Which Life Insurance Option is Right For You?
NOVEMBER 29, 2016
Heidi Moawad, MD
Most people often aren’t too excited about spending money on insurance, since they perceive it as money not spent on something enjoyable. Yet, insurance is a part of life. As a physician, you are likely supporting your family. And, if you die, your family will lose out on your time and attention. But life insurance can at least ensure that they won’t have to drown in bills without your financial support. As you plan out your finances, buying life insurance requires a little research and some basic know-how about the different types of life insurance.
Term Life insurance
Term life insurance is about peace of mind. This is a type of insurance plan that you can buy for a limited time period. You might pay for term life insurance for 10-30 years, during which you pay a premium that ensures your loved ones would receive a death benefit if you die during that time. Once you stop paying the premiums on term life insurance, your loved ones are no longer covered.
This is the type of life insurance that you can buy to protect your loved ones in case you die while they are still dependent on your income, and is based on paying a relatively small premium that ensures that your loved ones will receive a comparatively large amount of money if you pass away. It makes sense if you are worried about how your loved ones would get by financially without you. And of you are fortunate enough to live past the agreed upon term, then you and your loved ones do not collect any benefits.
Cash Value Life Insurance/Permanent Life Insurance
Another category of life insurance is often referred to as cash value life insurance. This type is a bit more complicated than term life insurance and is generally more expensive. However, it is often considered a savings plan, a possible investment, and beneficial from a tax standpoint. This is because cash value life insurance serves as life insurance for your loved ones and also functions as a savings that you can tap into after a certain amount of time. The savings itself can grow if you buy a plan that places your savings in investment funds. And, the growth is tax deductible, which makes cash value life insurance an appealing option for people who are in a high tax bracket. There are two main categories of cash value life insurance.
Whole life insurance is a life insurance plan that allows you to pay a life insurance premium that goes towards covering your loved ones in case you die and also towards building ‘cash value’ savings that you can withdraw at a certain age. The cash value can serve as a savings or may even serve as an investment.
With a whole life insurance plan, if you die before you are ready to take money from the cash value of your policy, your loved ones would receive life insurance. If you survive past the age that you are permitted to withdraw money from the cash value, then you can use the money that you have saved. If you have a whole life insurance plan with an investment growth, then your earnings are tax deferred, making this type of plan an advantageous source of investment income.
Universal life insurance is similar to whole life insurance in the sense that it is both a life insurance policy and a tax-deferred investment that you can tap into, but the premium and death benefit may change over time. Some policies may change based on your preference of how much life insurance and savings/ investment you want to build, while some may change based on the price of the plan itself. And the savings portion of universal life insurance may grow based on investment or interest.
Universal interest and universal index life insurance plans are tied to either an interest rate or an index fund that can allow the money you will eventually withdraw to grow. While the investments do not typically give returns on par with regular investments, they are often chosen because the investment growth is tax deferred, making them appealing options for individuals in a high tax bracket. And often, the potential loss from these investments is limited within the policy rules, making it safer than a traditional index fund or stock investment.
Overall, life insurance is a fairly complicated purchase. Many advisors suggest buying a term life insurance plan if you are young enough that you still anticipate earning money for many years. The higher cost of a cash value life insurance plan is often recommended for people who have more savings and who are looking for tax advantages. Some doctors choose to continue to pay for a term life insurance plan along with a cash value plan for maximal protection while in the high earning years.
Having a job and earning an income that can support your family is a privilege. Yet, it is important to take the time to learn how to best protect your family in case of the worst-case scenario.