Though life insurance is a cornerstone of personal finance for physicians, there is no uniform answer for how much life insurance a physician needs. Not surprisingly, every physician has different life circumstances and preferences, and therefore we see physicians who are happy with everything from no life insurance to >5 million in life insurance. This will depend on factors specific to you as discussed below. It’s important to be intentional about how much life insurance to purchase so that you ensure your loved ones can have the lives you’d want for them if you weren’t around, while simultaneously not overpaying for life insurance and diverting those funds from money that could be growing your net worth. There are some common guidelines which we will walk you through to help calculate how much life insurance coverage you need for your situation below.
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Do I Even Need Life Insurance?
There are several questions you should consider here.
The first question is if you have people who are dependent on your income and/or who you would like to support if you were no longer around. If the answer to this question is yes, you should be considering life insurance. The second consideration is how much money you already have saved. If that money is not enough to cover projected expenses you’d like to help with, you probably want to cover that gap with life insurance. This could include child care expenses, educational expenses, paying off the mortgage, or even making it possible for your significant other to work less in your absence and spend more time with your children.
We sometimes hear from members that they have coverage from their employer. Our experience on the group has typically been that this amount of coverage does not cover the needs of most physician families, but if you happen to be in the lucky position where your employer is paying for a plan that covers your needs, then you may not need one if you are certain you won’t be switching jobs. If you are paying your own premium through your employer plan and you are young and healthy, we do tend to recommend that you get your own plan instead. This is because the amount of coverage you will get for the same price will generally be much larger with your personal plan than a pool where all employees are included in actuarial underwriting, and also because if you leave the job, you won’t have to sacrifice your life insurance plan.
The last major consideration is how risk averse you are. If you don’t yet have dependents or if you have an employer sponsored plan you are happy with, you may elect to wait to get a life insurance plan later if your needs change. That is a totally reasonable approach, but keep in mind two things. One, as you get older, life insurance becomes more expensive and can actually become prohibitively expensive depending on your age or your health at that time. Two, if something comes up in your health history that actually precludes you from qualifying from a life insurance plan, you may no longer be eligible for coverage.
Visit our life insurance primer for doctors page to learn more about life insurance in general and our article on types of permanent life insurance to be aware of.
How Much Life Insurance Do I Need to Get?
This depends on different factors, including:
Your current net worth
The number of dependents you have
Your dependents’ ages
The standard of living your dependents are accustomed
Amount of your debt that will survive your death (for example, while many student loans are discharged upon death, outstanding loans such as mortgages will still need to be paid)
Cost of living increases if you weren’t around (examples: more childcare expenses, caregiver expenses for an elderly family member, cleaning services or other help around the house)
Future expenses you plan to provide for them, with careful consideration of large planned future expenses like college and a mortgage, as well as big picture questions about what changes you may want them to be able to make if you weren’t around (move to a higher cost of living where there is family support, the ability to cut back at work, etc.)
Below, we’ll walk you through a standard formula to help you assess your specific situation to help you determine your life insurance needs, taking the factors above into account.
Step 1: Your Debt Obligations
Add up the sum of your financial obligations and debts:
Mortgages on your primary residence and/or other properties, including vacation homes and rental properties.
Any significant credit card or personal loans debt, including business debt you are personally liable for
Student loan debt (if not discharged on death)
Step 2: Salary Replacement
Add up the sum of your net income (post taxes) that you live off of and multiply that annual income by the number of years you want your life insurance policy to cover it for. Generally, life insurance proceeds aren’t taxed as income, so you don’t need to cover your gross income. Depending on your tax bracket, this can make a huge difference!
If you don’t know the number of years you want to provide your income for, a general rule of thumb is typically 10x.
If you are a stay-at-home spouse, you don’t generate an income, but you do provide a host of services that will need to be replaced upon your death. Add up the annual childcare and home management costs required to cover what you provide for your family and use that amount instead of net income for this step.
Step 3: Expenses You Want to Cover
This step in particular is very household and situation dependent. Some parents are fine with their children taking student loans, while others are planning to support them through graduate school. The larger the number of dependents you have, the higher this amount can become. Total all the expenses you want to be able to cover for your dependents should you pass before the situations arise. These can include:
The ability for your spouse to not have to work
College savings for your children
Wedding funds for your children
Other large one-time expenses your family has planned in the future
Funeral service costs
Health care or residential living costs for elderly parents
Expenses for other friends or family members that you would like to help
Step 4: Assets and Investments
Once you know all the expenses you want to cover, you can back out the amount of funds you already have available to cover them, though pay attention to ownership here. Don’t include your home’s market value if you have a spouse who will still need to live in it, as your equity will remain illiquid. Also don’t include your spouse’s individual retirement accounts, as they still will not be able to withdraw funds without penalty until retirement age.
Examples of assets and investments to include, depending on your situation:
401(k) or other employer-sponsored plan balance
IRA balance
Market value of your real estate withholdings (with the exception noted above)
Value of other life insurance policies you already have, such as a work provided one
Any cash/savings on hand
Brokerage account balances
Step 5: Total Coverage Needed
To determine what you need for coverage, use the following formula:
Total Coverage Needed = Debt Obligations + Income Replacement + Expenses to Cover - Assets & Investments
Or
Coverage = Step 1 + Step 2 + Step 3 - Step 4
This is the total coverage you need to get in order to cover your current family situation.
Step 6: Determine Your Policy Term
Term insurance comes in different lengths, commonly 10, 20, or 30 years.
The goal of insurance is to provide for your dependents until they no longer depend on you. You generally want life insurance coverage until your dependents are able to provide for themselves (children) or until they become financially independent (spouses, dependent parents, etc.).
A strategy that we often recommend for physicians (who tend to have high insurance requirements at the beginning of their careers but accumulate savings quickly afterwards) is laddering life insurance policies. This consists of staggering your insurance policies so that you progressively drop layers of coverage as you and/or different dependents reach financial security and no longer require as much of your income or assets to cover living expenses and debts.
Where to Find Life Insurance Coverage
Once you know how much coverage you want to get, reach out to one of our sponsors thorough our affiliate links below. Thousands of our members have used and said positive things about these companies. They are brokers who can run rates across multiple insurance companies and help you navigate your options. It is generally a good idea to use a broker as they have access to the knowledge and discounts to help you get the best priced policy for you, but it doesn't cost you anything to use them (they are paid by the insurance company you ultimately choose).
PolicyGenius: PG is well known in the insurance space, and are a very convenient way to shop for life insurance as they will run rates across the major companies online within minutes, and then get on the phone with you to discuss your options. Contact them here.
Pattern: This option will allow you to enter your information and immediately begin generating quotes, as well as schedule a meeting with the great team at Pattern to discuss the options and figure out which plan is best for you. Contact them here.
Moment Insurance: Complete your quote inquiry information in less than five minutes and easily schedule an appointment to speak with a dedicated, experienced life insurance expert who will walk you through the process from start to finish and help you compare different options. Many in the group have worked with their experts previously, and had a great experience! Contact them here.