From student loans to owning a practice, and even lawsuits - physicians have specific needs for life insurance. Find out how to determine how much insurance you need and what type of policy is best for you.

Life insurance is an important consideration for anyone who provides for loved ones, but it is especially crucial for physicians. Those who work in medicine are some of the most aware that things can happen when we least expect, so we can skip over that part and note that with a high earning potential, life insurance is essential to make sure family is taken care of in case of an untimely death. 

It can be just as important for residents and physicians early on in their careers as it can be for high earning doctors. With physicians carrying a large amount of private student debt, life insurance can help pay off these private loans, providing financial security for family members. (Note: federal student loans are forgiven when someone dies before finishing payment).

Physicians who own a practice can use life insurance to make sure their business is taken care of if something were to happen to them. Some life insurance can provide coverage for business expenses like rent and employee salaries. Also, life insurance can provide liquidity to the surviving practice partners to buyout the deceased physician's share of ownership.

Types of life insurance policies

The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy's death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are typically available for periods of 1 to 30 years and may, in some cases, be renewed until you reach age 95. With guaranteed level term insurance, a popular type, both the premium and the amount of coverage remain level for a specific period of time. There are also term policies that have increasing premiums that are inexpensive at first but get quite costly as time goes by.

Permanent insurance policies offer protection for your entire life, regardless of your health, provided you pay the premium to keep the policy in force. As you pay your premiums, a portion of each payment is placed in the cash-value account. During the early years of the policy, the cash-value contribution is a large portion of each premium payment. As you get older, and the true cost of your insurance increases, the portion of your premium payment devoted to the cash value decreases. The cash value continues to grow--tax deferred--as long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will receive. If you surrender the policy before you die (i.e., cancel your coverage), you'll be entitled to receive the cash value, minus any loans and surrender charges.

Many different types of cash-value life insurance are available, including:

• Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to the claims-paying ability and financial strength of the issuing insurance company). Your only action after purchase of the policy is to pay the fixed premium.
  
• Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.
  
• Indexed universal life: This is a form of universal life insurance with excess interest credited to cash values. But unlike universal life insurance, the amount of interest credited is tied to the performance of an equity index, such as the S&P 500.
  
• Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. You select the subaccounts in which the cash value should be invested.
  
• Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value and death benefit goes up or down based on the performance of investments in the subaccounts.

With so many types of life insurance available, Earned’s team can help you understand what meets your needs and budget.

Choosing and changing your beneficiaries

When you purchase life insurance, you must name a primary beneficiary to receive the proceeds of your insurance policy. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. If you name your minor child as a beneficiary, you should also designate an adult as the child's guardian in your will.

How much life insurance do I need?

Your life insurance needs will depend on a number of factors, including the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you're starting your career and family, life insurance may not seem as important. However, as mentioned above, if you’re beginning your career with student debt, life insurance may be a good option to cover that debt in case something were to happen to you. As your career progresses and/or your family grows, your need for life insurance will most likely increase.

Each person’s insurance needs are highly individual and vary depending on their financial and familial situation. Here are some questions that can help you start thinking about the amount of life insurance you need:

• What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?
  
• How much of your salary is devoted to current expenses and future needs?
  
• How long would your dependents need support if you were to die tomorrow?
  
• How much money would you want to leave for special situations upon your death, such as funding your children's education, gifts to charities, or an inheritance for your children?
  
• What other assets or insurance policies do you have?

The questions above are a great start when it comes to thinking about the amount of life insurance you need. You can think through your responses to these questions and take them to an Earned Advisor to understand what works best for you. However, if you would like to go deeper into calculating your life insurance needs before speaking with a professional, there are three different approaches. 

‍Family Needs Approach

With this approach, you divide your family's financial needs into three main categories:

• Immediate needs at death, such as cash needed for estate taxes and settlement costs, credit-card and other debts including student debt and a mortgage (unless you choose to include mortgage payments as part of ongoing family expenses), and an emergency fund for unexpected costs
  
• Ongoing income needs for expenses such as food, clothing, shelter, and transportation, which will vary in amount and duration, depending on a number of factors, such as your spouse's age, your children's ages, your surviving spouse's income, your debt, and whether you'll provide funds for your surviving spouse's retirement
  
• Special funding needs, such as college, charitable bequests, funding a buy/sell agreement, or business succession planning

Once you determine the total amount of your family's financial needs, subtract that total from the available assets your family could use to help defray some or all of these expenses. The difference represents an amount that the life insurance proceeds, along with the income from future investment of those proceeds, might cover.

Income Replacement Calculation

This method is based on the premise that family income earners should buy enough life insurance to replace the loss of income due to an untimely death. Under this approach, the amount of life insurance you should consider is based on the value of the income that you can expect to earn during your lifetime, taking into account such factors as inflation and anticipated salary increases, as well as the interest that the lump-sum life insurance proceeds may generate.

Estate Preservation and Liquidity Needs Approach

This method attempts to calculate the amount of life insurance needed to settle your estate. Settlement costs may include estate taxes and funeral, legal, and accounting expenses. The goal is to preserve the value of your estate at the level prior to your death and to avoid an unwanted sale of assets to pay for any of these estate settlement expenses. This approach takes into consideration the amount of life insurance you may want in order to maintain the current value of your estate for your family, while providing the cash needed to cover death expenses and taxes.

What type of insurance is right for you?

Before deciding whether to buy term or permanent life insurance, consider the policy cost and potential savings that may be available. Also keep in mind that your insurance needs will likely change as your family, career, health, and financial picture change, so you'll want to build some flexibility into the decision-making process. In any case, here are some common reasons for buying life insurance and which type of insurance may best fit the need.

Mortgage or long-term debt: For most people, the home is one of the most valuable assets and also the source of the largest debt. An untimely death may remove a primary source of income used to pay the mortgage. Term insurance can replace the lost income by providing life insurance for the length of the mortgage. If you die before the mortgage is paid off, the term life insurance pays your beneficiary an amount sufficient to pay the outstanding mortgage balance owed.

‍Family protection: Your income not only pays for day-to-day expenses, but also provides a source for future costs such as college education expenses and retirement income. Term life insurance of 20 years or longer can take care of immediate cash needs as well as provide income for your survivor's future needs. Another alternative is cash value life insurance, such as universal life or variable life insurance. The cash value accumulation of these policies can be used to fund future income needs for college or retirement, even if you don't die.

Practice needs: Physicians with their own practices need life insurance to protect their business interest. As a practice owner, you need to consider what happens should you die unexpectedly. Life insurance can provide cash needed to buy a deceased partner's or shareholder's interest from his or her estate. Life insurance can also be used to compensate for the unexpected death of a key employee.

Review your coverage

As your income changes, it’s important to make sure your life insurance coverage stays in line with you and your family's expenses and needs. It’s always a good idea to check on your policy and make sure it aligns with your current needs and financial situation. Whether you’re looking to buy a new policy or make sure your policy is right for you, an Earned Wealth Advisor can help you better understand your life insurance needs.