Term Life for a med student?

[shishka32]

MS2 here, mid-20's, $150k whole life policy on myself that was taken out by my grandparents when I was 1 year old. Premium of $646 a year. I have zero debt due to personal savings + spouse income (no undergrad debt either thanks to a scholarship). We're hoping to graduate debt-free but may end with a max of 25k in loans depending on savings and tuition increases. ~15k in retirement. Married, no kids yet. Wife works making around 60k a year. She has no life insurance. We are currently planning on having kids in residency or maybe even after. She plans to stay at home at least while the kids are young but at that point I should be an attending or close to it.

Do I:

1) Keep whole life until residency then buy term life

2) Keep whole life until residency but buy term life now

3) Sell whole life now, buy term life now

4) Sell whole life now, wait until residency for term life

5) Something else I can't think of

 

I'm also a bit confused about which term and how much coverage I need both short-term and long-term which I think would differ based on which option above I go with. I think a long-term goal of 3-4 million of life insurance as a young attending with kids and spouse would be reasonable but I'm not sure.

 

Any advice appreciated. Thanks!

[SaintClive]

Now I'm not expert on whole life insurance policies so I can't comment on what you should do with the plan you have.  I think we might need more details on the plan to know whether you're better off just riding it out or jumping ship, so I won't address that.

 

The question about term life insurance really gets at the core of what insurance is for.  Buying insurance is a losing proposition (otherwise the insurance companies wouldn't make a profit) so the only purpose it has is to protect you against a statistically unlikely event that would be devastating if it occurred.  The question of whether you need term life insurance depends on whether your spouse would be in financial ruin without you.  Do you have a mortgage that you planned to be able to contribute to with a resident/attending's salary?  You don't seem to have any other debts.  I would say that as you have no income and she has an income and you two have no debts that you've mentioned and no children requiring expenses in the future that you probably don't need term life insurance at this point.  Now when you enter residency and if you get a mortgage or have children and develop a lifestyle that depends on a two person/income household, I would insure both of you.

[LBKCLU]

The first thing to do is obtain an "inforce illustration" showing the policy values based on the current dividend scale.

Are you at the point that the policy's premiums can be paid using dividends and no additional out of pocket premium outlay is required on your part?

Are you currently paying the premiums or are they being paid by someone else?

Is the policy in a gain position? If the cash surrender value of the policy exceeds the cost basis, it may be a taxable event.

If you are looking for additional coverage, based upon your age and no children, if you do anything at this point, I would suggest a 30-Year Level Premium Term Life policy.

However, with no children and no mortgage and a wife that works, the only real advantage would be toinsure your future ability (the ability to purchase insurance based upon your good health) and lock into premium rates based upon your current age.

[shishka32]

LBKCLU wrote:

The first thing to do is obtain an “inforce illustration” showing the policy values based on the current dividend scale.

Are you at the point that the policy’s premiums can be paid using dividends and no additional out of pocket premium outlay is required on your part?

Are you currently paying the premiums or are they being paid by someone else?

Is the policy in a gain position? If the cash surrender value of the policy exceeds the cost basis, it may be a taxable event.

If you are looking for additional coverage, based upon your age and no children, if you do anything at this point, I would suggest a 30-Year Level Premium Term Life policy.

However, with no children and no mortgage and a wife that works, the only real advantage would be toinsure your future ability (the ability to purchase insurance based upon your good health) and lock into premium rates based upon your current age.

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The policy's premiums can be entirely paid using dividends.

We are currently paying the premiums.

I'm honestly not sure what gain position means. Cash surrender value is $26,000.

I forgot to mention in the original post we have no mortgage and don't plan on one until I become an attending.

Thank you for your help!

[AlexxT]

My suggestion:  If you plan on having children in the next few years, you should get a term life policy now, probably a 30 year 3 million dollar policy.  That would cost you about $100-130 a month ( a very rough approximation ).  You could wait a few years, but since you're only 2-6 years from having children, you might as well lock in coverage now.

There are a few other ways to approach the term life insurance policy: e.g. get three  $1,000,000 policies now, one each for 10, 20, and 30 years, or perhaps get a 2 million dollar 30 year policy now and add a 20 or 30 year 1 million dollar policy in a few years when you're actually ready to have kids.

Your whole life policy is not very useful as life insurance, since it has such a small amount of coverage relative to what you need.  You should probably cash it out, but as others suggested, get the financial information about your policy from the insurance company to determine whether to keep it or cash it out.

Also, when your'e ready to start having kids, you should also insure your wife as well.  If she were to die, and you had children, you would probably want to cut down on work in order to spend more time with them, which would decrease your income, and also, you would probably need to hire a nanny to help with the kids, even if your wife had been working.  Both of these changes to your routine would require more money, which is why most people should insure a stay-at-home spouse.

