The debate between advocates of permanent cash value life insurance and people who advocate buying nothing but term and investing the difference in premiums is one of the most hotly contested topics in financial services. Sadly, most of the back-and-forth we see out there generates more heat than light. So we thought we’d put some general principles down that can help readers understand both perspectives, and enlighten their own decision-making process.
8 General Life Insurance Principles
1. Don’t put it off
Life insurance is an important cornerstone of any financial plan particularly with physicians. This stuff doesn’t get cheaper as you get older. When in doubt, just get a term policy in place that you can convert to cash value down the road if you decide that’s what you want. The important thing isn’t cash vs. whole life or universal life. It’s getting the insurance in place to begin with. You can always switch it up later as your career develops.
2. The most important consideration with life insurance is to protect your family with a tax-free death benefit
Yes, there are other benefits and advantages to cash value policies, but these are secondary considerations. Protection for your family comes first.
3. Beware of product zealots
Term life, whole life, universal life insurance, equity-indexed universal life, and every other form of life insurance are just financial products. They are just tools, which have evolved because they meet certain needs and situations. It doesn’t make any more sense to “hate” a form of life insurance than it does to “hate” Phillips screwdrivers or socket wrenches or hammers. We don’t ‘hate’ products. We hate the practice of trying use a hammer to turn a screw. Start with the situation and the goal. Then select the best financial tools to accomplish those objectives and to protect the client
4. The best kind of policy to own is the one most likely to be in force when the insured dies
In a way, this can be read to support the permanent cash value life insurance policy, because term policies are designed to lapse before the insured dies almost all the time. That’s why they’re so affordable for young people.
But it’s also a caution against committing inordinately high premiums. If you run into a cash crunch, and you have to lapse your gee-whiz whole life insurance policy because you just can’t afford the premiums anymore, it doesn’t do you much good.
Whatever life insurance policy you buy, think of it for the long term. You wouldn’t buy a pet you couldn’t afford to keep. So buy the life insurance policy you can afford to keep for a very long time.
The best policy to own is the policy you can easily afford. And since you can easily afford it, there’s no reason to risk putting it off.
5. Expect success
Think ahead to the estate tax. Nobody knows what the estate tax rate and exemptions are going to be when you die. But if you are diligent and skillful with your investing on a doctor’s income, and you live on less than you make, you can expect to amass a substantial nest egg over the course of a career. When this happens, it’s nice to have some liquidity in the form of a life insurance policy to handle the estate tax. This prevents the need to sell real estate or businesses at fire sale prices to pay the estate tax. If this is a concern of yours, you may want to consider permanent or cash value life insurance that is designed to last a lifetime.
6. You’re not the mass market
You’re a doctor. Or will soon be one. The financial tips and advice that you see on the financial media for the mass market don’t necessarily apply to you. You are likely to earn more than the Roth IRA limit, and are very likely to be an entrepreneur at some point with your own private practice, if you aren’t already. Few of the talking heads you see on CNBC or the other TV shows and the financial magazines understand your situation. They are focused on the mass market. Don’t fall for their one-size-fits-all advice, but get your financial, investment, insurance and tax advice from professionals who are accustomed to working with physicians, business owners and other highly-compensated professionals. There are applications of the insurance contract such as buy-sell funding, executive bonus plans for small businesses and asset protection considerations that most people in the mass market and the media that serves them never need to think twice about. But they are critical considerations for you.
7. Protect your life insurance policy against disability
If you’re disabled, think about how you will keep making your life insurance premiums. Right after a disability is the last time you want to lose your life insurance policy. Many life insurance policies come with riders that guarantee that your premiums will be paid if you become disabled. Think through this process in advance when you’re young and healthy.
8. Plan for future increases in income
A popular rule of thumb is that young people should own 10-12 times their annual income in life insurance protection. But this isn’t always great advice for medical students or residents who have every reason to expect substantial salary increases when residency is over. But you could become uninsurable between now and then. If you’re still just starting out, consider a rider that will guarantee you the right to keep purchasing insurance in line with your future income – regardless of what happens to your health in the meantime. This is very easy to do if you plan ahead. It’s almost impossible if you wait until after you have a health condition and then try to buy the policy your family needs.
For some of you, term insurance is going to be the way to go. Others will want or need some cash value life insurance in the form of whole life, universal life or some of their variants. For most of those people, the solution will be a combination of term and whole life or universal insurance. The important thing is to keep things affordable, and to consider your family’s protection first, before all other considerations.
Need more information? Looking to establish your protection plan for your family? Or add to your existing life insurance? Or do you just want a second opinion on any life insurance decision or policy? Call us today at 866-899-7318.
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