Life Insurance: Neither Cheap Nor Easy

In Part 1 of this series on life insurance, we provided an overall summary of life insurance and why it is an important part of any financial plan. Part 2 covered the basic types of life insurance. Part 3 outlined the kinds of policies that might be right for you, and some key considerations for arriving at that decision.

Now, let’s wrap it up with a summary, some precautions, and a few best practices that can help you find the right policy for you.

We write often on this site about the value of working with a professional, but we also point out many financial matters that can be ably handled without help. For most, life insurance is one of those areas of financial planning that should be probably be handled alongside a professional who specializes in these products. Why? Three key reasons:

• Any life insurance is better than none, but the right life insurance for you is truly essential. Unlike other aspects of financial planning, by the time you really need the life insurance policy, it is, indeed, too late for a do-over.
• While we’ve made this four-part series as simple as possible, the simple truth is that the variety and complexity of some life insurance plans can make choosing on your own a difficult proposition. A close friend of mine, who has sold life insurance for more than two decades, explains the difficulty of the sales process this way: “I’ll go over the different types of policies, and then we’ll work together to choose the one that best fits the customer. But, often, the person will think the policy he or she ultimately chose had all the features we discussed, as opposed to the trade-offs that are part of any investment or insurance vehicle.”
• Permanent life insurance vehicles that serve as an investment offer growth opportunities, but those opportunities come with a cost: the possibility of losing value. This is, of course, true of most types of investments vehicles. So why does it often come as a surprise to policyholders? Because many don’t think of life insurance as an investment the same way they see buying stocks or setting up an individual retirement account. Term life insurance is flat protection, for a flat (although not necessarily fixed) fee. But permanent life doubles as a savings and investment vehicle. And many annuities, which we covered separately here, are variable in their returns.

For physicians in particular, I would add a fourth reason. Many individuals still believe in the mythical target number of $1 million as the amount of life insurance you need. This number is wrong on so many levels. For most physicians, this number is way too low to provide anywhere near the sort of income you use to support your family now. A much better estimate for the yearly income that a lump sum generates is 4%. Thus, if you have a $1 million insurance policy, that will produce about $40,000 of annual income for the rest of your loved one’s life. This assumes the income grows with inflation each year.

Complexity, an over-abundance of choice, uncertainty about the amount of insurance needed, and the consideration of working with an outside advisor combine for a dangerous mix that lead many physicians to prioritize other needs over obtaining life insurance. Yet, even those three factors aren’t the top reason people put it off. That reason is cost. A 2015 study found that 80% of consumers misjudge the price for term life insurance—often guessing that it will cost them two to three times more than it would actually cost. Physicians are not immune to this way of thinking, despite their proximity to the health (or lack thereof) of their patients.

A life insurance professional can help you better understand the costs for the kind of protection you want. Look for a professional you trust, interview as many as it takes to find that person, and get started.

Life insurance isn’t easy, and while it may not cost as much as you fear, it isn’t always cheap. Should something that offers protection for your family and establishes your legacy be cheap and easy?