Physician Whole Life Insurance: Is It Worth the Cost for Doctors?

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So you are a newly minted doctor or may be even further along in your medical career. Now that you are earning a good income, you want to plan your finances and are evaluating insurance options to make sure that your family or dependents are protected in case the unthinkable happens to you. 

The insurance agent may be urging you to buy whole life insurance. However, you need to do your due diligence and understand all the aspects of whole life insurance before you make a decision.  

First let us start by understanding the basics of whole life insurance: 

Definition of Whole Life Insurance

Whole life is a type of permanent life insurance that provides coverage for the duration of your entire life. Whole life insurance has a combination of guaranteed death benefit and a guaranteed growth in cash value.

It pays out the benefit upon death, without a time limit, provided the policy is in effect at that time. Additionally, it has a cash value component that you can withdraw from or borrow against in your lifetime.  

Features of Whole Life Insurance for Doctors

Guaranteed death benefits

There is a guaranteed death benefit for whole life insurance, as long as you pay the premiums. This benefit does not change and is a fixed amount. Typically, whole life insurance policies mature at about age 100. The death benefit is paid out upon death or the maturation date, whichever is earlier. 

Guaranteed cash value

Whole life insurance policies come with a cash value that grows at a fixed rate of return. A portion of the premium is allocated towards this cash value.

It is possible to withdraw from or borrow against this cash value. However, if you make a withdrawal, it reduces the death benefit amount. If you borrow against the cash value and do not pay it back, the loan amount can be deducted from your death benefit, leaving a lesser amount for your beneficiaries.

Lifetime, fixed premiums

Typically you will pay fixed, level premiums for the duration of your lifetime or until the maturation age.

Tax benefits & implications of whole life insurance

• Death benefits will usually be tax-free, meaning beneficiaries do not have to pay taxes on death benefits.
• The growth in cash value is tax-deferred and you do not have to pay taxes on this growth annually. However, taxes may apply to withdrawals or loans that exceed the value of total premium payments.
• Withdrawals against the cash value is tax-free upto the value of the premium payments. This means that if the total value of the premiums you have paid is $120,000, you can withdraw upto this amount without paying taxes.

Consult with a tax advisor and familiarize yourself with the policy rules in detail before making any tax-driven decisions.

Another common type of insurance is term life insurance. It is important to understand the differences between these 2 types of insurance before making your decision.

How is whole life different from term life insurance?

Coverage period

Term life insurance provides coverage for a shorter period of time, usually 10 to 30 years. Whole life insurance provides coverage for one’s entire lifetime provided the premium payments are current.

Cash component

Term life does not have a cash component. It is purely an insurance product without investing or a cash component attached to it. However, whole life has a cash component baked in. This cash component grows over time with fixed returns.

You can take a loan against your cash value on whole life insurance. But this is not possible with term life insurance.

Why Whole Life Insurance Often Falls Short for Doctors

Too expensive

A whole life insurance policy typically costs around $350 per month for a $250,000 death benefit for a healthy, non-smoking 40-year-old male. On the other hand, a 10-year term life insurance costs $70 per month for a similar person. (Source: Aflac.com).

This is not surprising considering that with whole life, you are insured for your entire life, but term life coverage is for a lesser period, say, 10 or 20 years.

However, it is important to consider that many people do not need lifetime coverage, but only need insurance for a fixed period in time, for example, when their children are young, or when there’s a mortgage on the home, or there are not yet enough savings. But as the children grow up and become financially independent or you accumulate enough assets and savings that dependents rely upon, there is a lower need for insurance for most people. So it is not necessary to pay a large amount in premiums for lifetime insurance that one may not need later in life.  

Low rates of return

The rates of return on whole life policies tend to be from 2% to 4%, which are much lesser than if you had put this money in the stock markets or maxed out your 401k/ 403b.  Compare these returns with inflation-adjusted stock market returns between 1993 to 2023 of 7.22%. For additional context on investment returns and strategies, consider exploring The Boglehead Investment Approach.

