Life insurance for physicians: The Swiss Army Knife of financial planning

One of the oldest life insurance jokes has the agent telling a woman to whom he has just explained a policy, “Call me tomorrow if you wake up.” I hope my effort at a minimum will not put you to sleep. While this article doesn’t have a lot of detail on individual policies, I want medical professionals to realize that life insurance can be an important tool in your financial toolkit when it comes to individual types of insurance. These types can complement one another rather than be an either-or situation.

The decision to purchase life insurance is an important one for all of us, and when you’re a medical professional there a lot of things to consider. You’ve probably spent years studying and working and have likely borrowed a lot of money before formally beginning your career. For most early-career physicians, purchasing life insurance is considered within the framework of marriage, children, and homeownership. Beyond that, though, life insurance can provide much more value within the context of comprehensive financial planning. For a young family in which each spouse plays a pivotal role, life insurance can mean planning for income replacement, covering overall debt obligations (e.g., mortgages, non-forgivable student loans), and having adequate money for college planning for the kids. From the standpoint of family protection, there is no better way to protect a family than with life insurance which has generally affordable premiums and can help with virtually any type of situation. There is also the opportunity to take advantage of recent tax changes – the 2018 SECURE Act included changes to the “IRA stretch” rules that can make it much less appealing to leave Traditional IRA assets to your children. Under the new law, non-spousal beneficiaries of IRAs must take everything out of the account within 10 years from the death of the original account owner. Take, for example, a 40-year-old nephew who is left an IRA with a balance of $500,000. Under the new rules, he would be required to deplete the account within 10 years with distributions treated as ordinary income. If the original account owner earned a great living, the new rules can make their tax liability significantly worse. Life insurance, in contrast, is federally income tax-free and is a much more tax-efficient transfer of wealth. There are no rules that dictate how and when you use that income.

So, the question is have we been thinking about life insurance the wrong way? Too often, I hear “buy term insurance,” the cost of which admittedly is relatively low with a benefit at death often after 25 years or so; invest the money you saved with the low-cost term, the advice goes. However, the answer is not always that simple. Often, term-only can be the right approach, but there are situations that may require an alternative to include some term – possibly mostly term – and some permanent life insurance, which can be much more prudent. It doesn’t always have to be thought of strictly from an investment standpoint. In fact, I often tell clients that life insurance of any kind will never “outperform” equities over time. It was never designed to do so, and that’s not where it’s true value lies. What it can do is improve your overall financial picture by helping out with tax diversification and asset diversification, among other things. It has also become one of the most popular ways to purchase long-term care insurance through the use of hybrid life insurance policies with a long-term care rider.

From a tax-diversification standpoint, life insurance cash values can be accessed both through policy loans and withdrawals tax free, which can be quite helpful when it comes to overall financial planning for today’s physicians. The funds can be used toward college education planning, retirement, or creating a legacy. From an education standpoint, life insurance would not replace a 529 college savings plan or a Coverdell Education Savings Account but could be a great complement should you need additional funds to cover your child’s education costs. Additionally, life insurance can be leveraged in retirement should you need supplemental income. What’s more, it can help determine how much you might later have to pay for Medicare Part B or how much you may be taxed on Social Security, as monies drawn from policy cash values do not count as income. And life insurance can help in general as distributions can be received income tax free and can help with overall tax mitigation. Additionally, it can also be quite helpful when it comes to protecting you from creditors, especially beneficial for physicians. Cash values of personally owned life insurance are exempt against claims of creditors of the insured if the beneficiary of the policy is the insured's spouse, child, or other dependent relative. This affords physicians a measure of asset protection for the equity value held in most permanent policies.

Whether you need life insurance for a short period of time or much longer, this protection can truly be a swiss army knife that will help in more ways than one.

Edward Alferoff is a registered representative of and offer securities, investment advisory services through MML Investors Services, LLC. Member SIPC. www.SIPC.org Vital Planning Group, LLC is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Edward can be reached at edward@vitalplanning.com or 718.813.9840 CRN202409-809150