Imagine this…
Dr. Smith just graduated residency and moved across the state to start his new job as an attending physician. He has been happily married to his wife, Mrs. Smith, for five years and she is pregnant with their second child. She enjoys working as an administrative assistant for a local non-profit organization, but when it comes down to it, her income has very little impact on the family’s financial picture. One day, Dr. Smith develops a proliferating headache and Mrs. Smith finally convinces him to go see a specialist. After many tests and scans, Dr. Smith is tragically diagnosed with terminal cancer. Obviously, Dr. and Mrs. Smith are both devastated. However, just when things seemed like they couldn’t get any worse, Dr. Smith remembers that he never did follow through with getting life insurance like he had promised his wife over a year ago. He had agreed it was a good idea, but it never made it to the top of his priority list. Now, after recently purchasing a large house and deciding to send their kids to the local private school, it seems Mrs. Smith will be left with nothing. Now, Mrs. Smith not only has to deal with the inevitable loss of her husband, but also the prospect of financial ruin. Had Dr. Smith bought life insurance when he was healthy, Mrs. Smith would at least have had financial security as his parting gift to the family.
What is Life Insurance?
As a physician, you likely earn or will earn a large portion of your family’s household income (assuming you are married or have kids), so life insurance should probably be considered. Quite simply, life insurance is designed to provide financial support to the people who rely on your income in the event of your death. It is unique in the sense that the person who is insured (and is usually also the owner and payor for the policy) will receive no benefit if a claim is made on the policy – meaning the person who took out the policy passed away and the benefit is left for his/her survivors. This makes life insurance a truly selfless gift to your loved ones. The complicated part of life insurance comes from the many options that exist within the industry and trying to determine which is right for you.
Why Life Insurance?
Life insurance, as mentioned above, should be viewed as a gift to your loved ones in the event of your passing. However, as a fiduciary financial planner, I tend to think of it as an important planning tool. When we sit down to review a client’s situation, we have an end goal of creating a long-term plan, but we also create contingency plans to protect against the unexpected. One of the most challenging financial situations is when the primary breadwinner of the family passes away and the survivors are left without a way of sustaining their financial stability. The sting of the loved one’s passing is only heightened by the anxiety and pain of financial hardship. To hedge against this, a financial plan may call for life insurance (as well as other insurance products). This is similar to the way an investment portfolio uses diversification to hedge against market risk. In both scenarios, risk management is used to protect against catastrophe.
What options are available?
Unfortunately, the world of life insurance can be very complicated. With different categories like Term Life, Whole Life, Universal Life, and Variable Life it becomes difficult to even know where to begin. From there, you have additional riders and investment options available inside the contracts. To help simplify the conversation with my clients, I usually start with the caveat that insurance should be used to mitigate risk – not be used as an investment or retirement plan. That said, sometimes unique life scenarios lead us to go with any of the above options depending on several different factors. Such aspects could include whether you or your spouse are business owners, have a high net worth, are looking to make charitable donations, or have some special tax considerations.
What is right for you?
There are many things to consider before applying for a life insurance policy. The easiest answer is to make sure you work with your fiduciary financial planner before deciding on whether you need life insurance, how much, and in what form. Keep in mind, every person’s situation is different and unless you have a trustworthy person in your corner who knows which questions to ask, you might not get the right advice. Someone who is only in the business of selling insurance will only be able to recommend insurance products as the solution to fit your needs. A fiduciary should engage in a "big picture" conversation before making any recommendations because they are required by law to give advice that is in the client’s best interest. And while many insurance representatives are experts in their field and may truly want what’s best for you, they are not necessarily required to act in your best interest. Once your fiduciary advisor reviews your entire financial picture, you can then see what gaps in coverage need to be filled. If you do not have a fiduciary advisor, I invite you to CLICK HERE to schedule your free consultation with us at Physicians Financial Design.
With that said, for most of my physician clients, a simple Term Life policy will fit their needs just fine. In comparison to a permanent policy, the excessive cost compared to a term policy usually outweighs the benefits in my eyes. A simple side-by-side illustration showing the long-term financial outcomes of each option is often an eye opener for clients considering a permanent policy. So, when it comes to term policies, (if Life Insurance is indeed warranted), the biggest questions that need to be answered are "How much?" and "For how long?". Again, to be able to answer those questions, you'll want an advisor who is willing to dive deep into your situation to make an informed recommendation.
Things to consider:
Pros
Can protect your family from financial ruin in the event of your death
Term policies for young people are generally very affordable
Now, more people can qualify for coverage due to advances in healthcare
Death benefits are received tax free by the beneficiaries
Cons
Not everyone can qualify – age, gender, health, and health history affect insurability
Can be costly for older people or if there are significant health issues at play
Men will generally pay more in premiums than women
There are many reasons why people fail to protect their families through strategic use of life insurance, but probably the number one reason is that in order to consider the topic, one must also consider their own mortality. For many people, this is a difficult subject matter to discuss. However, no one is exempt from the possibility of death, so it is imperative that you protect the ones you love from financial hardship if they rely on your income.
Again, I’d like to stress that not everyone needs life insurance, nor would everyone qualify even if they wanted it. The important thing is that you speak to a fiduciary financial advisor to start the conversation and find out if life insurance should be added to your financial picture.
Thanks for reading! For more articles geared toward young physicians and their money, click here or check out The Money Malpractice Podcast on any of the major platforms.
Until next time…KEEP SAVING LIVES AND KEEP SAVING MONEY!
Disclosures
• RichMark Private Wealth Management. LLC is registered as an investment adviser with the State of Michigan, and only transacts business in states where it is properly registered, or is excluded or exempted from such requirements.
• Content should not be viewed at personalized investment advice. Market events and other factors may affect the reliability of the potential outcomes. Simulated growth is purely hypothetical and does not represent actual performance.
• Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio.