The subject of life insurance is very confusing to physicians because there are so many products and solutions AND opinions. Depending on the type of policy, your life insurance can provide a multitude of benefits you might now realize.
The subject of life insurance is very confusing to physicians because there are so many products and solutions AND opinions. Just a quick search online and you will see thousands of articles, websites and links. Unfortunately, this can lead to information that is biased or skewed in one way or another.
Life insurance, as a properly structured component of a comprehensive strategy, not only provides dollars to spouses, partners, children and heirs in the event of a death, but, depending on the type of policy, can also provide some of the following benefits:
— Protect your insurability in the event of a health change
— Security for a job change or company benefits cut rather than rely on group benefits for all your coverage
— A source of cash for emergencies and/or opportunities1
— Guarantee the ability to convert to a permanent product if a good fit for your overall financial strategy2
— Use the cash value early in the event of a long-term care need2
— Cash values grows tax deferred and if structured correctly, can be used in a tax favored manner
— Cash values in life policies are asset protected from claims of creditors in some states3
— Being in place to pay estate taxes to help you maximize the estate left to your heirs and charities
— Secure a bank loan and/or buyout a deceased partner in a business
How much life insurance do you need?
Please see the graph below for a visual discussion of a typical person’s need for life insurance. The solid line labeled “A” illustrates that at an early age, you may not need any (or not much) coverage. As you get older, you may be in a relationship, start a family, take on a mortgage and/or buy into a practice, and your need for life insurance increases. How much coverage you need and how long this lasts is due to a lot of variables and everyone is different. But, there is an economic and emotional toll that your death may present and life insurance is the most economical method of addressing this.
As you get older, typically your needs start to decrease — as you pay off debts, you build other assets, and your children become self sufficient (hopefully!). And, in fact, many people would look at this graph and conclude that they may not need any life insurance as they get older. Conceptually, this makes sense. Especially for people who are debt free, and have built up a substantial asset base. However, the dotted lines (labeled B) illustrate the fact that this insurance need line generally goes up due to inflation.
The point labeled “C” triggers an interesting situation. People who are very successful financially and, frankly, financially independent (and may not need life insurance for the original reasons) may want to keep (or buy new) coverage as a very effective method of paying estate taxes so that the estate that they have built more efficiently transfers to heirs or charities.
The maximum you can buy is based on your “Human Life Value.” Each insurance company uses a different calculation, but essentially the total is about 20 to 30 times your annual income. Essentially, this is the present value of your lifetime income stream. Ideally, if life insurance was free, we would all obtain this amount.
Since it is not free and most people are juggling many competing goals with their finances, a decision has to be made on how much insurance you should actually get in place. Essentially, tally up all the debts you have, any lump sums of cash you want to provide (emergency fund for survivors, college funds for kids, etc.) and then add that total to the present value of the stream of income that would be needed to go to your heirs at your death (factor in their working ability, your confidence in Social Security, etc.).
A competent financial advisor can work through this calculation with you. Usually, the resulting number suggests obtaining between seven and 15 times your annual income depending on all the variables.
1 Policy loans and withdrawals may create an adverse tax result in the event of a lapse or policy surrender, and will reduce both the cash value and death benefit.
2 This feature is generally available through an optional rider, and is available for an additional fee and restrictions and limitations may apply.
3 Applicability may be subject to restrictions. Consult a local attorney.
Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated. The answers provided are general in nature and are not intended to be specific recommendations. Please consult a financial professional for specific advice in relation to your individual circumstances. 596941/ DOFU 12-2012
Life insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender charges.
Policy loans and withdrawals may create an adverse tax result in the event of a lapse or policy surrender, and will reduce both the cash value and death benefit.
If a policy is over funded and becomes a modified endowment contract (MEC), the contract's earnings will be taxed as ordinary income at withdrawal, and may be subject to a 10% penalty if withdrawn before age 5-and-a-half.
Please keep in mind that the primary reason to purchase a life insurance product is the death benefit.
This should not be considered as tax or legal advice. Please consult a tax or legal professional for information regarding your specific situation.