of the policyholder should they pass within a certain timeframe (usually two years) after the policy’s beginning date
- Acts of war in which the policyholder passes due to wartime activities
- Active military service
- Aviation accidents
- Certain high-risk jobs, such as police officers, firefighters, construction workers, loggers, pilots, and extraction workers
Your career as a physician may not include most of these terms. But if your side hobbies are flying airplanes or you’re still considered active-duty law enforcement or military, you must share that with the insurer.
How to Get Started with Life Insurance
Ready to take the next step in controlling your financial future?
Contact an insurance agent who specializes in medical professional life insurance options, like those of us at OJM Group. Our advisors can assist you with your options for the best life insurance coverage, disability insurance, and final expense insurance.
We’ll also help you make decisions based on your unique needs, such as your health. You may need to have a medical exam as part of the underwriting process for certain life insurance plans, particularly with whole life insurance policies.
Term coverage usually requires no exam. Chronic health conditions may not exclude you, but they will likely come at a higher premium and with fewer options. In contrast, those in good health will have more flexibility in choosing their life insurance products and overall insurance quote.
Aside from a medical exam, there usually isn’t much to do to prepare for your new policy. Take a few minutes to prepare any essential documents for all covered policyholders (your spouse/partner and children), including birth certificates and government-authorized IDs. You’ll need these before the policy is finalized.
Finally, work with your advisor to compare rates for similar benefit amounts and add on any riders and other insurance products as needed. Once these steps are complete, you’re on your way to financial security with your term or permanent life insurance policy.
Conclusion
Finding the right coverage and a trustworthy physician’s life insurance agent can be as concerning as searching for a reputable physician.
However, when you work with insurance specialists like OJM Group, we do the hard work for you. Let our team guide you as you work toward financial peace of mind, letting you concentrate on saving lives while we protect your insurance needs.
Contact us today to
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice, or as a recommendation of any particular security or strategy. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
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