Cash component & life insurance come from the same bucket

People buying whole life insurance might think that they will get both the cash benefit and the death benefit. However, both these benefits come from the same bucket. So the more of the cash benefit you use, the less there is left for the death benefit for your beneficiaries.    

Whole life is the worst of both worlds for most people.

Ultimately, whole life insurance constitutes the worst of both worlds – life insurance and investments. It is too expensive for life insurance needs of most people. It also offers lower rates of return than tax advantaged retirement options and investing in stocks. If you want life insurance, it is better to get term life insurance just for the period that your dependents will need it, rather than pay high premiums for your entire life. If you want solid investment returns, max out your tax advantaged retirement contributions and invest in stocks and ETFs.

Insurance Agents & Conflicts of Interest

According to Insurance business magazine, insurance agents receive the highest commission rates for whole life insurance, often more than 100% of the total premiums for the policy’s first year. On the other hand, term life insurance pays the lowest commissions, often a percentage of annual premiums ranging between 30% to 80%.

This creates a conflict of interest, in which insurance agents are incentivized to sell an expensive product such as whole life insurance to high income professionals such as doctors. Moreover, doctors have very busy professions, and this means that they may not have the time to do a full due diligence.  

Insurance agents typically pitch whole life promising a slew of benefits, which do not necessarily work out for most people:

(1)   Agent’s pitch: Guaranteed cash value

Why this does not always work: The guaranteed growth in cash value is usually at a lower rate than you can earn by investing in stocks or retirement accounts.

(2)   Agent’s pitch: Insurance for the entire lifetime

Why this does not always work: Most people do not need insurance for their entire lifetime since they may not have lifelong dependents. Kids grow up and become financially independent, reducing the need for insurance. Moreover, as one grows in one’s career, you have more savings and assets which dependents can use. Term life insurance is a better option for most people since it provides insurance for the years when your dependents need it the most and you do not have to pay premiums for an entire lifetime.

(3)   Agent’s pitch: Tax advantages

Why this does not always work: The growth in cash value in whole life insurance is tax free. However, the same is true for tax advantaged retirement accounts such as 401k or 403b. So it makes sense to max out these pre-tax retirement contributions first. Moreover, the tax advantages may not necessarily outweigh the low rate of return from whole life insurance. Make sure to do the math to verify whether the tax advantages can outweigh the lower rates of return.

Who might whole life insurance be good for?

There are a few specific situations when it may be worth considering whole life insurance.  

Estate planning for high-net-worth individuals

Death benefits from whole life insurance are generally not taxed as income tax. This means you can leave the death benefit to your heirs as a tax-free benefit. Moreover, life insurance payouts are made fast within a few weeks after death and can be useful for immediate expenses, compared to the rest of your estate, which will have to go through a probate process that can last several months. 

Therefore, it may be useful for high-net-worth individuals as a component of their estate planning strategy. Understanding your liquid net worth is another key component of effective estate planning.

Lifelong dependents

If you have family members who are lifelong dependents, such as a special needs child or a spouse who needs lifelong care, then lifetime insurance can be very useful. For additional family financial planning insights, you might also want to evaluate whether you can afford a child as part of your broader financial strategy.

Conclusion

Whole life insurance offers fixed premiums and guaranteed payouts. However it is not the best insurance policy for most people due to high premiums and low rates of return. Most people will be served better with term life insurance and investing in standard retirement accounts or stocks. Whole life insurance can be useful in special cases such as for people with large net worth who are looking to leave behind an estate, or people with lifelong dependents.

At Planwell, we are building a fully automated AI financial planner and advisor to help you make super personalized financial decisions such as how to retire early and achieve financial independence & how much house you can afford, while considering your lifestyle, retirement goals and other key factors. 

We will be launching the product very soon. Stay tuned for an update. In the meantime, check out our blog posts to help you plan your finances.

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