Life insurance is a situation that no one wants to address or even think about due to its morbid nature.  For the mass majority of doctors with family or people who depend on their income, it is wise to consider what financial consequences their death can have on the people they leave behind.

2 Reasons to get Life Insurance:


  • (1) Income Protection:

    • As an optometrist, there is a good chance that you are the primary provider of your household and your income is essential for households expenses. You need to protect or at least maintain that lifestyle upon your death.
  • (2) Sense of Security for your families


    • Knowing that your loved ones will be provided for if anything happens to you is a great feeling to have.

2 Reasons to NOT get Life Insurance: 


  • (1) No one is dependent on your income


    •  If you are single with no kids, and your elderly parents don’t rely on your income, then great! You don’t need any life insurance. Hopefully the cash asset you leave behind is enough to cover your funeral expenses (~$10,000 average)

  • (2) You are financially independent


    •  If you are able to accumulate a significant amount of wealth that your family is able to live off of your investments upon your death, then great! No need to pay extra for life insurance.

Let’s discuss the difference between Term Life and Permanent Life Insurance 

Term Life

Whole/Permanent/Variable or Index-Universal Life

  • You pay a cheap set monthly premium for a specific time duration in exchange  for a benefit amount, of your choice. In the event of your death during that term,  your beneficiary will receive the benefit amount tax-free

  • Significantly More affordable

  • 30 year healthy Male ($1Million Policy for 30 years Term)


    Cost=$647 per year (or $53 Monthly) 


    30 year healthy Female ($1Million Policy for 30 years Term)


    Cost=$525 per year (or $43 Monthly)


     

     

     

    Source: Nerdwallet.com

  • More complicated, but in addition to the life insurance you sign up for,  there is a “investing” cash value component, resulting in significantly higher monthly premiums

  • Significantly More Expensive

  • 30 year healthy Male  ($1Million Policy for 30 years Whole Life)


    Cost=$8,380 per year (or $698 Monthly)


    30 year healthy Female  ($1Million Policy for 30 years Whole Life)


    Cost=$7,417 per year (or $618 Monthly) 

  • In the event of your death during that term,  your beneficiary will receive the benefit amount tax-free but you can borrow against the cash value. If you want to withdraw it, there is a high surrender fee


    Insurance brokers receive much higher commissions compared to term life.

"Insurance and investing should NEVER be mixed, for 99% of the population, signing up for low-cost, simple TERM life insurance is the best route.  Avoid whole life insurance at all cost" 

How is your term life monthly premium determined?

Age/Sex/Health History/Smoking status 

Beside all these listed above, other factors can include criminal history and even driving record (such as suspensions or speeding ticket violations)

Family History 

Family history of conditions such as heart disease, diabetes and cancer will have an impact on the cost.

Coverage amount and term

The amount of the coverage (ex: $1 million benefit) and the term (ex: 30 years) needed will be taken into account  Obviously, the higher the amount, and the longest the term will result in more premium costs.

Risky Hobbies/Activities 

If you like to skydive, rock-climb or engage in other potential risky activities, then be prepared to buy a little more in cost

How much term life should I get?

Everyone's situation is different so the amount of life insurance needed will vary. The first step is determine what your obligations are:


  • Future expenses such as funeral costs, child care, elder care for your aging parents, or college tuition for your children

  • Income support: What is the amount that is needed to support your family, basically what their yearly living expenses are

  • Any significant debt remaining such as a home mortgage or student loan

While these obligations might increase the total benefit needed, consider your saving and investments as well to offset those cost.


But for the majority of optometrists, a good guideline is: 

Pre-Tax Yearly Salary x 17= Amount of Term Life insurance

Example: If an optometrist is the sole income provider for his/her spouse and children, with an average salary of $120,000. Then, he/she would just need to purchase roughly $2 million worth of life insurance ($120,000 x 17). With this amount of coverage, the spouse should be able to replace all income with the yearly interest earned by properly investing the $2 million in low cost stock/bonds diverse index fund.


How does this work? Assuming a conservative average yearly return of 7%, the yearly gain will be roughly $140,000 and can be used to support the family, without touching the original principle investment of $2 million.


If your spouse can work halftime after your death and your family only relies on half of your doctor’s salary for their expenses, then you may only need 5-10X your salary in your life insurance.


The whole goal of life insurance is to maintain your family’s comfort of living.

How long should I get life insurance for?

Term life insurance is relatively cheap but shouldn’t exceed your monthly budget. Your life insurance will lapse if you miss a single payment, so make sure it is within your budget so you can make the payments!


You should ONLY get enough term life insurance to last you until you are retired (assuming your retirement nest egg will be enough) or financially independent, whichever happens first.


Another reason is because life insurance will be more expensive as you get older since you are more likely to die and get a payout (Duh, right?)


