It’s one of the first questions people ask about term life insurance.
How much term life insurance do I need?
It’s also one of the most difficult to answer. And for doctors who have greater coverage needs, the question becomes that much more complicated.
In this article, we help you determine how much term life insurance you need. (Spoiler alert: It's not as daunting as you may think.)
Like physician disability insurance, life insurance is designed primarily to replace the income of the person being insured. In the case of life insurance, however, it is meant to provide for the insured’s beneficiaries in the event of an untimely death.
What makes buying the right amount of life insurance so challenging are the extent of unknown factors. Not only do you have to assess your current financial situation, you also have to look into the future and forecast what your life will be like in 5, 10, 15, and 20 or more years down the road.
According to the 2016 Trends in Life Insurance Ownership study from Life Insurance Market Research Association (LIMRA), the average insured household has enough insurance to replace their income for about three years if they die. This is much lower than what the industry recommends.
LIMRA’s Life Insurance Needs Model estimates that 48 percent of households have an average life insurance coverage gap of $200,000.
“Our Life Insurance Needs Model examines total income, assets and debt, and the overall makeup of the household to determine how much life insurance would be adequate to keep the family financially stable in the event of the death of the primary wage earner. Our findings indicate that even Americans who own life insurance might not own enough to keep their families financially secure.” - Robert Kerzner, president and CEO of LIMRA
There are a number of methods doctors can use to make the decision, though not all of them will provide an accurate assessment.
Some people base the decisions not on what they need, but on what they can afford. They determine how much monthly premium their current budget can handle; however much insurance that buys is what they’ll get.
Others choose a round number that “sounds” like an adequate amount of insurance; like, for instance, $1 million.
Another popular rule of thumb is that you should buy a death benefit equal to 8-10 times your current income.
It’s recommended that doctors, dentists and medical professionals work with a licensed insurance agent to not only find the best coverage, but also to help them determine how much life insurance they need.
An effective agent will help you understand how much insurance is recommended by doing a comprehensive needs analysis. This is a method (usually done with software) of exploring your current financial situation and future financial needs to get a clear picture of your insurance needs.
This needs analysis will be based on number of factors, including:
- Current income
- Projected future income
- Funeral expenses
- Current and projected debt
- List of debts erased at death and ones that your estate must still repay
- Investments and other assets
- Number of dependents (today and possibly in the future)
- The potential cost of financing children’s college education
- Special needs of a spouse, child or other family member who depends on the insured’s income
- Whether you own or are a partner in a medical practice
This analysis will help determine the overall cost of what you will need your estate to pay for if you pass away unexpectedly, as well as items you hope to provide for. It will also consider how much your dependents need to live on and for how long once they lose your income.
With this information, your agent can make an educated recommendation on an amount of life insurance that adequately meets the needs of your family and loved ones without overspending on unnecessary insurance coverage.
The life insurance policy you buy today may not be adequate enough to meet your needs tomorrow. Maybe your current budget doesn’t have enough room for a larger policy, or you may need additional coverage later due to an increase in income, purchase of a home, and/or additional of dependents.
One way to increase your death benefit amount in later years is to buy a guaranteed purchase option (GPO) rider, sometimes referred to as a guaranteed insurability (GI) rider.
This rider enables you to increase the amount of your coverage without having to go through the underwriting process. There may be limits on how you use this option, such as the amount of death benefit you can add and when you can increase coverage.
Another way to increase your coverage as circumstances change is through laddering, which is owning two or more separate life insurance policies. A common use of laddering is to supplement a policy bought years before without completely replacing it.
For example, say you are a resident or new physician with a spouse, but no children. You purchase a $600,000, 30-year term policy to provide for your spouse in the event you pass away.
Later, you purchase a home. To help ensure your surviving spouse can pay off the mortgage and other debts, you add a $300,000 20-year policy to your previous policy. Once you have children, you may want to add another policy to ensure they can be cared for.
Rather than buying too much coverage at once, laddering can help you address your life insurance needs as they change.
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Colin is the Founder & CEO of LeverageRx, an online lending and insurance marketplace for doctors. Colin has over 10 years of experience in financial services and is a licensed life and health insurance agent.