Physicians come out of medical school highly educated and anticipating a career that will be rewarding in every way — including monetarily. Not surprisingly, this makes them perfect targets for people who sell life insurance.
Doctors have more money than time, and are justifiably proud of their ability to grasp complex subjects quickly. But what life insurance agents know that most doctors don’t is that there are a wide range of life insurance products available – and that the most expensive, most profitable products may not be the best ones for every doctor in every situation. When it comes to medicine, the average doctor knows far more than the average life insurance agent ever will. But when it comes to life insurance, it’s surprisingly easy to get fooled, unless you’re willing to take the time to really dig into the details and know the right questions to ask.
Life Insurance Basics
There are three main kinds of whole or permanent life insurance: traditional whole life; universal life; and variable universal life. But it gets confusing fast, with variations, sub-types, and sub-categories.
Doctors are aggressively sold cash value (permanent) life insurance, which combines an investment product with life insurance. It often sounds appealing to young doctors who don’t have time to invest.
These are really profitable policies for the agent to sell, for a number of reasons. First, these policies are complex, with substantial downstream potential tax implications for funding or not funding the policy at specified levels. Second, there are fees that really add up over time.
These policies cost much more than term life insurance, which is more straightforward. It’s like car insurance – pay every month and hope you’ll never use it.
It’s called “term” insurance because the policy has a specific monthly cost for a specific term. Rather than an open contract that runs for life, you choose a 10, 20, or 30-year term.
When should you buy life insurance?
It’s best to buy when you’re young and healthy, to lock in a long-term strategy.
Buy when you have dependents: a spouse, children, or parents who are dependent. You’ll need more life insurance when you’re young, and the family can’t afford to lose your income. You’ll need less as you get older, although it sometimes needs to be considered when estate planning.
It’s good to diversify
Buy from different insurance companies and “stack” your coverage: a 10-year term policy from one firm, 20-year term from another, and a 30-year term from a third. As your wealth grows and risk shrinks, you can pare your coverage back.
Summary: Life Insurance Dos and Don’ts
Do talk to a broker or independent agent. They work for you, not the life insurance company. They’ll help you navigate the complexity.
Do work with brokers or independent agencies that specialize in working with doctors.
Don’t speak only to a captive agent who works for a life insurance company. Their incentive is to sell you the most profitable policy they can.
Do buy term insurance — it’s the right answer 95 percent of the time.
Ravi Davis is founder of Hippocratic Financial Advisors, an organization dedicated to growing physician’s financial health and well-being.