5 tips you need to know when buying insurance

July 10, 2011

Our training as physicians doesn't include any information about insurance, one of the most expensive purchases we make during our careers.

Mistakes can arise from misinformation, but mistakes also can arise because many insurance companies predominantly use brokers and agents who are paid for selling products rather than for providing advice with our best outcomes in mind. Fortunately, you can undertake the actions outlined here to avoid some of the most costly errors that doctors can make when purchasing different types of insurance. These tips will be especially valuable to physicians who anticipate working at least 20 more years.

1. FOCUS ON PROVIDING THE APPROPRIATE DEATH BENEFIT THROUGH YOUR LIFE INSURANCE POLICY

Physicians sometimes view life insurance as a long-term savings investment because insurance agents often propose this purpose when they suggest that young physicians buy various types of cash-value insurance rather than term coverage. The selling agent has an incentive to sell cash-value insurance: he or she often receives more than 100% of the first year's total premium as commission.

Cash-value insurance (alternatively called universal, variable, or whole-life insurance) involves a side savings account and internal term coverage. The cost of the savings account is a multiple of the cost of the insurance itself, so the premiums easily can reach tens of thousands of dollars a year, whereas adequate death benefit term coverage may cost a few thousand dollars annually.

If you are a young physician with dependents, you may need coverage equal to as much as 20 times your annual expected lifestyle expenses for your family as a death benefit should you die prematurely. The high premium costs associated with cash-value insurance, however, could lead you to purchase much less than that amount, and that mistake could have devastating consequences, not only because you'll have an inadequate death benefit policy but also because you probably won't realize the long-term "investment" success you expect.

So what should you do? Focus first on providing the appropriate death benefit through your policy. If you do so, you will find that 20- or 30-year guaranteed renewable level term policies will offer the most coverage for your dollar. Only consider cash-value coverage when you have enough death benefit.

Some would argue against using only term insurance when a doctor or his or her family may need permanent insurance. Certainly, this argument is founded in some instances, for example in the case of a dependent with special needs who probably will require care long after the physician (and spouse, if applicable) are present. The counter argument, however, is that most families will accumulate substantial assets over a 20- to 30-year period while they are covered by the term insurance. In addition, the purchasing power of what looks like a large policy generally is markedly eroded over one's lifetime.

I've worked with physicians who, early in their careers, purchased a few hundred thousand dollars worth of death benefits. When they reached the latter part of their careers, they realized that this amount offered only a marginal benefit to them at that point. Learn from their experience.

Like most physicians, you may not realize that purchasing cash-value insurance means that you intend to continue paying for the internal cost of the death benefit for your entire life-even in retirement, when very few doctors require life insurance.

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