Ok, so the last post of “Why do I need insurance?” might have seemed a bit backward since I told you all what to buy, and not why to buy it. That was intentional.

As physicians we are so busy making big decisions day in and day out about things we know about…  that when it comes to things we don’t know about, we tend to just throw money at it to make it go away.

Trust me. I understand that. Being a doctor teaches you learn to prioritize things very quickly and your time becomes very precious. I will elaborate on this concept in a future post called “Time Management”.

Ok, let’s step back again. I’ve already explained:

“Buy a $2 million dollar 30 year term, level premium policy from a well known company for as cheap as possible, by the end of residency at the latest. If you already have a family, you really need it during your intern year.”

Why?

Insurance, at its core, is simply a vehicle of risk management. If you were invincible and could simply not die until a set date, than you don’t need life insurance. However, for the rest of us mere mortals we certainly do need it. The majority of us will go on to get married and have children. Your future spouse and future children will rely on you and your salary (at least to some extent) . In the untimely event of your death, you will want them to be taken care of.

Life insurance is all about mathematics. The insurance company needs to charge you a certain amount of money that whether you died tomorrow or you don’t die and your term insurance runs out in 30 years, they still made money off of you.

That is the cold, hard, morbid truth. You need to be worth money to them dead or alive.

You might then ask, but if I died right after I signed my $2 million dollar policy, doesn’t the insurance company lose money? Yes, they do. On you. There are many, many other yous who won’t die until their term insurance runs out in 30 years which will more than offset your early death. It’s a simple numbers game.

Why do I need it so early?

The most important reason is that you are human. Every day that you get older, things can happen that will make it more difficult or more expensive to get life insurance. For example, you may be diagnosed with Diabetes, some other chronic debilitating disease (Multiple Sclerosis, Crohns Disease) or maybe even some kind of cancer.  No one knows what their future holds for them.

For this reason, (and I hate to sound like a salesman here), you will want to lock in your good health as early as possible. Life insurance companies will not want to insure you if there is a higher chance that they will need to pay out for your death. Once again… very morbid, but it’s simple math. I’ve had friends get denied life insurance because they were diagnosed with Diabetes or even “borderline Diabetes”.  Get it early on in residency while you should still be young enough that these diseases (even if you get them later) hopefully aren’t detected yet.

Why term life insurance?

Term life insurance is coverage over a period of time (usually 30 years).

Why level premium?

As you would expect, life insurance usually becomes more expensive the older you get.

If you get a level premium you pay the same amount for the entirety of the term. $100 a month at 30 when you bought the policy and $100 a month at 59 just before your policy ends.

Why so much coverage?

As I stated before, you will make a good amount of money over your lifetime. Your plan isn’t to cover your whole life time earnings, but a reasonable number if you were to die early. $2 million is reasonable. $3 million if you are the only person working and/or if you have a lot of dependents.

Ask yourself: “If I died tomorrow, how much money would my family need to be ok for 10 years?” – knowing full-well that you will make ~$6 million over your lifetime.

Why from a well-known company?

If your company has a high chance of going out of business during your term of your policy then why even buy it? Stick with the big companies that have been around for a long time and get whatever is the cheapest with the stipulations above.

Joe’s Insurance Shack from that RV which sells $10 million 30 year term policies for $10 a month (or a LOW LOW PRICE of $10,000 up front)… probably isn’t reputable.

Why not whole or convertible?

The simple answer is because “it’s not what you need”. The longer answer is you don’t need to (and shouldn’t) mix insurance with investing. There is a reason I split my insurance posts into “Whatever Wednesdays” and investing goes on “Finance Fridays”. These are separate entities and should be treated as such. I could go on a long diatribe against whole and convertible, but I will save that for a future post because it requires a pretty good understanding of insurance and investing.

Just know that whole and convertible life insurance make the insurance company more money and you pay more money. Also, the agent who sells whole or convertible makes a significantly higher commission than term life insurance (for good reason).

TL;DR

Get life insurance early… before you fall apart and can’t get it.

Don’t buy from Joe’s Insurance Shack sold from an RV.

Don’t buy whole or convertible. Say no when they ask (and they will definitely ask).

Buy a 30 year term, level premium, $2 million policy.

Profit.

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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