Do I need life insurance?

This is a question that many, if not all, people have pondered at some point. If you have been thinking about it recently and you haven’t been able to find the answer to that question or associated questions, this page is for you. And while it may not be filled with as many witty comments [Editor’s note: You mean dad jokes?] as we usually pride ourselves on, it is still definitely worth your time.

Click on any of the questions below to jump to the answer. Hit your “back” button to come back to the top. Or simply scroll through and read all the questions and answers.

What is life insurance?

Life insurance is insurance against losing your life, affectionately known in the medical community as “death”. Life insurance pays your selected beneficiaries a specified amount called a “death benefit” if you die while your policy is still in place.

Do I need life insurance?

 You need life insurance if there is anyone who depends upon your current or future income. This may be a spouse, children, parents, or any other individuals whose financial security is linked to yours. As a physician, you (or someone on your behalf) paid for undergraduate and medical tuition. You sacrificed time and money to learn a skill. You expected that this investment would be repaid, in part, with future earnings from selling this skill. If your life is shortened, the financial return on your investment is reduced.

It can be morbid to think about, but would you have chosen to become a physician if you knew in advance you would die immediately upon finishing your residency? For most people, the answer would be no. That time and money would have been better spent in other ways, time with family and friends for example. But you continued through school and training on the assumption that the sacrifices you made would eventually benefit you and your family over time, during a hopefully long life. You cannot directly control when you will die. Ok sure, wear seatbelts, get flu shots, eat well and exercise! The future is unknown but from a financial perspective, there is indeed a way to ensure that those who assumed they would benefit financially from your sacrifices can maintain those expectations, and that is through the purchase of life insurance.

What kinds of life insurance are there?

There are several different types of life insurance which fall into two main categories: “term” life insurance and several varieties of “permanent” life insurance. Permanent life insurance includes: universal life, whole life, variable universal life, survivorship life, and indexed universal life. Almost every type of policy which is not term life insurance is usually a type of permanent life insurance. One other type to mention is “convertible” term life insurance. This is term life insurance which (for an extra cost) allows you to “convert” the term policy to a permanent policy later.

What is “term life” insurance?

This is insurance which will pay you an agreed upon “death benefit” provided you die during the agreed upon term, and you are current on your premiums. For example, you might have a $1,000,000 death benefit on a 20-year term policy, which costs $1000 per year. As long as you die within 20 years of the start of the policy, your designated beneficiaries will receive $1,000,000. You can stop making payments at any time during the 20 years, and voluntarily cancel the policy if you no longer need it. But once 20 years pass, your policy will usually change such that either your premiums increase (often dramatically) if you wish to continue to be insured or alternately, your benefit will be significantly reduced.

 What is “permanent” life insurance?

There are many different types of permanent life insurance. But the feature they have in common is that there is no specified end date. You can continue to pay the premiums and remain eligible for the death benefit throughout your life. Most have a “cash benefit” in addition to the death benefit. This allows you to receive some amount of cash if you need it prior to your death, or upon cancelling the policy. Some allow loans against the cash benefit. Some types of policies allow you to track an index or invest some of your premiums in stocks-like or bond-like investments, with the goal of increasing your cash benefit or death benefit above what is otherwise guaranteed.

Why should I only buy “term” life insurance and avoid permanent life insurance?

We could write dozens of pages on this topic and not answer this question sufficiently. You can certainly do a web search on this question and find more detail. But here is a very brief, very bare list:

• Term insurance is cheap, permanent life insurance is expensive

• Term insurance is straightforward and easy to understand, while permanent life insurance is incredibly complicated and rarely understood by those purchasing it and even those selling it

• Most people only need life insurance for a specific duration of time (e.g. the “term”) and do not need a life insurance plan that lasts into what might be a long life (e.g. the “permanent” part of permanent life insurance)

• Term insurance is “pure” life insurance: if you die your beneficiaries get paid a set amount. Permanent life insurance attempts to combine many different unrelated features, such as investing, investment guarantees, and ability to take loans.

• Almost no one needs the various features that permanent policies layer on top of the death benefit. And even if so, they can otherwise “buy” those same features more cheaply and simply outside of a life insurance policy.

• It’s nearly impossible to afford to buy the amount of death benefit your family requires when purchasing a permanent policy, which leaves you underinsured

• Permanent insurance companies pay agents/brokers much more in commissions compared to term life insurance. This motivates agents to oversell the benefits of permanent life insurance and recommend these polices instead of term life insurance, even though very few people need permanent life insurance.

There is no shortage of insurance company websites and insurance representatives who will provide you with counter-arguments if you are interested. Are you one of the very rare exceptions who might potentially benefit from a permanent life insurance policy? Statistically, almost certainly not. What un-biased resource will you use to help figure out the answer? Some of those exceptions MAY include:

• Having a special needs child or spouse who may need lifelong care (and you do not or may not have the ability to sufficiently save for them over your earning career).

• Very high net worth which may exceed current (or future) estate tax exemptions

How much life insurance do I need?

