“How much can I get for how little?”
This is the usual question from a potential buyer of “term” life insurance.
But for our residents, fellows, and young physicians who want to protect their life and their family, it’s an incomplete question.
The better question is, “How can I inexpensively protect my family from bad consequences while we buy time for our assets to grow to a point where we won’t need Life Insurance anymore?”
Thinking through potential bad things that can happen is no fun, especially with the understanding that the probability of something catastrophic happening (other than death) is highly unlikely to happen to you.
And you’re right. It is not going to happen to you. That’s right… it is statistically NOT going to happen to you.
But it does happen to some, and when it does, the consequences are either tolerable or devastating, leaving one either emotionally comfortable or severely distressed.
Keeping in mind that insurance, by nature, is intended to cover “low probability/highly severe financial consequences”, there is a difference between “inexpensive” Life Insurance (the goal) and “cheap” Life Insurance (the mistake).
So, what makes term life insurance “cheap”?
After 24 years of working exclusively with physicians, I’ve experienced a lot. The issues that follow are very real. (We’ll just leave it at that, but I can tell you that I am much more “mindful” of structuring Term Life Insurance now than I was 24 years ago…)
So, let’s look at an example of this low probability circumstance happening to someone like you.
A Physician, age 30, buys a $1,000,000, 20-year Level Term Life Insurance policy. She is delighted because, after a comprehensive search, she found the least expensive contract. She got the best rating class possible: only $25.73 a month. Such a deal!
Then, at age 42, with three young children, she is diagnosed with MS and is partially disabled and can practice only part time.
By age 45, she is totally disabled and not working at all.
So, here’s the situation. Typically, if one is disabled early in one’s career, one has not enough time to attain enough assets for retirement (and other objectives, such as a child’s college tuition). This is because the monthly benefits being received from one’s disability insurance benefits leaves little to save. There simply is not enough money.
This was the reason for purchasing the term life insurance 15 years ago.
Now the life insurance takes on greater value. It’s there to do what was intended: to make sure there are assets there for the family.
But does it?
Here is what her Life Insurance policy can and cannot do for her and her family…
This was the lowest premium, and it is, indeed, a cheap policy:
- She has 5 years left on her 20-year level term. Then you know what happens at the end of the level term? It becomes very expensive, onerously expensive, and increases in premium every year. So, with a tight budget, it quickly becomes unaffordable at just the wrong time.
- She is now uninsurable and cannot get a new policy.
- Her policy could have been convertible to a longer term, but only during the first 10 years.
Talk about stress. At a time when one is emotionally vulnerable, now there is additional stress.
So, how could this have been avoided?
There could have been a longer “conversion” period put on the original policy. This would have allowed for the policy to be stretched to a longer term.
A conversion to a “permanent” policy is no bargain at this point; it has a much higher premium; it is around $1,000 per month; $12,000 per year, year after year. But, at least one would have had the option.
Please Note: longer conversion periods cost pennies more per month but need to be applied for and put on the original policy at inception.
Could a better decision have been made back when the policy was originally purchased?
The answer is “yes”. There could have been a “Waiver Of Premium” Rider on the policy.
Waivers differ with each Insurer, but “strong” waivers waive premiums when one is totally disabled… and continue to waive them past the “level” term period… Many will waive it all the way until one passes, no matter how long one lives.
Disability waivers typically cost about $12 – $15 per million per month.
If this had been part of the policy, the contract would have stayed in force free of charge.
So, the result could have been less stress, knowing that one’s family would be getting that $1,000,000 no matter how long or how short one’s life would have been.
Could decisions have been made that would have been even better than this?
The answer is “Yes”. This could have been a contract with the ability to both “waive” the premium and then convert it to a permanent contract, which, if one is totally disabled, not only waives premiums, but it funds itself, that is, the Insurer pays the premium.
Now that same $1,000 per month is deposited into the contract by the Insurer and would have been building a cash reserve for the insured that could have been accessed later in life.
At age 65, the cash would have probably been in excess of $500,000… and, of course, there’s the Life Insurance.
Now, instead of stress, there is the emotional comfort of knowing that one’s family is financially sound no matter if one lives a long time or dies prematurely.
There’s a little bit more to this story…
A “20” year level term is, by far, the most common “term” chosen by young physicians, and, with me having been around for 24 years, many of those 20-year terms are coming to an end.
As mentioned before, once the “level” term ends, these contracts get incredibly expensive. No one ever keeps them.
The thing is, many, now at age fifty-something, still want some life Insurance. “The kids are still in college.” Not quite enough yet in the Retirement plan. Just want the extra million for another 10 – 15 years or so… These are all commonly heard reasons.
Well, back at age 30, that 20-year term for $25 per month could have been a 30-year term for $44, but it was decided back then that was just a little too “pricey”.
Now, at age 50, if one is healthy, a new 10-year level term is $75 per month and a new 20 year term is $119 per month.
And again, that is assuming one is still in good health.
In closing, if you want the cheapest Life Insurance, anyone can shop for you. But as a young physician, if you want “inexpensive” insurance with the appropriate protections for you and your loved ones, our promise is to watch out for you and provide the right kind of guidance.
Dave Serena
Dave Serena is in his 25th year as an agent with the Wisconsin Medical Society’s insurance group: WisMed Assure. He has physician clients in 36 states and continues to provide them with life-long counsel and guidance. His position is that physicians are free to practice high quality medicine and enjoy their families when they are confident about their personal financial security. He can be contacted at [email protected] (414) 238-6105.
Originally posted in FYI: For Your Insurance.
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