I hate life insurance. And I have no love for insurance companies. But life insurance is one of those areas where doctors often make mistakes, so I thought I'd hit the issue here today. Almost every doc I've met has some kind of life insurance, be it whole life, variable life, or (most excellently) term life insurance.
When I ask you how you feel about your life insurance, if you're like most you'll say, "I fee like we have enough. After all, I've got a million dollars worth."
And a MILLION DOLLARS seems like a LOT of money when it comes to life insurance. After all, you may recall that kid you knew in high school whose dad died one summer of a massive M.I. and his mom got a check for a million dollars. Suddenly THAT kid got a brand new, bright red sports car. Right?
One of the symptoms of residentia (that syndrome where you still view your entire life as though you were still a resident) is that a seven figure chieck seems like a lot of money.
So the Million Dollar Myth - the thought that a million dollars worth of life insurance is enough - persists to this very day.
OK, let's play a game. We'll call it the "Life After Life Insurance Game".
Here are the rules:
- You're dead. (No cheating, please.)
- Your spouse (husband or wife) cannot go back to work.
- They use the life insurance money you left them to cover the cost of the goals you promised to pay for while you were alive.
Ready? Let's play.
First comes the check for $1,000,000.00 dollars. Your family uses a chunk to pay off the house, of course, since this is the epicenter of financial security and family stability. If you're like many of the doctors I serve, that's about $500,000, but could be as little as $300,000. So let's call it $400K.
Next, they sock away some money for college. If two kids attend Ivy League, you're looking at $50,000 per year, times four years, times two kids (and I've seen families with five kids, so we're being conservative here). That's $400,000 today, and if they invest well, it might grow fast enough to keep up with college inflation.
So, it looks like your family wins, right? The house is paid off, your kids are going to school, and they've still got $200K left, right?
Do I smell "sports car"?
Probably not. Remember Rule #2? Your spouse is not going back to work. So how will they support themselves during the years before THEIR retirement, and AFTER their retirement?
If your family spends $5,000 a month, then $200K will last about three years. Most physician families I know spend about $10,000 per month, so that means the money will last only a year or two.
Given some modest assumptions, it would take about two or three million MORE dollars to build a fund large enough to supply an after-tax income of $7500 to $10,000 per month for life.
Which brings us to the truth behind the myth: most doctors are underinsured for life insurance simply because there's not enough "death benefit" (grizzly words, I know) to support their survivors' way of life.
If you don't like the thought of paying the premium for four or five million dollars worth of life insurance, I hear you. Just remember that you may be able to reduce the amount of coverage you have as the years roll on, and your need for insurance decreases as your savings accounts grow.