In this episode of the podcast, we dive into the always-fun topic of life insurance. We start out by sharing an overview of life insurance and discussing the purpose of it. We then transition into the three general life stages (early-career, mid-career, and late-career/retirement), explaining how your life insurance need changes at each stage and sharing tips and strategies for how to ensure that you have the coverage you need, for the time you need it, while paying as little as possible for it.
Outline of this episode
- The purpose and life cycle of life insurance [1:17]
- The two basic types of life insurance [3:14]
- Coverage you need in early-career [6:23]
- Coverage you need in mid-career [9:39]
- Coverage you need in late-career/retirement [12:40]
- The recap [16:06]
The purpose and life cycle of life insurance
Life insurance is one of the most common—and one of the most important—types of insurance. It’s also something most people make mistakes with. Life insurance is a product you purchase where you pay a certain amount of money each year (premiums).
In exchange for paying those premiums, if you pass away while the policy is active, the insurance company pays a lump sum of money to your beneficiary (most commonly a spouse or child). The primary purpose is to protect the people who depend on your income if you were to pass away and your income went away. It’s a financial safety net for your dependents.
The two basic types of life insurance
Term insurance is life insurance coverage for a specific period of time (term). You pay the premium for as long as you need the coverage. Once the term is up or you stop paying the premium, the coverage ends. Depending on your age and the coverage amount you choose, term life insurance might cost $500–$1,000 annually.
Permanent life insurance is far different. It’s often referred to as whole life insurance, cash-value life insurance, universal life insurance, and more. Permanent life insurance is coverage you have until you die. These policies are a combination of life insurance and investment product. The premiums are dramatically higher and can cost $2,000 or more a month.
Within term insurance, you can choose between level term or annual renewable term. With level term, your annual premium is fixed and is the same every year. A 20-year policy with a million-dollar death benefit might have an annual premium of $750. With an annual renewable term, the premium will increase as you get older. You’ll pay more for this type over the long run.
The coverage you’ll need throughout your career
Your early career is when your life insurance needs are the highest. If you’re a young parent with one or more kids, you have a higher need for life insurance because you’re early in your career and haven't had a lot of time to save. You’ll have more years to fund living expenses and save for college. Knowing this, you want to make sure you pay as little as possible for the coverage.
But if you fast forward into your 40s and 50s and your children are off to college, your situation is far different. Your needs are declining as you’re paying down your mortgage and saving for retirement and college. But you still need coverage. We suggest taking time to revisit your need as it may be lower than your current coverage.
Eventually, you reach a point where you don’t need life insurance. Most people are thinking of retirement at this point. This is when your expenses and debt should be decreasing and your account balances have grown to fund retirement. If something happens to you, your accumulated assets can pass to your dependents. They should be able to continue maintaining their expenses and meeting financial obligations.
Resources & People Mentioned
- Episode #14: Insurance for Physicians – What Types & Amounts You Actually Need
- Download our guide: The Toolkit for Optimizing Your Finances as an Employed Physician
- Download our guide: The Financial Checkup