How physicians can determine life insurance needs

Few physicians escape medical training without being lectured about carrying disability and life insurance, the eat-your-peas staples of personal finance for doctors.

Joseph Haig, MD, emergency physician in Elizabeth, New Jersey, carries both life and disability insurance policies, though his financial adviser is urging him to carry more life insurance based on some recent conversations. The married father of three already spends $12,000 a year on the policies.

“I wish I could put that money elsewhere,” Haig says, but between school loans, a mortgage and other expenses, he feels he can’t risk living without his income in case he gets sick or hurt, or saddling his family with those bills in case he dies before his other savings have had a chance to grow.

Meanwhile, 62-year-old John Verheul, MD, MPH, a family practitioner in Midlothian, Virginia, has used life insurance as an investment for nearly 40 years, both for his family and for his practice partners, though when his family was younger he had a nagging sense that the coverage amount might not adequately cover their expenses.

Now that his kids are grown, Verheul and his wife, Linda, are considering options for the insurance, including borrowing from a permanent policy or letting their beneficiaries, their adult children, take over the premiums.

How much life insurance physicians need at various stages in their careers is, of course, a moving target that depends on their other financial resources, their dependents and a host of other issues. And like Haig and Verheul, most physicians have to balance those needs with competing goals, from college savings to retirement. Little wonder, then, that financial advisers tend to bristle at generalizations about how much is needed.

“I really dislike the rules of thumb because they disregard individual circumstances,” says Peter Palion, CFP, a financial adviser with Master Plan Advisory Inc. in East Meadow, New York. “Even physicians aren’t the same. You could have one who has several dependents to cover and another who is married to an heiress.”

Palion, who is Haig’s adviser, prefers to get physician clients talking about how they would want their spouses and children cared for in the event of death. As these conversations are unfolding, Haig says he is beginning to understand more fully why the adviser is recommending more coverage, though cost remains an issue, he adds.

Contemplating coverage

Palion says that while the general rule of thumb of having six to 10 times annual income is a good range, physicians who customize that amount can either save themselves some money on premiums or prevent hardship.

“I’ve had conversations with clients who said, ‘If Frank passed away I would want to quit work and dedicate my life to the kids until the last one enters college.’ And I’ve also heard, ‘If Frank dies I’m not going to have a financial problem,’” because of other resources at the couple’s disposal, he says. 

Other advisers agreed.

“There’s usually a set of circumstances where you could have made the case for someone having more insurance,” says H. Jude Boudreaux, CFP, founder of Upperline Financial Planning in New Orleans. While more insurance would have been nice for survivors, however, physicians need to balance that against the reality that without those insurance premiums to pay over many years, they could more quickly build wealth in other ways, he says. 

Determining the right amount of coverage doesn’t end there, however. It has to fit with your overall financial game plan, experts say. Adviser Kevin Meehan, CFP, regional president of the Wealth Enhancement Group in Itasca, Illinois, recently counseled a new physician client with a universal life insurance policy that was eating up half the physician’s total monthly savings. 

“He was looking for a portion of his savings to be in a more conservative tool where he wouldn’t take on the same market risk as in his 401(k) and profit sharing,” Meehan says. “The idea wasn’t that misdirected generally, but he had to keep paying for it to work. And there are no 30- to 40-year policies to verify it worked in the past. And to commit 50% of savings to it is just too much.” 

To help clients talk through their priorities, Meehan asks about their tax situation and their estate wishes (meaning a discussion of how important it is to leave large sums to heirs), what they are saving today, what kinds of life insurance they’ve held in the past, how much debt they carry and how much income they believe would have to be replaced if they died tomorrow.

“For someone who has only been practicing five to seven years, it’s probably going to be a pretty shocking amount because they are making a good living and their biggest asset is future earnings,” Meehan says. “It’s also highly likely they have a ton of school and housing  debt. That person is going to need a lot of life insurance. The shock factor of saying they might need $5 million is pretty substantial, and it will be ridiculously expensive.”

