Financial Planning For Resident Physicians, Item #8 Protect Your Loved Ones
This is the ninth article in a series dedicated to helping the resident physician take steps to put their house (financial and otherwise) in order. My previous articles on the subject may be found here.
I have a friend who got married during college to an impressive young man who wanted to be a doctor. After working hard in his undergraduate years, he was accepted into medical school and my friend and her husband moved out east so that he could begin training to become a doctor.
Not long into his schooling my friend’s husband passed away in a tragic accident. She was left a widow with a young child and one on the way. You might imagine the hopes, dreams, and plans that were built upon their marriage, and how shocking it was for my friend when all of a sudden her life was turned completely upside down.
What would happen to your loved ones if you died today?
I suppose that it’s not a pleasant thing to think about, but some day we are all going to die. We don’t have the benefit of knowing beforehand when that is going to be so that we make sure our lives are in order and so that our family is well prepared to weather the emotional storm that follows the death of a loved one. Because a premature death is unpredictable, life insurance provides an important measure for helping lessen the burden created by your untimely death.
If you’re a resident and married, it’s almost certain that you need life insurance. If you’re not married, you may consider getting it so that you can “lock in” coverage while you’re young and healthy. Without an influx of money at an early death, how will your family plan their future with you gone?
I’ve met with people who have told me that they aren’t going to get life insurance because their spouse would just sell the house, move into their parents’ home, or just get remarried. As I’ve had these conversations, what I don’t like about these ideas is that they require rapid, life-altering decisions to be made relatively quickly after your death and at a time of great vulnerability and emotional instability. For those who are banking on their loved ones moving in with the in-laws or other family, you’ve just required that at your death your family become dependent on someone else. Do you really want to do that?
Life insurance isn’t a cure-all, but it can take care of your family’s financial concerns for a period of time—sometimes an extensive period of time. You’re family will be grateful for that planning.
How much life insurance do you need?
There are a number of ways to determine how much life insurance to get. Here are a few to consider.
The first, and most simple method, is the ten times income approach. For example, if as a resident you’re earning $60,000, simply times that by ten and the life insurance amount you should purchase is $600,000. At my first job as a financial advisor, we sold a lot of insurance. I found that even with more technical analyses, people’s life insurance needs often came to around ten times income.
Alternatively, you could conduct a more detailed analysis. There are a variety of ways to do this, but generally speaking, it means doing something like the following:
Funeral and other final expenses
+ Amount needed to pay off existing debts (such as mortgage, car loans, etc.)
+ Amount desired for future goals (education for kids, etc.)
+ Amount desired for family to live off of and for how many years
= Amount of life insurance needed
So while requiring a little more thinking on your part, the detailed analysis method still gets you to a reasonable life insurance need.
Another method of determining how much life insurance to get focuses on how much yearly income you would like to leave your family, assuming that the lump sum death benefit were invested and achieved a reasonable rate of return. This type of planning requires us to make a few assumptions. Here are some examples, but you will need to determine what you feel is reasonable for your unique situation.
Let’s assume that at your death your loved ones invested a $1,000,000 life insurance benefit and were able to achieve an average 6% rate of return going forward. We’ll also assume that inflation erodes purchasing power at an average 2.5% annually. Under these assumptions, your family would be able to withdraw 3.5% (6% - 2.5%) per year with the expectation that future year fund withdraws keep up with the rising cost of living while never diminishing the principle.
In practice, we don’t achieve average return or average inflation rates every year, so adjustments would be necessary during the lean years of return, as well as during years of plenty.
Term v. Permanent Insurance
As a starting place, it’s worth mentioning that “permanent life insurance” and “whole life insurance” are interchangeable terms. Because advisors sell the product under both names, I use each of them to refer to the same product in my writing.
Term insurance is temporary insurance. You purchase it for a set number of years and then after those years are up, if you want coverage, you will need to undergo another health screening and pay for an entirely new policy. Because the cost of life insurance is based on your age and your health, it’s often advantageous to buy a policy when you are younger (and likely healthier) so that you benefit from less expensive rates. This also protects you against the possibility of losing the ability to obtain coverage if you experience a negative health event.
Unlike term insurance, whole life insurance lasts as long as you do if you pay for it throughout the duration of the policy. Sometimes whole life coverage requires payments for your entire life, or until age 65, or 20 years, etc. It depends on the structure of the policy.
Because permanent life insurance provides a guaranteed death benefit, the cost of coverage is generally much more expensive. If you’re looking for a guaranteed death benefit at a date further out than a 20 or 30 year term insurance policy allows, permanent life insurance is a tool that can provide that guarantee. But make no mistake about it, insurance companies aren’t in the business of losing money. You pay a pretty penny for that guaranteed death benefit.
It is my opinion that most resident physicians, attending physicians, dentists, attorneys, teachers, husbands, mothers, bricklayers, and human beings generally, are likely to benefit more from the purchase of term insurance combined with a prudent saving and investment strategy than the purchase of a whole life insurance policy.
Stay-at-home spouses need coverage too.
The financial contribution by stay at home spouses is very real. So there’s a huge financial impact to account for if they were to pass away suddenly. If something happened to your stay-at-home spouse and you were left alone, how would you manage?
Life insurance can provide flexibility so that the working spouse can take time away from their job to be with the kids, as well as pay for help that will be desperately needed.
Some final thoughts.
Life insurance isn’t fun to talk about, or even fun to buy. Working with insurance companies can be a pain in the you-know-what. But it’s something that needs to be done.
It seems trite to say, but life insurance can be an expression of love. The money left behind won’t ease the pain your family experiences if you die prematurely, but it will leave them with an appreciation that you cared enough about them to be financially prepared for the worst.
These are my opinions, unless I’ve specifically cited other material. The information and ideas I’ve presented are for information purposes only. Before you implement anything, make sure you have a thorough discussion with a qualified professional who understands your situation.