Laddering Term Life Insurance

[Dr. Intentionality]

Hello All! If a 25 year old resident is planning on purchasing a ladder of term life. What would you recommend?

Option A:
$1M - 30 yr policy
$1M - 20 yr policy
$1M - 10 yr policy

Option B:
$1.5M - 30 yr policy
$1.5M - 15 yr policy

I'm not fixed on the policy amounts just yet, but wanted to get your take on these different structures.

Also, would it be difficult for a resident to obtain this much life insurance, or would I have to purchase a lesser amount and then purchase more upon reaching attendinghood like disability insurance?

Thank you!

[G]

Hello All! If a 25 year old resident is planning on purchasing a ladder of term life. What would you recommend?

Option A:
$1M - 30 yr policy
$1M - 20 yr policy
$1M - 10 yr policy

Option B:
$1.5M - 30 yr policy
$1.5M - 15 yr policy

I'm not fixed on the policy amounts just yet, but wanted to get your take on these different structures.

Also, would it be difficult for a resident to obtain this much life insurance, or would I have to purchase a lesser amount and then purchase more upon reaching attendinghood like disability insurance?

Thank you!

Life insurance is cheap if you get it young. Assuming you need it, just buy everything now. I got a 20 year policy when I had a kid (well, a few years after having a kid since I had too many "dangerous" hobbies initially). If I were to do it again, I would do a 10 yr big and 20 yr small.

Good luck.

[CordMcNally]

It would depend on how much life insurance you need for your situation. I agree with @G, if I had to do it again I would get a larger 10 year policy and a smaller 20 year policy.

[Random1]

If you think you can save 2 mill in the next 10 years, then you will need a 10 year 3 mill term policy assuming your numbers are correct. If that does not look feasible then a 20 year 2 mill term policy , will give you an extra 10 years to save another million.

[Scott at MD Financial Services]

The first thing you have to do is figure out how much coverage you need in total. The process of using a term ladder is to then know how quickly you are going to accumulate assets because term is simply there to provide an asset to your family that you have not yet earned and saved. Once you know how much you will have accumulated at 10, 15, 20, 25, or 30 year marks then you have a corresponding amount of term life expire at those points. As much as you might want others opinions the reality is it is your numbers that drive that calculation process so only you can answer what is right for you.

As for how much can you obtain in coverage, most carriers will go about 25x earning thus at your income of $55k+/- it is about $1.3 million but if a resident wants more we have never had any issues with calling the underwriter, explaining the situation and having more coverage issued. Probably would be difficult at $5 million, $2-3 million however is not a problem.

[Dr. Intentionality]

The first thing you have to do is figure out how much coverage you need in total. The process of using a term ladder is to then know how quickly you are going to accumulate assets because term is simply there to provide an asset to your family that you have not yet earned and saved. Once you know how much you will have accumulated at 10, 15, 20, 25, or 30 year marks then you have a corresponding amount of term life expire at those points. As much as you might want others opinions the reality is it is your numbers that drive that calculation process so only you can answer what is right for you.

As for how much can you obtain in coverage, most carriers will go about 25x earning thus at your income of $55k+/- it is about $1.3 million but if a resident wants more we have never had any issues with calling the underwriter, explaining the situation and having more coverage issued. Probably would be difficult at $5 million, $2-3 million however is not a problem.

Thank you for your insight! WCI suggests using the following formula to determine policy amount (which as you say, is essentially a calculation determining the assets that I have not earned and saved for my family):

Term Life Insurance Policy Amount (Round Up to Nearest Million) = (Monthly Expenses x 12 x 25) + (Amount Owed on Mortgage... or Desired Home Cost) + (Amount wanting to save towards Children's Education...$50K-$200K/child) + (Spouse's Student Loans) + (Private Student Loans) + (Other Debts/Mortgages) - (Current Nest Egg) - (Children's College Savings)

Residency seems like an ideal time to purchase life insurance (young age and health), but it also seems that most residents are unable to determine a few of the variables in the above formula. For example, how would a resident accurately predict their monthly expenses as a future attending and how would a resident determine how much to allocate towards kid's college when they don't know how many kids (if any) they are going to have? Given this uncertainty, I imagine the right thing to do as a resident would be aim towards the higher side (or as Dr. Dahle puts it: round up to the nearest million). But that would still leave the question as to how to structure a term life ladder appropriately, given a resident likely has a difficult time accurately predicting their future savings rate as an attending.

