Life changes. Once you graduate from medical school and complete your residency, the rate of change only seems to escalate. New job opportunities and business decisions can mean more income, while marriage, children and owning a home lead to more spending.
As these changes occur, ask yourself: What happens if I die and am not here to meet my financial obligations? Will my family be financially protected? What will they need to carry on without me? Who should be my legal beneficiary?
Your life insurance needs change with each fork in your life’s path. So each turn along the way should trigger a review of your coverage even if you have a whole life policy. Protecting loved ones from your debt and other financial obligations may require adding to or changing your life coverage.
What You Need to Know Before Getting Started with Life Insurance
When putting together a life insurance plan to protect your family, it’s helpful to know four things:
- The younger you are when you buy life insurance, the lower your premiums.
- Your financial advisor may be able to inform you about several options from different carriers.
- Group life through an employer may not be enough. Most group policies are relatively small (paying around three times your annual salary). Also, you need to consider what happens to your coverage when you leave the position. Will you face a more significant financial burden if you buy life insurance later in life?
- Your insurance needs are never one and done. You need to review your coverage periodically. An annual review is a sensible practice. Plus, take action when a significant life-change occurs.
Before we jump into some of the scenarios that should trigger an insurance review, here’s a quick overview of the difference between whole life and term life insurance:
- Whole life pays your beneficiaries upon your death. As long as you pay your premiums, it doesn’t expire or go down in value. Premiums are higher than term life insurance; however, you can borrow against the policy’s cash value.
- Term life lasts for the period (or term) of the policy. The premiums are lower than whole life insurance, but it only serves one financial goal — paying your beneficiaries upon your death.
When to Review Your Life Insurance Policy
Let’s look at a few scenarios that might warrant a review to determine whether you need to increase (or decrease) your life insurance coverage:
- Marriage or Divorce
Once you marry, you have a partner to consider. Even if you both work, you’re likely to make decisions and purchases based on your collective income. Life insurance ensures that you can cover a portion of the costs of living even if the unexpected happens. If you marry, you should review your life insurance policy or buy one that ensures your death will not put your spouse in financial jeopardy. Similarly, if you divorce and don’t have any significant obligations or dependents, you might want to take a look at your policy to see if you should decrease your coverage or even allow a policy to lapse.
- Adding Children to Your Family
Once you have your first child, your priorities and obligations change forever. You want the best schooling and protection for your minor children, and in some cases, you may want to extend that protection to the next generation.
- Making an Expensive Purchase
If you make any major purchases, it’s time to check your life insurance policy, for instance, if you buy a house or a medical building. Your death could lead to your survivors’ inability to keep up with payments, leaving your family or practice into a difficult financial situation.
- Starting Your Practice
Whether you are opening a solo practice or starting a partnership, you’re going to have expenses for equipment and office space. You may need a loan to purchase machinery or to take out a mortgage on a medical building. You’re also committing to other people; you want succession to go smoothly should you die. To protect the practice and your family, you and your partners should have term policies. Not only will this provide short-term cash, but life insurance is a financial asset that often makes borrowing easier.
- Rising Income
As your income grows, so too does your lifestyle. Perhaps you decide to buy a second home, a boat or an RV. You have more earnings, but also more expenses to cover each month, so you need additional coverage. As a general principle, most physicians base their coverage on their income—typically six or seven times their annual income.
- Changing Beneficiaries
There are several reasons to change legal beneficiaries. In the event of divorce or the death of your spouse, you’ll want to re-assign the beneficiary. It is important to note that changing your will does not automatically change the terms of your beneficiary designation. Later in life, you may want your death benefits to help your children and grandchildren.
- Paying Off the Mortgage
For many physicians, the mortgage on a home or office building is the most significant expense of their life. Once you pay off your mortgage(s), make an appointment with your financial advisor because you may be able to lower your coverage significantly.
- Providing Long-Term Care for a Loved One
Throughout your life, people are, at one time or another, going to rely on you for care and financial protection. One consideration is the need for long-term care for a parent, a spouse, or even a child with special needs. The last thing you want is for their care to be at risk should something happen to you.
- Shifting Needs with Retirement
In retirement, typically, your major purchases are behind you, and your children are grown and on their own. With fewer financial responsibilities, you may be able to reduce your coverage and allow one or more term policies to lapse. And if you have whole life insurance, you may want to think about the future and make your children or grandchildren your beneficiaries.
- Your Changing Health
While life insurance rates don’t usually go down, improving your health could lower your premiums. If you lose a significant amount of weight or quit smoking, talk with your financial advisor about the possibility of lowering your premiums.
Life insurance plays a vital role in paying off debts and protecting your family should you die. Be careful not to set and forget your insurance plan. As your life changes, talk with your financial advisor about the best ways to incorporate life insurance into your long- and short-term financial planning.
