Buying Life Insurance for physicians is not as simple as getting it for most people...
Don't let your careers allow you to be sold a product that you neither need nor want.
Physicians generally need life insurance just like ordinary Americans. But -they have many special considerations when they shop for insurance including their student debt, high relative income, and the potential delay of them receiving this income. Although many insurance agents might suggest whole life insurance for physicians we still believe it is the exception not the rule. Physicians need to take special care to calculate their real insurance needs.
Life Insurance for Physicians:
Doctors need life insurance. If you are a doctor = you need to shop for a policy. Term insurance is far less expensive than whole life and is a best bet for most. Physicians because of their high income have more specialized need when determining their life insurance needs.
Doctors have special life insurance considerations.
About Physician's Insurance Needs:
The average American physician earns about $299,000 in salary. Orthopedics and Plastic Surgeons average out in the highest specialty. While Public Health and Pediatrics being the lowest paid specialty. But these simple statistics hide other more important and salient details. The average medical doctor will have about $166,750 in student loan debt! What may sound like a high salary, in general for the first ten or so years will go towards paying down this extraordinarily high student debt.
The ratio of debt to income must be a strong consideration when shopping for life insurance.
A Note About Insurance:
There are several factors that are specific to doctors when shopping for term or whole life insurance.
Doctors are unique and have numerous special considerations:
- High Income
- Potential Student Debt
- A Longer Waiting Period toward making good money
What Makes Doctor's Needs for Life Insurance Different:
There are a number of lifestyle and life insurance considerations that make doctor's situations more unique. Among them:
More details on each of these reasons can be found below.
Doctor's Relative high Income:
With docs earning on average just under $300,000 per year, they make a lot of money. What is less obvious about this is that their career is more safe, likely than others. In other words its much harder to be fired, so to speak. If you own your own practice and bring in $250,000 per year there is a higher chance that this will be the case.
Relative High Debt of Docs:
This is also a huge distinction between physicians and other high earners. Yes lawyers and financial management people also have high debt, but often they do not have to go to school for so long and are not forced to do residency requirements. The fact remains doctors keep a bunch of debt for awhile.
Physician Net Worth Slow Lift Off:
Simply because often doctors are 30 plus before they start earning real money, they end up behind for awhile. This is not to say that they will not make up for it later, but in the beginning it can be a problem. This is obviously a problem for doctors that have children at ages such as 32 or 36 years old.
Another consideration concerns individuals savings. Doctors generally are not able to contribute to their ROTH IRA when they are young and earn too little or later when they do make more money, but likely far more the federally allowed ROTH IRA income limit.
Higher Rate of Self Employment...:
There is absolutely nothing wrong with self employment. Its just that it is different. Often small businesses do not have corporate 401K plans. Working for smaller practices has numerous benefits but often qualified savings accounts and company perks are not part of them.
A Slightly Lower Level of Financial Knowledge:
This is a generalized statement and might not apply to you. But doctors are generally really smart, but less so on personal finance. If you are a personal financial gurus - congrats! If you are not, you may want to hire a financial planner. But both kinds should beware. As our section below details physicians often are a targeted group of financial pros...
A Potential Increased Need for Business Life Insurance:
We will not fully get into this topic because its beyond the scope of this article. However physician practices may need various types of business life insurance such as Key Man Insurance and Buy Sell Agreements. Both of these are relatively complex concepts. You would want to speak with an attorney about them before you talk with an insurance agent. Be aware that these things do exist.
Whole Vs Term Life Insurance for Physicians:
As a physician - you should know that you have a target on your back! That is correct, doctors are routinely sold to by armies of financial individuals: Financial Planners, Accountants, and even Insurance Agents. Many insurance agents specialize in selling whole life insurance to doctors.
This is not in and of itself a bad thing. Having specialists that understand a doctors lifestyle can make good sense. But it ceases to be a good thing when they sell you something that you may not need.
Do doctors need whole life insurance? Maybe, maybe not. Certainly there is no more need for a doctor to have one of these policies than an executive.
Do doctors need term life insurance? Probably, but not certainly. Many physicians that work in certain practice groups have a group life insurance policy. If you do, it might be for a high amount.
Life Insurance Calculations for Physicians:
It is commonly suggested that consumers carry ten times earnings in life insurance. Since docs have a much higher wage, this might be an overstatement. Perhaps eight times is a better rule of thumb.
If you carry one or two times earnings from a group policy you will want to have this part removed from your eight times earnings calculation. A sample calculation could look like this:
Doctor Makes $400,000
Doctor Might Need 8 Times Earnings: 8 X $400K = $3.2MM
Has Two Times Earnings Group Life 2 X $400K = $800K
Therefore: $3.2MM - 800K = $2.6MM in Life Insurance
In this example a doctor earning $400,000 ends up needing to buy $2,600,000 in life insurance. This is a lot of insurance and is probably unaffordable in a whole life contract. Via a 20 year Term Life Insurance policy, a Female, Non Smoker might be able to get a John Hancock policy for as little as $1,670 per year. That same quantify of insurance in permanent form might cost her $16,000 per year.