This is a difficult question, with many subjective components. You must attempt to calculate, broadly, the financial repercussions of your death on those who depend on your income. If you are single, and no one depends on you financially, you likely don’t need any life insurance at all. But what if you are married/partnered, have children, or perhaps you have parents who are likely to depend on you in the future?

You’ll need to first consider what kind of financial situation will remain for those left behind. Do they still “need” anything from you? Do you want them to maintain their standard of living? Did you plan to pay for your childrens’ education? What about housing? Will your spouse be able to keep going, financially, as he/she expected or had planned for? Don’t forget to take into account that as the years go by, you may build up savings that will pass to your dependents, which reduces your life insurance needs. But also remember that term life insurance has a fixed death benefit, which means over time that benefit will be affected by inflation. In 10/20/30 years what seems like a big death benefit now may not seem so large.

Given the wide range of individual circumstances, it’s difficult to provide generic recommendations for how much insurance to purchase. But we’ll throw out a number you can use as a starting point. For early career professionals with a primary care and/or academic salary of $150,000 to $300,000, start with a default or minimum assumption of a $2,000,000 death benefit with a 20-year term. Those with higher incomes should consider scaling the death benefit proportionately.

How long do I need life insurance?

You only need life insurance for as long as someone still depends on you financially. For example, suppose you have a 10 year old child. He/she needs continuing financial support if you are the primary earner and you die. But what about when he/she turns 18? 24? 30? You would want to consider a term which lasts until you feel your children will be independent. Alternately, you don’t need life insurance after you otherwise have sufficient savings/investments to pass on to your dependents or beneficiaries when you die. Your inheritance to them is a form of life insurance.

If I need life insurance now, will I always need life insurance?

As implied in the previous question, you will likely not always need life insurance. Once you have a policy, you can re-evaluate at any time and simply stop paying on the policy when you feel you no longer have a need for that insurance.

What affects the cost of life insurance?

Anything which increases the chances an insurer will have to pay out on a policy will increase the cost. Are you older? Use tobacco or other substances? Have a medical condition? A concerning family medical history? Male? Excessive BMI? These increase the chance you will die sooner than otherwise and will increase the cost of insurance. In addition, the longer the term the greater the chance you will die during the term and hence a higher cost. And of course, selecting a higher death benefit will also increase the cost of a policy. There are also differences depending on your home state.

What does term life insurance cost?

As mentioned earlier, there are many factors which affect the cost. But we’ll give you one set of numbers simply to give you a general idea. Assuming a healthy male with no risk factors, here are the approximate “cheapest” annual quotes (rounded liberally) for various combinations of age, death benefit, and term:

What are the first steps in researching term-life insurance?

Your first step should be to simply get an idea for the approximate cost. If you are healthy, an easy way is to go to a site such as www.term4sale.com or www.PolicyGenius.com. These allow you to get quotes based on your age, location, amount of coverage, and the term. We much prefer term4sale (we have no relationship with that site) because the website’s layout and input method allows you to quickly see many different quotes, from dozens of different insurers. Also, term4sale does not sell insurance, but simply is a way for independent brokers to get their names “out there” but does not require you to provide any identifying information (not even an email address). By contrast, some sites (such as Policy Genius) get referral fees or a portion of the commission if you buy through them. Thus, there may be some bias in how quotes are presented or promoted. In addition, many sites won’t show you quotes from companies which do not provide them a referral fee. You should be able to purchase the IDENTICAL quote you see on any online site from any independent broker or agent. No agent has any special deals or discounts.

What if I'm a smoker, or have an existing health issue or risk factor?

Getting quotes and buying insurance is somewhat more complicated if you are not “totally” healthy, because each company will treat your issue differently. If the condition is serious (for example, non-curable cancer) you may not be insurable at all. But each company will determine for themselves how much risk of you have of dying early (and thus, your cost for that insurance). You will need to work with an independent agent who can help you figure out your options. In certain cases, your best bet may be to buy extra life insurance when moving to a new employer, because this is a time you can sometimes buy a limited amount of extra life insurance without regards to your health status.

What if I already have life insurance through my employer? 

Many employers provide some amount of life insurance for free. Typically, this is either a fixed amount, or some multiple of your salary. In most cases, the amount of insurance provided is not sufficient for most physicians, and thus you’ll still need your own individual policy. Keep in mind that your next job may or may not provide life insurance, and thus any employer coverage you have now will not necessarily be there for you later.

Does my spouse or partner need life insurance?

If your spouse has income and contributes substantially to the family budget, then they likely also need life insurance. But even if your spouse (or you) does not work outside the home, consider all their contributions to your life. Household work? Child care? Home finances? If your spouse dies, will you be able to continue to earn income from your job in the same manner as previously? You may find that your costs increase if you need to pay for help for someone to perform the tasks previously performed by your spouse. Alternately, you may find your income decreases if you have less time to devote to your job/career if you wish to assume those new responsibilities.

I needed life insurance like, yesterday. How do I get it?

