The insurance costs for malpractice, life insurance, disability, and overhead are significant, yet many doctors spend even more money on insurance, often without receiving any more benefits.
With every doctor at the early stages of the career looking for the largest death benefit at the lowest premiums, you would think that purchasing life insurance is simple. A term life insurance is the solution. The plan is that the term life policy stays in place until the doctor has accumulated sufficient investments and no longer requires insurance.
Instead of a term policy, many doctors opt for a permanent policy, such as universal life or a whole life policy. The premiums under this policy are split three ways: a term policy for the death benefit, administration fees, and the remainder into an investment account. The income earned is not taxed until the funds are withdrawn. The investments and insurance proceeds on death will be paid tax free to your estate for the amount that exceeds the adjusted cost base of the policy. This can be used to cover other estate taxes, or to provide additional funds to your surviving family members. The permanent policy can also be used a retirement vehicle, as the cash value of the policy grows tax free, similar to an RRSP.
With such great features, why would not every doctor want to own one? The problem is the steep premium which must be paid with after tax dollars.
We have a 40 year old doctor client who is paying a $14,000 annual premium ( or $20,000 before tax) for a two-year old $500,000 permanent life policy. She figures for the premium she can purchase a term life policy at a fraction of the cost, and use the remainder to help pay for a rental condo she considers purchasing.
The reason she wants to get out of the policy, is that after paying two years of premiums, she realized that she actually does not need any of the benefits the policy offers. She does not anticipate that she will leave a sizable estate that will attract substantial income taxes on death, nor is she keen to invest her retirement dollars in an insurance policy. The problem is that she cannot draw out the investment because of the substantial cash surrender charges. Instead, she can use this policy as a term policy, by using the accumulated locked-in cash value to pay for future term insurance premiums.
There are many doctors who have regretted the purchase of a permanent insurance policy. The lesson here is that you should determine whether the insurance product fits your future goals before writing a large premium cheque. While a permanent policy can be a sound choice for some doctors, if it is bought for the wrong reasons you will find yourself looking for a way out.