[Dr. Intentionality]

Life insurance is cheap if you get it young. Assuming you need it, just buy everything now. I got a 20 year policy when I had a kid (well, a few years after having a kid since I had too many "dangerous" hobbies initially). If I were to do it again, I would do a 10 yr big and 20 yr small.

Good luck.

It would depend on how much life insurance you need for your situation. I agree with @G, if I had to do it again I would get a larger 10 year policy and a smaller 20 year policy.

Thank you for the suggestions! I've also heard the argument be made that inflation can play an important factor when laddering policies... so one should be careful skimping on the longer policy.

[Scott at MD Financial Services]

There is no perfect answer and truthfully the answer changes as your needs/family changes. If you need coverage then buy some now, when you become an attending your needs will probably adjust then too, just keep in mind this does not have to be a one and done for the rest of your life, you can buy more or drop coverage as things change. Be mindful at your age the spreads on these contracts are not very much and sometimes where a ladder can be the most efficient assuming you hit all of your accumulation targets the savings can be pretty small. My question/concern for you is A: do you have a need for coverage now and B: since you are not working as an attending you don't have any of the savings numbers so figuring how much for how long is really just a guessing game at this point.

[CordMcNally]

Thank you for the suggestions! I've also heard the argument be made that inflation can play an important factor when laddering policies... so one should be careful skimping on the longer policy.

There's no reason a physician shouldn't be financially independent after 30 years.

[Dr. Intentionality]

There is no perfect answer and truthfully the answer changes as your needs/family changes. If you need coverage then buy some now, when you become an attending your needs will probably adjust then too, just keep in mind this does not have to be a one and done for the rest of your life, you can buy more or drop coverage as things change. Be mindful at your age the spreads on these contracts are not very much and sometimes where a ladder can be the most efficient assuming you hit all of your accumulation targets the savings can be pretty small. My question/concern for you is A: do you have a need for coverage now and B: since you are not working as an attending you don't have any of the savings numbers so figuring how much for how long is really just a guessing game at this point.

Thank you!

I have yet to start residency and have a spouse that will be graduating from PA school at the same time I will be beginning residency. Plans for future kids?... Not sure at this point. Having a partner would probably justify the need for a policy sooner rather than later, but as you say the numbers become a guessing game (without a clear crystal ball). It's good to know that the spread between contracts in my case would be small... don't have to worry about making a significant mistake. I appreciate your suggestion to be flexible on this issue as my needs will likely change... that's probably the take away from all of this (as much as it paints me to not to check off the life insurance box and forget about it).

[Dr. Intentionality]

There's no reason a physician shouldn't be financially independent after 30 years.

I completely agree... but 25% of physicians in their 60s have a net worth under $1M, after all. I have a feeling they aren't the ones that frequent physician financial forums.

[CordMcNally]

I completely agree... but 25% of physicians in their 60s have a net worth under $1M, after all. I have a feeling they aren't the ones that frequent physician financial forums.

If you feel like you'll be in that position then, by all means, go for it.

[Dr. Intentionality]

If you feel like you'll be in that position then, by all means, go for it.

Hopefully not.

I'm just pointing out that inflation is definitely a factor that should be considered when choosing the longer policy amount.

To quote WCI:

You should also keep in mind the effects of inflation. Although inflation makes the dollars you pay premiums with worth less each year, it also makes the dollars paid out in benefits worth less. A $1 Million policy right now might only be the equivalent of $553K in 20 years. This, in essence, has the effect of automatically laddering a policy, since it costs less and is worth less over time.

Choosing a lower longer policy amount would only amplify this "auto-laddering" effect of inflation.

[CordMcNally]

Hopefully not.

I'm just pointing out that inflation is definitely a factor that should be considered when choosing the longer policy amount.

To quote WCI:



Choosing a lower longer policy amount would only amplify this "auto-laddering" effect of inflation.

While the chance of you (or your dependents) using that policy is either 0% or 100%, if you looked at physicians on financial forums as a whole, you'd be better off sticking to a shorter term and investing what you were going to spend on the longer plan. However, you need to do what you feel comfortable with.

[Lordosis]

Do you need it yet? No kids and a professional spouse. She is not dependent on you. If your loans are Federal they are discharged upon death. It might be worth waiting until you have real need and then you might have a clearer picture of what you need.

But again it is cheap comparatively so do what makes you comfortable.