[Osiris]

Congratulations on being debt free and thinking things through insurance wise.

I would pick choice 5. This would consist of cashing out  the Whole Life Policy (now  or within the next few years depending on what is most advantagous financially/tax wise ).

Right now there is no reason to have life insurance and if you need life insurance it would be term. I was elated when I became financially independent and could put the premium of my life insurance/disablity insurance into my savings account .

I would suggest to get term life insurance for you as well as  your spouse  to cover the cost of bringing up your children once you would get them. Personally I would go for the fair amount and not splurge on the amount. ( $1 million)  There is an excellent chance you  or your spouse will not need it to survive for more then 5 years and why over pay more than you would already do (Life insurance has high margins and term life is more competitive and reasonable than whole life where the life insurance agent makes a killing).

Figure out when you would become financially independent/self insured. Unless you have many children, support sick parents/siblings a 20 year term ( or 500 k for 15 years and 500 k for 25 years) may suffice.

May you and your spouse  live to a ripe old age.

Osiris

 

 

 

[LBKCLU]

If you add up all the premiums you have paid thus far, that is your cost basis. So, let's say it was taken out 20 years ago. Your cost basis would then be $12,920 ($646 x 20). Anything over that in terms of surrender value would be taxable to you as ordinary income (not capital gains).

For that reason, at this point, it probably does not make sense to cash out that policy unless you are going to do a 1035 exchange and move that money to another (larger) whole life insurance policy (which does not make any sense based upon your situation) or an annuity (and makes no sense at all).

http://www.finra.org/investors/1035-exchanges

I would just keep the Whole Life policy inforce and then determine if you feel that you need/want additional life insurance. I don't think a "laddered" strategy (buying multiple policies with different guarantee periods) makes any sense either. As an MS2 with no income, I can tell you with almost 100% certainty, that no carrier would allow you to purchase a $3,000,000 death benefit. Some carriers won't even allow residents to purchase that much unless they are almost done with their training.

 

[AlexxT]

LBKCLU wrote:

I don’t think a “laddered” strategy (buying multiple policies with different guarantee periods) makes any sense either. As an MS2 with no income, I can tell you with almost 100% certainty, that no carrier would allow you to purchase a $3,000,000 death benefit. Some carriers won’t even allow residents to purchase that much unless they are almost done with their training.

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So, how much term life could a medical student or resident purchase?

And why don't you like laddered policies? I understand that the argument against them is that inflation will eat into the value of the policies, so 30 years later, the 3 million dollar policy will only be worth 1 million in today's dollars.  Also, there are costs associated with each individual policy, so you get more for your money with one policy.  But under many circumstances, I think that strategy will save some money, and get some insurance in place earlier when budgets are tighter.

However, particularly if he can't get 3 million now, but could get a smaller policy, say 1 million, or even half a million, why not get a smaller 30 year policy now, and add another policy to it later, either a 30 year or a 20 year, depending on when they will start having children?

I probably don't need to convince an insurance broker of the need for life insurance, but as a student, I saw deaths among my college classmates, and med school classmates .  I have seen young friends become ill and un-insurable.    So, if I had dependents, I would get insurance as soon as I could.

[jfoxcpacfp]

Cash out and pay the taxes. You're in a much lower tax bracket than you will be in a few years. Think of what you have left as a small windfall that you can put toward a future house downpayment or contribute to your Roth IRAs.

Otherwise, you really have no need for life insurance until you have children, take on a mortgage, or experience some other life event that would cause either of you financial harm in the event of your untimely demise.

[AlexxT]

jfoxcpacfp wrote:

Otherwise, you really have no need for life insurance until you have children, take on a mortgage, or experience some other life event that would cause either of you financial harm in the event of your untimely demise.

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I agree with this.  But he's already married, and plans on having children in the next few years.  While he doesn't need the death benefit right now, by getting the insurance a few years early he's avoiding the risk of becoming uninsurable later.  That's a very real risk.   Granted, this can be taken too far, but I think that if someone is married and planning on having children within say, 5 years, that it pays to get life insurance sooner rather than later.  That risk can be hedged by getting a smaller policy now and adding another policy to it later when they are ready to have children.

[LBKCLU]

I am definitely a believer in insurance and use "laddered" policies all the time for my clients.

However, for a medical student with no mortgage and no children, I don't see the value in purchasing policies with a limited duration when his insurance need will be much greater in the future. For that reason, I would only suggest a 30-Year Level Term policy.

Keep in mind that one can also ladder coverage within the same policy with Banner Life (William Penn in New York), without incurring additional policy fees (as is the case with separate policies).

