By: Mark Maurer, PhysicianInsure

 

Whether you’re just graduating or have your own established practice, the main driver behind most physicians’ purchase of life insurance is to ensure your loved ones are taken care of if you are no longer alive or, at the very least, to avoid being a financial burden on these loved ones at death.

 

The purchase of life insurance is typically for: (a) Income replacement — if you are alive, you can earn a salary, and at time of death leave a lump sum of money that will earn a similar amount annually to replace that income; (b) Income creation - if you never quite got enough savings for you and your loved one to live comfortably for the duration of both of your lives, life insurance creates an additional sum for the survivor since you’ll most likely spend down your savings together (nest egg renewal); and (c) Asset preservation — this is estate planning, where you spend your whole life building up assets in the form of a practice or real estate and you do not want it to be dismantled or depleted at death by Uncle Sam.

 

Income Replacement:

The concept is fairly straightforward. If you are not alive to earn income, there is a sum of money earning it in your place. How large that sum of money is depends on some key factors: the amount of other liquid assets already in place; how long you want this income replacement provided (usually until normal retirement age, but sometimes people feel their loved one can/should go back to work after a period of time); a reasonable rate of return this money can earn; and whether or not inflation should be taken into consideration.

 

While each physician’s situation presents its own set of circumstances, a general rule of thumb about how much life insurance is needed depends largely on age. (The younger you are, the more income you’ll earn over your remaining lifetime.)  Also, since most people tailor their lifestyle to their income, the insurance industry has set general guidelines based on multiples of annual income.

  Ages                               Multiples of Annual Income

30-40                                         20-25

40-50                                         15-20

50-60                                         10-15

60-70                                          7-10

 

Term insurance is generally best-suited for this type of need. Term insurance has set periods of time that premiums are guaranteed level: 10 years, 15 years, 20 years, 25 years, and 30 years. The longer the premiums are guaranteed to stay level, the higher they’ll be (so 30-year term costs more per year than 20-year term). And since the amount of income needing to be replaced goes down as you age, it is common practice to “layer” the coverage, buying two term policies with differing term lengths.

 

For example:

A resident, age 30, making $65,000 per year may want 20 times earnings or $1,300,000 but may buy a $1,000,000 20-year term policy and a $300,000 30-year term policy, giving him $1,300,000 of coverage for the first 20 years, and $300,000 of coverage between age 50 and 60.

 

While life insurance can replace income at death, equally important for physicians in their working years is Disability Insurance, which replaces income if you are injured, disabled, or seriously ill. After all, while you are unable to work, you’ll probably still be responsible for your practice’s overhead expenses, and you wouldn’t want your retirement plan to go unfunded.

 

Income Creation:

The other basic part of life insurance protection is more permanent. These needs are the final expenses, the final medical charges, plus the replenishment of savings/investment accounts. The unique characteristic of life insurance is that it jumps in value at exactly the time it is needed most.  At death, there are certain extra, one-time expenses that must be paid. Even if you have investment dollars that can be used, that usually means your loved one who is grieving must make a decision about which assets should be liquidated … and it could be at a very inopportune time. Life insurance is paid in cash, freeing your loved ones from tough decisions at a tough time.

 

If you do not have someone who relies on you for income, you may still choose to purchase life insurance to pay off debts so they are not a burden on someone at your death. You would want to cover such things as mortgage, college loans, personal debt, and possibly final expenses (funeral, etc.).  Actually, oftentimes, life insurance is a prerequisite for loan approval. And income creation is not always a stand-alone issue; it is often combined with income replacement when considering the total insurance needs of a physician client.

 

Asset Preservation:

While estate tax laws are ever-changing and there are both state and federal estate taxes, generally there is a high tax (can be over 50%) on estates over a certain amount (say over $3,000,000). Currently, the law allows an unlimited amount to pass on to a surviving spouse at the first spouse’s death (called unlimited marital deductions) so that no tax is due until the second spouse’s death. So for estate tax purposes and those who wish to pass on most of the estate to their surviving spouse, the insurance industry has developed a life insurance product called “Survivorship,” also known as “Second-to-die.” This type of policy is less expensive than insuring both spouses separately.

 

However, estate planning often takes into account more than just taxes. Many times, estate planning comes into play if you want certain assets to be passed on intact (like your practice, a farm, a residence, or a personal collection). Therefore, to balance the estate or equalize what each beneficiary will get, life insurance is used to generate cash so all beneficiaries are treated equally.  Insurance is also a great way to pass on a legacy to your children or grandchildren.

 

PhysicianInsure is a national provider of insurance designed exclusively for physicians. For more information or for a confidential quote, please contact us at: info@physicianinsure.com  or 877-962-8737.