Multiple considerations

There are ways to address the expense, he says. Once Meehan arrives at a recommended amount of insurance, he talks about what the client can do realistically to fit insurance into other goals such as retirement and college savings. The result is a comprehensive plan that may not be optimal for every goal, but would still leave the client significantly better off financially.

“Usually, the whole-life conversation of trying to build cash value as an investment comes off the table at this point because it’s just too expensive. Large volumes of term insurance if the person is in good health is not inexpensive, but it’s nothing compared with multi-million-dollar cash value policies,” Meehan says. 

Before making a final decision on life insurance, he says, he discusses disability insurance as a way to protect income if the client is alive but can’t work. 

“There’s no easy way to make disability insurance inexpensive because the insurance companies have such a significant risk,” he says. “You have to pair the life and disability conversation together with the reality that you can only do so much.”

For a couple in their mid-30s with $325,000 in annual income, Meehan suggests saving 20%, or $65,000, for retirement. Another $40,000 or so might be put toward shorter-term goals, like college, and for life and disability insurance, as well as an emergency fund. 

Realistically, few couples are able to save a third of their income, but it’s a good goal to aim for, experts say.

For clients getting into their 50s, Meehan also begins conversations about long-term care insurance. Despite carriers leaving the market and significant cost increases in recent years, he believes it’s important at least to consider as part of  overall insurance planning. Rather than trying to cover all of the costs, however, he recommends clients buy below the maximum daily benefit levels, thereby partially self-insuring for the costs.

“Long-term care is the most interesting part of the insurance discussion today,” notes Kevin Reardon, CFP, an adviser with Shakespeare Wealth Management Inc., in Pewaukee, Wisconsin. Many companies are capping the amount of coverage clients can even purchase, he says.

Another way to look at the long-term-care insurance decision is to think about what happens to the daily benefit over time, says Reardon. By purchasing a relatively rich policy today without inflation protection, clients can protect themselves adequately in the short term, while they continue to build up other savings. Then, if a long-term care event happens later in life, it will be worth less due to the impact of inflation, but clients will need less because they’ve been able to save in other accounts, he says. 

More popular today, he says, is the practice of buying long-term care riders on permanent life insurance policies. The coverage isn’t as rich as a stand-alone long-term-care policy, but clients intuitively feel better about not “wasting” money on benefits they might not ever use. “It’s more palatable so that if they don’t use the long-term care component, they have the life insurance behind it,” Reardon says. 

Yet another way to obtain long-term care protection is with so-called longevity insurance, or deferred fixed annuities, experts say. These are annuities generally purchased around age 60, typically with a lump sum of perhaps 10% of the person’s savings   that begin to pay out monthly when the insured reaches his or her mid-80s. It isn’t officially long-term care insurance, so the money can be used for any expenses late in life.

Keep in mind that the 10% is a rough estimate. A person with a family history of longevity and who is uncertain about whether the nest egg will outlast a long life might put up to 30% into this type of vehicle. 

The caveat: Inflation. With today’s low interest rates, these annuities won’t keep pace with even modest levels of inflation, so be sure to factor that into your plan.  For people who have a serious shortfall in retirement savings, committing a large chunk of their nest egg to long-term care insurance may not be feasible.

For those concerned about legacy issues, most carriers offer additional features  such as riders that guarantee heirs a certain amount back if the insured dies before collecting. 

Some advisers say they like the concept of these long-dated annuities, but most believe they would be a tough sell with clients. 

“My experience with clients is that they tend to have gotten away from the whole ‘pension’ concept where they give up a chunk of money in return for a payment stream for life,” Reardon says. “They are willing to take on the risk and track it rather than shift it to an insurance company. It’s the same concept as buying term life insurance and investing the difference they would have paid for whole life.”

Just bear in mind that taking on too much risk with the thought of saving enough over time to self-insure can be an enormous gamble, and a disaster for those left behind.