A More Advanced Life INsurance Calculation for Physicians:
When buying this much life insurance though, I think its a failure to just use a rule of thumb. A better more in depth method will involve calculating your total net worth. Your net worth is all of the money that have in stocks, mutual funds, bonds, savings account, home equity, rental properties, etc. Then subtracting out your total debts: mortgage, car loans, credit card debt, private debt, and yes your student loans.
EXAMPLE A: $200K 401K + $80 Home Equity + $100K Savings Account = $380K Total
Then, separately consider your "financial needs." This can be difficult to explain to someone and is very personalized. Think of it this way: What are your financial goals, who are you financial taking care of? Children and or a spouse? Consider their costs (and increased costs) for a period of time until the children are out of the house or your husband/wife retires. A simple way to do this is to take all of your annual costs and multiply by 20 or 25.
EXAMPLE B: $150K Needed Per Year * 25 Years = $3.75MM
Now simply subtract B from A to determine your life insurance needs:
Final Example: $3.75MM - $380K = $3.37MM in Life Insurance Needed
Of course if you have a group life insurance policy offered through work you would want to reduce this number further still. This is a much more nuanced and specific approach for term life insurance needs. I prefer it. When a client comes to me having already gone through this process I know that they have done their homework. In our example the pure life insurance needs showed almost the exact same numbers $3.2 vs 3.37. This was just happenstance and usually will not be the case.
A Quick Note:
Many people (as in non lawyers and non accountants) may tell you to avoid using student loan debts in your calculation. I am not suggesting this. Why? Because this topic is beyond the scope of my expertise. Does your surviving spouse have to pay off your student loan debts if you pass? Possibly not, but this is a complex topic. I would caution you from taking this advice from any non bankruptcy attorney.
Sample Term Rates Physicians:
Below is a simple chart of pricing for twenty five year $1,500,000 term life insurance policies.
Banner Life INsurance Sample Life Insurance Rates $1,500,000 - Non Smoker
Various Ages, Various Sex, Various Classes, CA, 25 Year Term
$1.5MM 25 Year
Female Age 35
Female Age 40
Male Age 35
Male Age 40
*all sample pricing - subject to change. All prices per annum.
Great Insurance Solutions, Doctors:
So what exactly does all of this look like? Here are some examples of physicians becoming insured.
"Do I Really Need a $1,000,000 life insurance policy?"
The working Doctor, mother, and wife outside of New York City. With student loan debts of $650K and and an income of about $550K per year. This 35 year old opts for a $2MM 30 Year term policy from Banner Life Insurance.
The stay at home mother who is married to an attending physician, feels that she would like her own life insurance policy. She buys a 20 Year, $1MM policy from AIG. Her husband also has his own independent term life insurance policy.
The working Doctor Couple, both are physicians. They each carry little student debt and do not plan on having children. They are early saving to become physicians abroad. They each opt for a small $500K term policy through the Principal.
The Cosmetic Surgeon who no longer has any student loan debt. He has an incredible two times earnings in group life from his physician network. He still decides to go ahead and purchase a $1MM term policy through SBLI to make sure that his family is well cared for, He realizes that this is probably too much, however since the 20 year policy was so cheap, he went with it anyways.
The Working Doctor with a Stay at Home Mom in Ohio who was denied a separate policy from his Home Auto Life Insurer procures a $2MM policy through Pruco Insurance. This twenty year policy is relatively expensive due to the doctors health issues. He has since moved his home and auto coverage.
The California Super Mom outside of Los Angeles. She is the sole working individual and has a gigantic $4MM 30 year term policy through AIG. The policy does cost her a pretty penny, but since she works in the ER is she aware that things can happen at any moment.
The couple outside of Chicago Illinois who are both physicians. They have lots of kids and their net worth is conservatively placed at about $4MM dollars. They each have a one times earnings group employer policy. After a long and exhaustive search they each decide to plunk down to purchase $2MM whole life insurance policies through Ohio National. These participating policies they believe will allow for both insurance and a financial savings account. Since they have over $800K in short term and medium term savings already they are comfortable knowing that they will be able to make the high annual premium payments even if one of them would not be able to work.
Summary of Life Insurance for Physicians:
Buying whole or term insurance when you are physician is an important thing to do. In general this site is a proponent of term insurance for most. However since physicians do make real money its possible that a well thought out whole life contact could make sense. Calculating life insurance needs for physicians is much different than the general public calculations.
Questions About Doctor's Life Insurance:
Kindly send along your questions email in the comment box below or direct to scott @ marindependent.com
Question: Do all Doctors need life insurance?
Answer: No, not all Physicians need life insurance. However many do. It depends on your family and your financial situation.
Question: What happens if I, as a doctor, cannot afford the term insurance that my family needs for me to have?
Answer: If you cannot afford the term insurance that you need for your family there is no great solution. The best possible answer may be to buy what little term insurance that you can afford for now and purchase more at another time.
Conclusion Whole Vs Term Life - Doctors:
Thank you for Reading our article about physicians and life insurance.