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Life Insurance: What Kind Should You Buy?

by Lawrence B. Keller, CLU, ChFC

Why Purchase Life Insurance

A life insurance policy is a contract with an insurance company that will pay your beneficiary a sum of money in the event of your death.  If you're married, have children, or have an outstanding mortgage, you should make sure to purchase enough life insurance to allow your family to maintain their lifestyle or to replace your full economic worth, also known as your "human life value".

There are many types of life insurance policies available in today's market.  However, all policies fall into one of four categories – Term Life, Whole Life, Variable Life, and Universal Life.  For purposes of this article, I will limit my comparison to term and whole life insurance.

Term vs. Whole Life

Term Life

Term life insurance is usually the most appropriate for resident physicians.  It allows you to purchase the largest death benefit while minimizing your (initial) premium outlay.  Term insurance offers pure protection and does not build cash value. 

When you purchase a term policy, you're buying coverage for a specified period of time.  If you die within the term of the policy, the insurance company will pay the death benefit to your beneficiary.  The majority of term policies purchased today have fixed premium rates for 5, 10, 15, 20, 25, or even 30-years.

It is important to note that there are two types of level premium term insurance available. The first type is guaranteed premium level term, where the premiums are guaranteed to remain level during the entire term of the policy. The second type is non-guaranteed premium level term, where the premiums are only guaranteed for a limited time period such as five or ten years. Once the guaranteed period ends, the insurance company reserves the right to increase your premium rates.  Generally, you should avoid purchasing a policy that does not have a fully guaranteed premium rate for the entire term of the policy.

Term insurance is best used to cover short-term needs or when your income level makes the proper amount of whole life insurance unaffordable.

Whole Life

While providing the security of a death benefit, whole life insurance policies also build cash value.  When you purchase a whole life policy, you traditionally pay a fixed premium rate for the life of the policy.  Part of your premium payment goes to the insurance company to cover the cost of the death benefit, while the balance is invested in the insurance company's general account.  The cash value of a life insurance policy grows on a tax-deferred basis and can be accessed through policy loans or by surrendering the contract.

In addition, life insurance is considered an "exempt asset" in many states – and is specifically protected from the claims of creditors, including malpractice.  However, state laws vary widely when it comes to protecting life insurance.  As a result, it is important to know whether or not your state exempts some, all, or none of the cash value in your policy.  If you are in a state with an unlimited exemption, besides helping you accumulate wealth, your whole life policy can play a vital role in your estate and asset protection plan. 

Unfortunately, the advantages of whole life insurance have been minimized or often overlooked by the financial services industry.  As a result, you may have read or been taught that you should "buy term and invest the difference".  This strategy calls for term insurance to be owned for a period of time and then cancelled when your other assets are considered to be "adequate", typically at the start of retirement.  What you are not taught is that this strategy simply does not work! 

In fact, by properly coordinating and integrating whole life insurance with other assets you can enjoy increased access, flexibility, and control over your wealth throughout your lifetime.  This culminates with retirement options that may otherwise not be available.  It is for these reasons that whole life insurance should be the heart of a physician's financial plan.

Other Features to Look For in a Policy

Term Conversion Option

A large number of term policies allow you to convert some or all of the death benefit of your term policy to whole life regardless of your future health.  This is an extremely valuable feature for residents and fellows, whose income and financial situation will change dramatically once their training is completed.  Ideally, if your goal is to convert to whole life, you should only purchase your term policy from a company that has a reputation for offering a broad array of competitive whole life insurance policies.

"Waiver of Premium" Rider

Another important aspect of a life insurance policy is the waiver of premium rider.  This rider enables you to have the premiums of the policy paid for by the insurance company in the event of your disability.

While most companies offer the waiver of premium on all types of life insurance, there is no more important application of this rider than with whole life.  In addition to providing for the continuation of life insurance protection, the savings component of the policy is also maintained as cash values continue to build.  This characteristic provides a unique benefit to the policyholder that cannot be matched by even the best stocks, bonds, or mutual fund investments.

Summary

Life insurance can be used to help physicians accomplish a variety of goals.  The type of life insurance that should be purchased depends on such factors as your age, health, budget and long-term financial plans.  If you are considering the purchase of a new life insurance policy, or replacing an existing policy, it is best to consult with a knowledgeable insurance agent that represents several companies.  He or she can then review your situation and help you make intelligent and informed choices regarding your life insurance protection.

Lawrence B. Keller, CLU, ChFC is the founder of Physician Financial Services, a New York-based firm specializing in income protection & wealth accumulation strategies for physicians.  He can be reached for comments or questions toll-free at (800) 481-6447, or by e-mail to lkeller@physicianfinancialservices.com.

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Andrew Schwartz's S.O.S. for Savings

by Andrew D. Schwartz, CPA

2004 is more than half over.  Think back to the financial resolutions you declared on December 31, 2003 just as the ball in Times Square was dropping.  Have you made any progress toward your savings or debt reduction goals?

If you're like many of your colleagues, there's a good chance that you have trouble saving money.  To help you out, we've put together an answer to your S.O.S. for savings:

• SET a reasonable savings or debt reduction goal for the year

• OPEN a separate account to hold the savings

• SYSTEMATICALLY add to the new account or pay down your debt throughout the year

Ask any good saver, and they'll tell you that the most effective way to save money over time is to do so systematically. Most people find that they will not meet their savings goals UNLESS they plan ahead and set aside a fixed amount of money each month. For example, someone looking to save $6,000 per year will meet their goal only if they attempt to transfer $500 every month into a separate savings or mutual fund account. People who don't save systematically during the year and hope to have that $6,000 sitting in their checking account at the end of the year generally fall short.

Another benefit of saving systematically is that you take advantage of a concept known as Dollar Cost Averaging. The theory behind dollar cost averaging is that, when you're buying shares of a mutual fund, you're buying an asset that fluctuates in value. By purchasing the same dollar value of the fund each month, you'll buy some of the shares when the price of the fund is low, and will buy other shares when the price of the fund is high. But you reduce the risk of buying ALL of the shares when the price of the fund is at its highest level.

Most mutual fund companies, in their never ending quest to bring in assets, allow you to establish an automatic savings program to purchase additional shares of their funds. In connection with setting up your account, you can instruct the mutual fund company to transfer a set amount of money from your bank account into your mutual fund account on a monthly or quarterly basis. Some companies allow your to transfer as little as $25 per month.

If you participate in your employer's 403(b) or 401(k) plan at work, you're already taking advantage of an automatic savings program.  Other popular ways to save systematically include 529 plans, Education Savings Accounts, and IRAs.

Before the summer is over, consider either signing up for your first automatic savings program, or increasing the amount you're already socking away each month or quarter.  Whether you see the proverbial glass as half-empty or half-full, on July 1st, the year is half over, but you still have six full months to work on meeting your 2004 savings and debt reduction goals.

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