I would also not be so quick to surrender a permanent insurance policy as, even with declining interest rates, he is likely at the point that premiums can be paid internally without additional out of premium outlay required.

Yes, he is in a low tax bracket now but why incur taxes at all and give up the death benefit that the policy provides?

He can always decide what he wants to do with the policy at a later point in time when his needs change. At that point, he can cash it out, do a 1035 exchange, gift it to a charity or simply borrow against it for supplemental retirement income.

A Medical Student this early on would most likely not qualify for more than a $500,000-$1,000,000 death. Residents can typically purchase $1,000,000-$2,000,000 (or more if at the end of training) or their specific financial circumstances justify the need for a larger amount of coverage.

[jfoxcpacfp]

AlexxT wrote:

jfoxcpacfp wrote:

Otherwise, you really have no need for life insurance until you have children, take on a mortgage, or experience some other life event that would cause either of you financial harm in the event of your untimely demise. 

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I agree with this.  But he’s already married, and plans on having children in the next few years.  While he doesn’t need the death benefit right now, by getting the insurance a few years early he’s avoiding the risk of becoming uninsurable later.  That’s a very real risk.   Granted, this can be taken too far, but I think that if someone is married and planning on having children within say, 5 years, that it pays to get life insurance sooner rather than later.  That risk can be hedged by getting a smaller policy now and adding another policy to it later when they are ready to have children.

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I understand and took that into account, but that is such a big selling point with insurance agents (and a reason parents buy policies on their kids). Of course, you can become uninsurable at any point in your life, so when is the right time to hedge against that minuscule risk? Maybe WCI has some guidelines he could share. However, I don't necessarily think that, just because he's considering cancelling an unnecessary and expensive policy, that he should do so now. You just have to use your own judgment for what you are comfortable with. I just believe that the risk is overstated based upon relatively rare anecdotal evidence.

As for the argument LBKCLU is making ("why incur taxes and give up the death benefit that the policy provides?"), it's because he's still paying a large premium for relatively low payout. He's paying the premiums himself, but whether he is writing the check or the policy is, it's still coming from him. It's not like he'll have to dig into savings to pay the taxes; they will come from the payout. Sometimes it's better to cut your losses and pony up. I think this is such a case.

[shishka32]

Thank you all for the interesting perspectives.

A total of $15,500 has been paid into the policy. Most of this was paid by my grandparents until I became 18 about 7 years ago. The current cash benefit is just over $26,000. This would leave an income tax on the 10.5k is my understanding.

It sounds like a reasonable approach would be cashing out the insurance, getting a smaller (500k? 1 mil?) 30 year level term policy, then getting a 1-3 million level term policy when I get into residency/attending land. I could use the after-tax cash surrender value towards tuition to avoid that possible loan debt I mentioned earlier or put it into retirement. I agree it doesn't make much sense to get life insurance on my wife until we start having children. We do plan on having kids within the next 3-4 years.

I should mention there is a bunch of family pressure to get life insurance now and in large amounts as one of my parents died when I was young and the payout on the life insurance helped raise my siblings and me. I am trying to think logically through this and that is why I find myself here.

Out of curiosity, why do life insurance companies care how much insurance a person is buying? If one can afford the premium, aren't they just making more profit? I couldn't find much with a google search. Thanks!

[jfoxcpacfp]

shishka32 wrote:

Out of curiosity, why do life insurance companies care how much insurance a person is buying? If one can afford the premium, aren’t they just making more profit? I couldn’t find much with a google search. Thanks!

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I puzzled over what you meant by that question for a minute then realized that you are responding to this comment by LBKCLU: "A Medical Student this early on would most likely not qualify for more than a $500,000-$1,000,000 death. Residents can typically purchase $1,000,000-$2,000,000 (or more if at the end of training) or their specific financial circumstances justify the need for a larger amount of coverage."

I'm sure the answer is pretty obvious, but I'm curious as to what he'll say, too.

[Osiris]

jfoxcpacfp wrote:

shishka32 wrote:

Out of curiosity, why do life insurance companies care how much insurance a person is buying? If one can afford the premium, aren’t they just making more profit? I couldn’t find much with a google search. Thanks! 

Click to expand…

I puzzled over what you meant by that question for a minute then realized that you are responding to this comment by LBKCLU: “A Medical Student this early on would most likely not qualify for more than a $500,000-$1,000,000 death. Residents can typically purchase $1,000,000-$2,000,000 (or more if at the end of training) or their specific financial circumstances justify the need for a larger amount of coverage.”

I’m sure the answer is pretty obvious, but I’m curious as to what he’ll say, too.

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The answer if not obvious to me ( other that is a bad idea to worth more dead than alive).

LBKCLU enlighten us.