Example: Assuming you are a 35-year-old optometrist in great health making a $170,000 salary, you can sign up for a 30-year Fixed rate with 3 million coverage for roughly $2370 a year (or $197 monthly payment). If something suddenly happens to you, your family will be fully protected until your retirement account kicks in.


If you choose a shorter term like 15 years, that is perfectly fine as well. It will be more affordable compared to the 30 years term. After 15 years expiration, you can choose to renew it for another 10 or 15 years but risk paying the higher premium due to your older age risk.


But many doctors at this time might be financially free and therefore do not need any life insurance to support their family.

"As a general rule, we recommend a 15 years FIXED TERM as an initial choice for life insurance" 

Who should I buy life insurance for?

It boggles my mind when I see doctor buy life insurance for their children. Why? You are not relying on your children for any income.  Life insurance should only be purchased to replace the potential income loss in case of a death.


So, aside from buying life insurance for the primary income provider, one should also buy life insurance for the non-working spouse as well. If your spouse is a stay-at-home husband or wife, calculate how much life insurance you should get to replace his or her “income” to maintain the household like cost of hiring a full time nanny to take care of the kids until they are 18 years old. This is somewhat tricky since it is variable, but it is always better to err on the higher side.

What about Whole Life Insurance?

You will be exposed to many awful financial products in your career and  whole life insurance is one of them. This is probably one of the biggest financial scams that many insurance salesmen will use to prey on “smart” doctors, and will go by many names such as Universal, Universal index, Variable or Permanent life insurance. Whole life insurance is sold to provide life insurance coverage, as well as a cash value policy that is supposed to be invested and promoted to grow tax-free. Sounds good right? NOPE!


Three Reasons Why Whole Life Insurance is a Rip-off:


1) Fees are too high and costly:


  • Whole life insurance has a ridiculously high monthly premium payment and is almost 22x the amount of a cheap term life.

2) Poor Return on Investment for Cash Value Policy:

  • The whole life insurance itself has extreme low returns, roughly 2-3% but only after having the policy for over 15 years. RIDICULOUS RIGHT? This is not even beating the yearly inflation rate of 3-4%. Many times, the policy will have a negative return due to heavy up-front sale commission fee and high surrender fee (what you pay to quit the policy early). In many cases after 10-15 years, you either break even or lose money.

3) You don’t need the income Tax or Estate Tax benefits:


  • Many salesmen will be quick to point out that loans can be taken from the cash policy tax-free and better than your retirement or taxable account. But hey! It should be tax-free if you are using post-tax money to pay the premium to fund this cash policy (duh right?) 

  • Another “tax benefit” that most salesmen will try to promote is the death benefit of the policy to help “wealthy” optometrists avoid estate taxes. In 2020, estates worth more than $11.58 million per individual or $23.16 million per couple are subject to federal estate taxes, a figure that majority of Optometrists won’t reach in their lifetime.

The simple take-away is to AVOID whole life insurance at all costs, don’t be one of those dumb doctors that gets preyed on by an insurance salesman posing as a financial adviser.  If your financial adviser even remotely brings up whole life insurance, FIRE HIM!


Buy cheap term life insurance and use any of the ridiculously high whole life monthly payments to invest in your own tax-efficient retirement accounts such as your 401K, Roth IRA and other IRAs, then dump the rest in a taxable brokerage account (15-20% long term Capital gain tax).


This will give you better cash liquidity and mimic the S&P 500 Stock Index average return of 10-12%.


Check out The Optometrist's Guide to Retirement + Investing 101


What if I already signed up for Whole Life Insurance?


If you already fell prey to Whole Life when you were a naïve young doctor, sorry to hear that! But yes, dump it, eat the high cost surrender fees and let it be a very expensive life lesson…. The only time that you would even consider keeping a whole life insurance policy is if you had it for greater than 15 years (usually as a gift inheritance from your parents), then you can compare the total cost of surrendering the policy versus paying future premiums into it. 99% of the time, it is better to dump it.


Remember a pig dressed in makeup is still a pig, that is basically what whole life insurance is.

Where Can I Purchase Life Insurance?

There are several reputable companies that offer life insurance, but there are also a lot of less than desirable, shady companies out there offering inferior product. It used to take a lot of time and energy to get multiple quotes, but Aaron and I have vetted and researched these recommended online independent brokers who can help you to quickly shop multiple companies for the coverage that's right for you. They have a very user-friendly interface and their team will help you through the entire process from application to signing a policy. You can even get an estimate without entering your personal information!


Check out these Recommended List of Insurance Agents today!

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About DatBuiOD

Dr. Bui is a lead optometrist at the Apple Wellness Center in the heart of Silicon Valley. He has a deep passion for ocular disease and healthcare technology. He started his career with $230K of student debt and has been focusing on strategies on attacking this massive debt such as budgeting and personal finance, along with investing. He is a big advocate for passive index funding with a small portfolio toward technology stocks. Lastly, he wants to help all new doctors and high-earning professionals navigate toward wealth and financial independence.

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