Life insurance: The investment residents can't afford to miss
Key Takeaways
Life insurance can help provide financial stability for residents and their families in case of premature death. One major benefit of buying a policy while younger is the ability to lock in lower premiums.
The two main types of life insurance are term-life and permanent policies.
Residents may want to speak to a financial planner about the best options for life insurance.
With your professional life starting in earnest, the last thing on any (young) resident’s or fellow’s mind may be life insurance. It may seem like life insurance is something only parents or spouses would buy to protect their financial interests. Regardless of your personal situation, however, buying life insurance as a younger person can yield great financial benefits.[]
Unlike health insurance, life insurance is not a perk of postgraduate training. Nonetheless, it’s an important consideration due to the significant investment residents and fellows make in themselves by spending years and thousands of dollars on a medical education. As Investopedia notes, the potential revenue a physician can earn reaches into the millions, and life insurance can help defray financial losses to you and your loved ones in the case of your death.[]
Term vs permanent policies
Any discussion of life insurance should begin with the different types available.
Term-life insurance offers death protection for a prescribed period of time. Substantial coverage can be purchased at low prices, which makes it perfect for short-range goals such as paying off a loan or securing extra protection during child-raising years.[]
The most popular form of term-life insurance is level term, which varies in how long it lasts (eg, 10, 15, 20 years).
During these periods, the premium is locked. Term-life insurance is a good option for residents on a tighter budget, per the AMA.[]
Permanent policies are more complicated than term policies, says the AMA, and are commonly issued in three forms: whole life, universal life, and variable life.
Whole-life insurance, explains State Farm, offers full coverage and is a permanent solution.[] It is ideal when preparing the family for the unexpected. The death benefit can help address loss of income, mortgage costs, and educational costs for children. Moreover, whole-life policies accrete cash value that grows tax-free. This “living benefit” can be tapped during the policyholder’s lifetime. The AMA notes that some common reasons why policyholders access the cash value of a whole-life insurance policy are to supplement retirement income or pay expenses linked to long-term care.
Universal life insurance policies offer more flexibility, according to State Farm, and protect family members while accumulating tax-deferred cash value.[]
Universal life insurance provides permanent protection with coverage that can be modified based on changing needs.
The policy can be set up as a survivorship or a joint policy. The cash value of a universal policy can be applied toward premium payments.
Variable life insurance, explains the AMA, is a cash value policy involving an investment component. Payouts depend on the performance of underlying investment vehicles, such as stocks, mutual funds, or bonds. Because these underlying subaccounts are volatile, there is more risk in these policies, with payouts depending on market factors.
Protect your family from financial hardship
The AMA staunchly recommends that all residents purchase life insurance.
"Your need for life insurance is just that, your need. Your personal circumstances—family situation, financial obligations, debt—all play a part in the type and amount of life insurance you may require."
— American Medical Association
“In the event of your death, a well thought out life insurance plan can help protect your loved ones from your current debts—medical student loans, credit card balances, car payment—and provide for the future needs of your dependents—ongoing living expenses, funding a child’s education,” the AMA advises.
“The bottom line,” AMA adds, “if you have people who depend on your income, you should have a level of life insurance coverage that protects them from financial hardship.”
An upside to buying life insurance while you are younger is that premiums are cheaper, which supports affordability—even on a resident’s budget. The longer you wait, the more it costs to purchase a life insurance policy.
One rule of thumb regarding how much coverage to purchase is to provide for about 10 times your annual salary, according to Investopedia.
With residents, however, current salary is dwarfed by future earnings, so this benchmark of 10 times your salary likely underestimates future financial goals.
Other factors that play a role include the number of dependents and how long you need coverage.
Another approach to calculating how much coverage you need, says Investopedia, involves taking your total financial resources (ie, investments, savings, spouse income, other life insurance) and subtracting this total from the sum of your financial obligations, such as current and future expenses including mortgage payments, education expenses, and student loan payments.
In deciding on a policy and the coverage amount, it can be helpful to discuss your options in detail with a licensed agent, as well as a financial planner.[]
What this means for you
Although the types of life insurance vary, it’s a good idea for any resident to consider purchasing some iteration based on need. Life insurance can protect your family in case the worst happens. Permanent policies offer better coverage than term policies, but they are more expensive and more complicated to understand. Compare your options with the help of an agent, and seek the advice of a financial planner, who can put the purchase of life insurance into perspective.