There are three main ways:  1) through your employer 2) through an association or other group e.g. the AMA 3) though an agent or broker

• Employer — Most employers will allow you to buy extra life insurance through the company which provides you your free basic life insurance. In some cases, this insurance terminates when you leave your employer. That is, there is no “term”. Alternately, you can buy term insurance which is “portable” and which stays with you if you leave that employer. Be careful however, as this insurance is much more expensive than you can buy elsewhere. One reason is that insurance companies know that many people will simply buy policies from a “known” name without shopping around. But another pitfall is that insurance you purchase through an employer may be a “group” policy, and typically these are not guaranteed to be “non-cancellable” and “renewable”. Essentially, these are two features you really want in any insurance policy. These ensure that 1) the insurance company can’t arbitrarily change the cost or other policy terms in the future and 2) they simply can’t decide to stop insuring you in the future.

• Association — You can also buy insurance through many associations or trade groups. If you are a physician, we’re certain you’ve received insurance solicitations through the American Medical Association or another similar group. Association-based policies are rarely your best option. If they are cheap, it’s likely because they are not “non-cancellable” and “guaranteed renewable” which are features that almost everyone should have in a term-life policy. But if they do include these features, the insurance is likely to be more expensive than insurance you can buy through an independent agent.

• Agent/Broker — Your best bet is to contact an independent agent after you’ve researched quotes on a site such as www.term4sale.com. You can simply call an agent and say “I saw a specific quote for term life from Company X for $Y. Please make this happen”. Almost any independent agent should have access to that policy, at the price you saw online. But be careful if an agent tries to “up-sell” you to another product you don’t need. We’re especially thinking about a permanent life insurance policy. These make much more in commissions for agents when compared to term life insurance and an agent may try to convince you to look into permanent policies. If this happens, just re-state that you are only interested in term policies. If there is any resistance, just hang up and try another agent. Life is too short to do otherwise. Now, if an agent also later suggests you consider renter’s/homeowner’s insurance, auto insurance, or other products well, that’s fine. They do have a business to run, after all!

What health information will I need to provide?

Short answer: potentially everything. An application will ask you about personal risk factors (existing conditions, substance use, etc) as well as family history. In addition, you may be asked to provide the names, dates, and contact info for every physician you have seen in the past 5 or so years. This includes routine office visits, ED visits, hospitalizations, etc. Each insurer may contact your health providers and request your medical records. You may also be asked to provide urine and blood (which will be screened for infectious diseases, lipid status, drug use, etc) as well as have your height/weight/BP recorded. Based on your records, they may ask for follow-up information. Don't lie! You run the risk of having your policy voided at the worst possible time (for example, after you die) if they found that you knowingly withheld information.

Do I need life insurance on my children?

No, unless your children provide substantial income upon which you depend. We should all be so lucky!

I’m being offered several “riders”? Do I need any?

A rider is just another term for an optional addition to a policy. Sort of like adding a moonroof when purchasing a car. In general, you don’t need any of the riders you may be offered. We won’t go through all the possible riders, but we’ve rarely seen a rider which was really necessary. One rider to mention which is usually free and comes with most polices (or can be requested) is an “accelerated death benefit” which allows you to get amount of your death benefit prior to death for certain terminal diagnoses (e.g. expected death within 12 months).

Does it matter which company I buy my insurance from?

In general, you should just go with the cheapest option. Life insurance is easy, in that if you die, your beneficiaries get paid the agreed amount. There is no way for any company to have a “better” product. Cash is cash! HOWEVER, there is one factor to possibly consider. What if a company goes bankrupt during the term of your insurance? For example, say you have a 20-year term policy, and in year 4 your insurance company just folds. In this case, you’ll end up with no policy and may not be able to get new insurance, if for example you’ve developed a health condition in the interim. Also, any new policy may be more expensive. This is why you’ll see insurance companies which have financial ratings. It’s a subjective measure of their financial health. This can change fast, but “healthier” companies are more likely to remain in business longer. The counter-side to this is that even if your company goes out of business, your policy is almost certainly likely to be picked up “as is” by another firm and you’ll just continue as if nothing ever happened (apart from a new logo on your statements and perhaps a new address to mail your payments). If you stick to one of the many “A-” or higher rated companies, you’ll be fine.

Should I pay my premiums annually or monthly?

It can be cheaper to pay your premiums annually rather than monthly. Don’t assume that your monthly payments add up to your annual premium divided by 12. Sometimes the cost is the same, so just be aware of this. And don’t forget to pay your premiums! You run the risk of having your policy cancelled because you missed an email or snail mail reminder. If you bought through an agent, he/she will be notified of a late payment and will help contact you to make sure you make the payment before any grace period for cancellation ends.

What kinds of commissions do agent or brokers make on term life policies?

This can vary dramatically. But one common arrangement is for the agent to receive 70-130% of your annual premiums when you buy the policy, plus 1-2% of the annual premium each year for some number of subsequent years. This is a VERY rough estimate, just to give you an idea. In general, you needn’t worry about the commission and just buy the cheapest policy which meets your needs.