Life Insurance Information for Residents
What is Life Insurance, really?
Life Insurance, as with all insurance, is a bet you’re making with an insurance company that something bad will happen (in this case, that you’re going to die.. with liability car insurance, it’s the bet that you’re going to get in a wreck and cause some damage to someone else’s vehicle). You’re putting up your money stating that the bad thing will happen (although hoping it won’t..) while the insurance company is putting up a lot more money betting that it won’t happen. The odds are on their side, otherwise they wouldn’t be in business.
That said, insurance is not an investment – you shouldn’t be looking to profit from any of the above mentioned events. You want to simply ensure that if they do happen, those that need the money to make things right are able to get it .
Do Residents Need Life Insurance? How Much Do You Need?
Ask yourself this question: If I were to die, how much money would my loved ones need to sustain their lives?
Are you single with no dependents? If so, probably not much money is required. A couple dozen grand should be enough to pay any outstanding debts you may have or pay your mortgage while your home is sold, etc.
If you’re married with a stay-at-home spouse and two small kids, for example, they’ll likely need a large amount of cash to maintain any semblance of a “normal” lifestyle without you (money for babysitters/day-care while your spouse works, money for a vehicle to haul the kids around, money for their educations, etc.).
Here’s a handy calculator from SmartMoney that will walk you through potential expense areas to calculate how much life insurance you may need.
In your calculations, you can ignore your federal student loans as they are canceled upon death. Non-federal (i.e., Private) loans may not be canceled , so those may still need to be paid back.
What Type of Life Insurance Should I Buy?
There are several different kinds of insurance and your choice of type depends on several factors including how long you need insurance, how much you’re willing to pay today versus paying in the future, and if you’d like to use the insurance as an investment (which you shouldn’t). Below I detail the most common types of life insurance available. A major consideration is how long you need insurance – different times in your life require different levels of life insurance, so keep that in mind.
Employer (Residency Program) Provided
I assume most residency programs provide basic life insurance, probably with a value of 1x – 1.5x your annual salary. This insurance only covers you while you are employed by that employer (a form of term insurance, described below). If you’re single or your family’s livelihood can be sustained without your income, this may be all the life insurance you require.
Term Life Insurance
Term Life Insurance is a temporary policy in effect for a given time period – the term – usually for a period of 10-30 years. It’s probably the most popular choice for life insurance and if you need additional insurance, it will likely be your best choice. You’re able to obtain large amounts of insurance (upwards of a couple million dollars) for only a few hundred dollars a year. But if you don’t pass within the term, your premiums are kept by the insurance company and you don’t have anything to show for it… except your life, I guess, which is a pretty decent consolation prize!
Traditional Whole Life Insurance
This form of life insurance gives the owner, as the name states, a policy that is in effect for the insured’s entire life, as long as premiums are paid. The policy also builds up a cash value portion that can be borrowed against (tax free, up to the amount paid in), but lowers the value of the insurance that would be paid out if you were to die. Traditional Whole Life policies have the same death benefit and same premium payment for the entirety of the policy.
Since insurance premiums are going to be higher the older you get, whole life insurance policies have a higher premium while you are young to make up for the lower premiums you will pay as you get older (relative to what a term insurance policy holder would pay). Paying more up front is the price you pay to have whole life insurance.
Variable Whole Life Insurance
These policies are similar to whole life insurance in that they provide permanent, whole life death coverage as well as a secondary account. In Variable Whole Life Insurance accounts, that secondary account can be used to invest in mutual funds, stocks, etc. and can be used to increase the value of the death benefit. The risk is a lot higher, though, as your death benefit may decrease if the investments don’t do well.
Variable Whole Life policies do have certain tax benefits that make them attractive to the very wealthy in retirement and upon death. These policies are something to keep in mind for the future, but the additional cost and complexity outweigh any potential benefits for residents and med students.
Universal Whole Life Insurance
Again, Universal Whole Life policies cover the insured for their entire life. It’s flexible type of insurance that allows the policy holder to alter the amount of the premium they pay each year. This is done such that if the amount paid toward the premium is less than what would otherwise be required, the additional amount needed to fulfill the premium is taken from the cash balance account.
The benefits of Universal Whole Life Insurance also deal with – you guessed it! – taxes. The cash value account as well as the death benefit aren’t taxed when they are passed on to the beneficiary. The down side is that the death benefit isn’t guaranteed – it depends on how much the policy holder pays into the account.
Where to Purchase Life Insurance
Your employer will likely offer additional life insurance at amounts of 2x-5x your salary in addition to the coverage they already provide. Be sure to compare the rate they offer to others you’ll find using the methods below.
If you’re young and healthy and willing to provie it with a medical exam, you can get super low rates on term insurance. The website http://www.term4sale.com/ offers a quick and easy search for companies that can give you an idea of what the costs will be (note that I don’t work for term4sale.com nor am I rewarded for providing that link. It’s just a handy, quick search).
Contacting an independent life insurance broker in your area may also be very helpful. They can give you more details and help you shop around for the best company and best rates on your policy.
Also check any groups you belong to as they usually have some sort of group insurance discount. These groups could be alumni associations, professional associations, fraternities/sororities, credit unions, AAA, and other such organizations.
What We’re Doing for Life Insurance
Of course I can’t recommend a product to anybody out there because everyone’s situation is different, but I can tell you what Andrea and I are likely to do. Right now, we both have life insurance through our employers which is more than enough to cover us. I have a mortgage that she could support with my life insurance, she has some private loans that I’d be able to pay off if (God forbid) something were to happen to her. Other than that, we have no dependents to take care of and we’re both working and not dependent upon the other’s income. Hence, it is not necessary for us to have additional life insurance right now.
In the future when we have kids, we will likely purchase a small (~500k) term policy to cover each of us for about 15 years, just to make sure the kids can be taken care of if something were to happen to one of us. At the termination of that policy, we’ll still be in our mid-upper 40s and will hopefully still be in good health. We can then look into a small traditional whole life policy to cover us into old age.
Tags: Insurance, life insurance, personalfinance
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- Health Benefits
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