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Q. Money Is Tight, and We’re Young and Healthy. Do We Really Need Life Insurance?
A. Every now and then, I see an article in a newspaper or on social media about an untimely death of a previously healthy young person. Often it is cancer or trauma—nowadays, COVID-19, as well. At the end of these articles or posts, a GoFundMe account started by friends or family members to help the surviving partner and children cope with the financial ramifications of the loss typically appears. These are important community gestures. However, GoFundMe is not a life insurance company.
Recently, I saw a post on social media about another untimely death, with the usual link to GoFundMe. It involved a resident who died of eclampsia while giving birth. The baby survived, and the GoFundMe was to help provide for the partner and child. I suppose it is possible that even people expecting a life insurance payout would start a GoFundMe account, but I suspect that it is rare. Besides, a typical GoFundMe drive raises just a few thousand dollars, averaging $2,600. How, I worry and wonder, will the survivors make ends meet?
Aside from the personal loss of any loved one, losing the breadwinner of a family can be a catastrophic financial event. Consider the death of a resident who stood to earn $300,000 or more per year for the next 30 years. That is a loss of $9 million in expected income. Given how easy and inexpensive it is to insure against that loss, it is a shame to see those losses go uncovered. Consider that a 28-year-old healthy female can buy a $1 million term life insurance policy for just $15 a month. Two quarters a day. You can’t even get coffee at McDonald’s for that, much less a decent latte. This investment represents no genuine financial sacrifice whatsoever for a resident physician making $60,000 per year.
Physicians, even residents, are not invincible. Although the odds of death for someone in their 20s and 30s are low, they’re not zero. Approximately one out of 2,000 people of resident age (25–35) dies in any given year. There are about 130,000 resident physicians in the country. That means approximately 65 of our trainees die every year. Of course, some of them do not have any dependents, so as sad as their death is, it does not produce the same financial catastrophe as for those with dependents. However, what if we assume half of them do have at least one dependent? I do not even want to know how many of those physicians never got around to buying a good term life insurance policy. I hope that number is zero. But the GoFundMe drives leave me worried.
How Life Insurance Works
Term life insurance is not a complicated product. As the policy owner, you will need to pay a premium once a month or once a year to keep the policy active. So long as you pay those premiums, in the event of your death, your designated beneficiary will receive the face value of the policy. They can get the money as soon as they have a copy of your death certificate, and the money comes to them tax-free.
Who Do You Buy a Policy From?
Policies are best purchased from an independent agent, one who can sell you a policy from any company. That will give you lots of options in the event you have any interesting medical problems or adventurous hobbies. Most important, it provides competition that keeps prices low. Rates can vary substantially between companies, and only by having your agent shop around to various companies can you be sure you’re getting the best rate on what is, in essence, a commodity.
What Length Should You Buy it For?
As a general rule, you want to buy term life insurance that will last until you are financially independent. The idea is that when you have a nest egg large enough to live on for the rest of your life, you no longer need life insurance. If you die, your loved ones will just live on that same nest egg. Because it will likely take a typical physician who remembers to save for retirement 20–30 years to reach financial independence, you should therefore buy a 20- to 30-year level term policy.
How Much Should You Buy?
Obviously, the longer the term and the higher the face value, the higher the premium will be. Most knowledgeable physicians purchase a policy with a seven-figure face value. Once they add up the cost of paying off a mortgage, sending kids to college, and supporting their partner at least for a few years, they end up with a large sum. Remember, the face value should be approximately equal to the amount of money that would make you financially independent. So $200,000 isn’t going to cut it. Most new attendings end up with a $2–$5 million policy, but $1 million seems to be a common amount for residents. Certainly $1 million is far better than the $2,600 that would come from the average GoFundMe.
Should You Buy Whole Life Insurance?
Some insurance agents push a product called whole life insurance, primarily because the commissions they earn from selling it are much higher than what they get from a term policy. However, whole life insurance is far more expensive than term life insurance for a healthy young person, and young doctors have so many other great uses for their money that selling a whole life policy to a resident is, in my mind, akin to financial malpractice. Although whole life has some niche applications to people in some circumstances, being a doctor is not one of them. Just get a basic, easy-to-understand term policy and don’t recommend agents pushing whole life policies to your peers.
When you apply for insurance, you’ll have to answer a few questions about your health and hobbies, have your vitals taken, and provide blood and urine samples. Assuming everything checks out, you should be able to finalize the policy with the agent within just a few weeks. It really is a simple process.
Bottom line: If someone else depends on your income, you need to get life insurance in place ASAP. It is more important than saving for retirement, figuring out what to do with your student loans, or buying that new home.
It is my fervent hope that no resident or young physician’s family will ever have to resort to a GoFundMe again to meet their basic needs after that person’s death.
When did you buy your first life insurance policy? What other advice/warnings do you have for healthy, young physicians that haven’t purchased it yet?
The post Do Healthy Young Docs Really Need Life Insurance? appeared first on The White Coat Investor – Investing & Personal Finance for Doctors.